What are porter’s three generic strategies and why would a company want to follow only one?

There are many management techniques that anyone can use. With that being said, Porter’s Generic Strategies is one of the most frequently used among these techniques. This strategy is used to visualize the approach of a company or organization toward its competitors. For example, if the competitor provides lower costs for their products/services, then you can use the “Lower Cost” strategy to counter them. If you want more information and examples, then continue reading below.

Porter’s Generic Strategies

What is Porter’s Strategy?

Porter’s Generic Strategy was introduced by Michael Porter in 1980. It’s comprised of three basic strategies, namely the “Cost Leadership Strategy,” “Differentiation Strategy” and “Focus Strategy.” Porter indicated that every company or organization should only pursue one of these strategies or risk wasting company resources in a futile attempt to grow the business fast.

Porters Generic Strategies

As mentioned, this strategy comprises three individual strategies that have different scopes. To give you a better understanding of each strategy, we will provide some useful information about each strategy below.

The first of Porter’s Generic strategies focus on the pricing side of the business. The targets of the strategy are price-conscious customers. It’s an approach where the company provides a quality product that is on par with the competition for a lower price.

The next strategy aims to show the difference between your products and its competitors. While there are price-conscious customers, there are also those who don’t care about the price as long as they get high-quality products. This is where the Differentiation strategy comes in. You provide the best features that your product possesses. This generic strategy is much more effective if you have something that the other products don’t have.

The last of the three strategies is called Focus strategies. The scope of this strategy includes specific consumers. This means that it is not highly recommended for huge companies, but they can employ it on top of either differentiation or low-cost strategies. Using the Focus strategy, companies can focus more on providing specific products that cater to the specific needs of a consumer group. That is why it is highly applicable for smaller businesses with less competition since it aims to provide unique and exclusive products and services.

Porter’s Generic Strategies Templates by GitMind

Like any other strategic outline, Porter’s generic strategy also has its own model or diagram. Although complicated when explained, it becomes easier to understand with the use of its diagram. It is also a fact that it is an essential tool for presentations with the audience within a company. On that note, if you want to get free templates, then try the ones below.

• Porter’s Generic Strategies Blank Template

Porter’s generic strategies are very subjective. This means that their contents depend on the user. That is why for starters, it is better to use blank templates first. This will ensure that you won’t apply the wrong strategy for your company. Aside from that, using blank templates such as this one saves an enormous amount of time.

• Medical Sector Generic Strategy Template

Another way to use this strategy is in the medical field. As the template above shows, every medical institution must have a clear goal on how to sell its services. That is why this model is perfect since it gives them a clear view of the things that they can improve to be successful and avoid bankruptcy.

• Hotel Generic Strategy Template

Similar to the previous one, another industry that can use Porter’s generic strategies is the hotel industry. The template above shows the things that can be done in order to provide quality and affordable service to the clients. As we all know, a hotel must provide top-notch services to its customers to avoid bad reviews and keep it going.

Conclusion

Business strategies are crucial for any company that provides services and products to its clientele. By determining the right scope and target market, you will be able to provide what the customers actually need. This means that you will avoid spending time and money on producing unprofitable services and products. With that being said, there is no doubt that Porter’s Generic Strategies will be a helpful tool if used correctly.

Porter's Generic Strategies is a group of four categories of competitive strategy: Differentiation, Cost Leadership, Focus (Cost), Focus (Differentiation).

How was Porter's Generic Strategies Developed?

The study of business strategy was strongly influenced by Michael Porter, Harvard Professor, and author. In 1985, he wrote the seminal text, Competitive Advantage: Creating and Sustaining Superior Performance, concerning business strategy. In his text, he proposed 3 (or 4) categories of generic strategies for approaching a product market. 

What is the Effect of a Competitive Strategy? 

Per Porter, any one of these strategies is capable of producing a competitive advantage for a business in a given market. It is important to note that, every strategy is not possible for a single firm. However, if the firm is capable and executes a strategy sufficiently, then it can achieve a competitive advantage in the market.

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What are the Generic Strategies?

In summary, the strategies were as follows:

• Cost Leadership - Minimizing the costs incurred in providing value (product or service) to a customer or client.
• Differentiation - This means making ones product unique or special, compared to other competitors or substitute products in the market.
• Focus:
  • Cost Focus -  This does not mean a focus on cost. It means minimizing costs in a focused market.
  • Differentiation Focus - This does not mean a focus on differentiation. It means an orientation toward differentiation from other competitors/products within a focused market.

Let's take a deeper look at each of Porters Generic Strategies.

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What is the Cost Leadership Strategy

Cost leadership means being an industry leader in low-cost production. Remember, this does not concern the cost for the consumer. It concerns the cost of production for the business. The strategic position serves one of two purposes at any stage of execution:

• It produces higher profit margins for the business at a given price, or
• It allows for an overall lower price to consumers, which can be used to increase market share.

In order to employ this strategic approach, you must be able to establish and maintain a lower cost structure than any competitor. This includes the cost structure of competitors producing similar (and sometimes, substitute) goods.

Note: This strategic approach is the genesis of out-sourced production of products to countries where the cost of manufacturing and shipping is lower than the costs within the United States.

Techniques for effectuating this strategy vary. As noted above, outsourcing is a common way of lowering production costs of products and services. Companies often employ new technologies in hopes of bringing down traditional cost structure (e.g., Wal- Mart). Operations managers study efficiency theories, such a Lean Sigma in order to determine ways of cutting waste (i.e., costs) in the production process.

The downside of cost leadership strategy is that competitors will enter the market (new entrants) when old cost structures are replaced by more efficient structures (ex. Southwest Airlines). The existing business may be stuck at old cost rates (such as fuel) where new entrants have the benefit of lower rates.

What is the Differentiation Strategy?

Differentiation is the strategic tactic of separating your produce or service from others in the industry. Unlike cost leaders, differentiation strategy focuses on the value proposition to customers. That is, the product or service has some unique character or feature that differentiates it from other competitors where the value proposition is greater to certain customers. Examples of differentiation sub-strategies include:

• Product performance (Speed, strength, etc.)
• Quality of how the product is made.
• Durability of product
• Appearance
• Functionality (e.g., ease of use, features, etc.)
• Brand Image (e.g., luxury goods Rolex)
• Novelty of Innovation
• Operational Efficiency
• Support for Customer (Warranty, Guarantee, Customer Service)
• To employ this strategy a business will have to find unique qualities about its product or service that can set it apart from other products or services in the market. This requires an in-depth understanding of ones own product, as well as an understanding of all of the available products in the market.

What is the Focus Strategy?

The focus strategy is a third category that is split into 2 categories that modify the cost leadership and differentiation strategy. In either case, the focus strategy involves concentrating efforts on customers who have unique needs or wants, commonly referred to as a niche market. 

This level of customer focus allows a business to either produce a given product in a lower cost structure or to produce a product or service with unique features or characteristics that meet the needs or wants of the focus market. 

Either subcategory of the focus strategy allows for distinct advantage:

Example: A cost focus strategy may uncover ways of producing a generally accepted product at a lower cost that allows for creating a cost advantage for the customer in the niche market.

• Example: A differentiation focus strategy may allow the business to uncover previously unrecognized needs or wants and meet those needs or want through unique product features.

As in the above explanations, a business will likely have to pursue one or the other subcategory of focus strategy. Trying to accomplish both can lead to a lack of focus or effectiveness with either strategy.

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