Michael Porter, author of 'Competitive Advantage,' suggested in 1985 that all companies pursue one of three general strategies. In this lesson, we'll learn what those strategies are and when each is appropriate to use.
Low Cost, Differentiation, and Focus
Business professor and strategist, Michael Porter, wrote the book Competitive Advantage: Creating and Sustaining Superior Performance in 1985. In this book, Porter presented his readers with the idea that companies pursue one of four generic strategies based on their strategic target and their strategic advantage. These strategies include:
Cost leadership strategy
Combined cost leadership and differentiation strategy
You can take a look at this matrix to make sense of what Porter was suggesting:
According to Porter, companies could find a strategic advantage by pursuing either a low-cost strategy or a differentiation strategy. A low-cost strategy is when a company attempts to offer goods or services that are comparable to their competitors, but at a lower cost. You don't have to look further than your local Walmart to see an example of a low-cost strategy. Walmart's strategy is based on offering the lowest cost.
The low-cost strategy isn't always the best strategy, and not all companies use it. One company that does so successfully is Apple. If you've ever bought one of its products, you may have noticed it was significantly more expensive than a similar phone, tablet, or computer. For many customers, the Apple brand is unique and offers important, unique benefits over the competition, so they're willing to pay those prices. As such, the company is employing a product differentiation strategy, or how unique customers view goods and services.
On Porter's model of generic strategies, the horizontal axis is the degree to which a company pursues a low-cost or a differentiation strategy. It's important to note this isn't an either/or decision. Companies can have strategies that are a combination of low-cost and differentiation strategies. Consider some of the tablets made by Samsung. They aren't as low-cost as some of the competitors, but they aren't as unique as Apple's iPads, which places them in the middle of the strategic advantage scale.
In addition to choosing a strategic advantage, companies select a target market. A target market is a group of consumers a company views as potential customers and can either be industry-wide or focused on a particular segment.
Companies pursuing an industry-wide focus offer goods and services that are useful to an entire market. For instance, the iPad appeals to a broad market in that it meets the needs of students, professionals, gamers, readers, and even young children. By contrast, the Microsoft Surface aims to be more of a laptop replacement and is targeted more towards working professionals. While Apple's iPad may have more of an industry-wide focus, the Microsoft Surface has a particular segment focus.
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An industry-wide versus segment focus is not an either/or decision. Like strategic advantage, each option is on opposite sides of the same scale. A company can still meet the needs of a specific consumer group while providing goods and services to other segments of the market.
Avoid Being Stuck in the Middle
Porter's generic strategies model does not suggest one strategy or focus is better than another. Instead, prospective managers can use it as decision-making tool. But, while one strategy isn't necessarily better than another, there is one area to avoid: being stuck in the middle.
Managers get stuck in the middle when chosen strategies have no particular focus but try instead to be all things to all customers. This is not only impossible, but also results in lower sales and higher customer retention costs, all of which can be a financial burden on a company. In Porter's model, being stuck in the middle is the same as not really having any direction at all.
Michael Porter wrote Competitive Advantage: Creating and Sustaining Superior Performance to discuss generic strategies as models managers could use to think through and identify their competitive advantage and customer focus. They may achieve the advantage by using a low-cost strategy, whereby a company attempts to offer goods or services that are comparable to their competitors, but at a lower cost; product differentiation, where companies consider how unique customers view goods and services; focus strategy, where companies choose to focus on an industry or a particular segment; or a combined cost leadership and differentiation strategy.
Porter didn't say one advantage or focus was better than another. He did, however, suggest that the one place you don't want to be is stuck in the middle. By choosing strategies that have no particular focus but trying instead to be all things to all customers, companies get stuck in the middle and ultimately fail due to their lack of focus and direction.
Porter's Generic Strategies - A Practical Exercise:
The following exercise is designed to help students apply their knowledge of Michael Porter's generic strategies in real-life situations.
Below are examples of companies and their position within their industry.
1. Nespresso: Nespresso is the new industry leader for coffee machines and capsules. Nespresso's premium coffee paired with an exceptional line of machines results in its coffees being recognized for their particular (and preferred) flavor. Nespresso's brand has grown so much that some customers are skipping coffee shops like Starbucks all together so that they can enjoy their high-quality Nespresso at home.
2. Costco: Every year for the past decade, Costco has shattered record after record for its number of subscribers. Costco's offering is fairly simple: Customers pay a single amount for an annual subscription and, in exchange, can find many household items in bulk at very low prices that cannot be beaten by their competitors.
3. Snapchat: Snapchat has taken the social media market by storm by specifically building their product for teenagers between the ages of 12 and 18. This key portion of the social market has allowed Snapchat to collect data on a specific market segment while building a strong brand reputation with its customers.
For each of these companies, determine which of Porter's generic strategies is most applicable.
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