What are Porter's Generic Strategies?

Porter’s Generic Strategies are the standard basic strategies that a Business can follow, suggested by Michael Porter.

 

The strategies proposed depend on:

  • The Competitive Advantage of the company.
    • What makes the Company “Strong” in the Market.

 

  • The Scope of the Market targeted.
    • If the Company is targeting the Entire Market or just a small Segment.

 

Depending on these 2 parameters, Porter suggests 4 main strategies:

Porter's Four Generic Strategies

Porter’s Four Generic Strategies.

 

The Porter’s 4 Generic Strategies are:

  • Cost Leadership.
  • Differentiation.
  • Cost Focus.
  • Differentiation Focus.

 

Let’s see them in more detail:

Cost Leadership Strategy

 

A Company should follow a Cost Leadership Strategy when:

  • Its Competitive Advantage is, or can be, its Cost-efficiency.
    • If it has a competitive Manufacturing process, or Cheap raw materials, for example.
  • It targets an entire Market.
    • If its Competitive Advantage can, and will be applied to all its products on the Market.

 

Cost Leadership strategy Example

 

BiC is the perfect example of a Cost Leadership Strategy.

  • They don’t just make cheap (and very good) pens.

 

All their products (shavers, lighters, pens, etc) follow the same philosophy:

  • Affordable, robust and high quality products.

 

Their Cost Leadership Strategy aims entire Markets.

Mainly:

  • Pens.
  • Razors.
  • Lighters.

Differentiation Strategy

 

A Company should follow a Differentiation Strategy when:

  • Its Competitive Advantage is its Uniqueness.
    • Due to the Quality of its products or the character of the Company.
  • It targets an entire Market.
    • This Uniqueness is present in all its products.

 

Differentiation strategy Example

 

Why people buy luxury products?

  • Most of the time, because they want to show how well they are doing.

 

Hence, what is the main target of most luxury companies?

  • To be recognized and unique.

 

Louis Vuitton is a good example of a company that has followed a Differentiation Strategy:

  • They have differentiated almost all their products with their famous ” LV monogram”.

 

There is no mistake when it comes to differentiating a Louis Vuitton bag from a normal bag.

  • Perhaps, their products would not be so desired without this design…

Cost Focus Strategy

 

A Company should follow a Cost Focus Strategy when:

  • It is very Competitive in Cost in a certain Product or Market Niche.
    • Perhaps this company markets this product in large packages, for example.
  • It targets a Niche or a “small” Market segment.
    • Rather than large or entire Markets.

 

Cost Focus strategy Example

 

Today, the energy drink Market has become a big attractive Market.

  • But, not long ago, Red-Bull was pretty much the only energy drink.

 

Then, “Monster” appeared and…

  • What Strategy did they follow?

 

While Red Bull was selling 250 ml cans for $2.5, Monster was offering 500 ml cans for $2.

  • Red Bull: $10 per liter.
  • Monster: $4 per liter.

 

Monster focused on their Costs and Pricing, and this Strategy made them the great profitable company it is today.

  • Remember: Monster was a relatively small company that was targeting a small segment of a niche market (at the time).

Differentiation Focus Strategy

 

A Company should follow a Differentiation Focus Strategy when:

  • It has a very Unique product or Niche.
    • Only in one product (or few); The rest of its products may be ordinary
  • That product is targeting a small Market segment.
    • The segment in which the product is Unique.

 

Differentiation Focus strategy Example

 

Following with the energy drink Market, once Monster succeeded with its low prices, many other companies tried to replicate its success.

  • But none of them were as successful as Monster.

 

All their products that were copies of Monster.

  • And people love new things.

 

Then, in 2012, a new energy drink appeared: G-Fuel.

They offered a new concept: They sell you the powders and you mix them with water.

 

In this way, the manufacturing process is much simpler and they can offer dozens of different flavors.

  • Furthermore, the distribution process is extremely easy and efficient.

 

G-Fuel is now an increasingly popular energy drink thanks to its Differentiation.

  • They have Focused on the energy drink Market, nothing more.

In addition, they have also focused on selling mainly online.

Some professionals claim that these strategies are very general and vague.

  • Perhaps it is true, but they provide a simple guideline for analyzing the Strategy of a Company.

 

This method makes you think about your Competitive Advantages and how you can design a Strategy based on them.

 

However, it is true that this framework is not perfect.

Now, before looking at more examples, let’s discuss the pros and cons of Porter’s Generic Strategies:

Pros and Cons of Porter's Generic Strategies

Pros

 

  • It forces you to think about the Competitive Advantages of a Company.
  • It is very easy to Understand.
  • The proposed Strategies quite well Synthesize the main alternatives that an average company has.

 

Cons

 

  • The Strategies proposed are vague.
  • It doesn’t offer a Step-by-Step guideline to follow.
  • It Settles for a Big picture, without going deeper.

This method is not intended to offer a final solution to all Companies. That is impossible.

  • Its purpose is to help companies discover how they can be successful.

 

We recommend using it in conjunction with other strategic tools.

  • There is no single strategic tool that solves everything by itself.

Porter's Generic Strategies examples

We have chosen 4 real examples that perfectly show how these Strategies are used in successful companies.

 

Let’s begin:

IKEA - Porter's Generic Strategies example

 

How has IKEA become so successful?

Because they have focused on reducing their Costs to the extent that it is the customer who assembles the furniture.

 

In addition, they have done so in all their products:

  • From kitchen utensil to shelves.

 

There are entire “Markets” (in plural) where the cheapest option is an IKEA product.

  • Clearly, they followed the Cost Leadership Strategy.

 

They have not tried to launch a premium product line, or something similar…

  • They have kept the throne by sticking to their Costs.

Natuzzi - Porter's Generic Strategies example

 

In case you do not know Natuzzi, we will summarize it for you:

  • It is the exact opposite of IKEA.

 

It is a small Premium furniture Company.

  • Small if you compare it to IKEA, of course.

 

They focus only on High-Quality products.

  • They have not tried to grow by lowering prices or qualities.

 

And, they have succeeded by Differentiating themselves from other companies, which tried to reduce Prices or Costs.

  • Natuzzi followed a Differentiation Focus Strategy.

Apple - Porter's Generic Strategies example

 

It seems that Apple has always been the almighty company that it is today.

  • But this has not always been the case.

 

Some years ago (decades in fact) Apple was a minor player in the technology industry.

  • They did not have the best software or the best hardware.

 

What did they do?

  • They chose to be “Different”.

 

Their computers had minimalist designs, and little by little they began to explore “new things”.

  • The first successful “new big thing” was the iPod.

 

Not everyone remembers the beginnings of Apple and how they followed a Differentiation Strategy.

  • Once they released the iPhone the story changed.

SanDisk - Porter's Generic Strategies example

 

After talking about Apple, we wanted to give you an example of another technology company that had followed a different Strategy.

  • Then, we thought about SanDisk.

 

To this day, it seems that all technology companies must be involved in our day to day, or have certain values, etc.

 

SanDisk is a “discrete” company, that didn’t intended to “change the world”, and succeeded by doing one simple thing:

  • Develop affordable high-quality flash memory products.
    • USBs, Memory cards, etc.

 

Unlike Apple (which was much larger) they didn’t try to develop computers or other technological devices.

  • They focused on memory devices, and how to reduce costs and therefore prices.

 

They followed a Cost Focus Strategy.

 

* If you think all companies follow this Strategy, think about Apple’s iPhone prices.

  • While SanDisk’s prices have decreased over years, Apple’s have risen.

 

All Companies try to reduce Costs, but not all see it as a Central Pillar of their Strategy.

Summarizing

Porter’s Generic Strategies are the standard basic strategies that a Business can follow.

 

The strategies proposed depend on:

  • The Competitive Advantage of the company.
  • The Scope of the Market targeted.

 

Depending on these parameters, the strategies proposed are:

  • Cost Leadership.
  • Differentiation.
  • Cost Focus.
  • Differentiation Focus.

 

This method makes you think about your Competitive Advantages and how you can design a Strategy based on them.

  • It is highly recommended to use it in conjunction with other strategic tools.

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