Michael E. Porter introduced the Generic Strategies in his 1985 book “Competitive Advantage: Creating and Sustaining Superior Performance” to describe how businesses pursue and achieve competitive advantages while also providing strategists and analysts with insights on how to maximize profit potentials in a particular industry or market.
There were three strategies originally identified by Porter in his 1985 book. These are cost leadership, differentiation, and focus. However, he later divided the focus strategy into two: cost focus and differentiation focus. There are now four generic strategies.
Porter explained that a particular industry has multiple “segments” that can be targeted by a firm. He put emphasis on the fact that a specific business organization needs to utilize one of the strategies he identified because utilizing two or more would result in a so-called “stuck in the middle” scenario in which the firm loses focus and a clear direction.
The Four Generic Strategies of Porter Explained: Cost Leadership, Differentiation, Cost Focus, and Differentiation Focus
1. Cost Leadership
A cost leadership strategy is an approach to building and maintaining a competitive advantage aimed at maximizing earning potential or profits. There are two more specific ways to achieve cost leadership according to Michael E. Porter.
The first one is by reducing costs while maintaining industry-average prices. Costs represent all the expenditures channeled in creating and distributing a particular good or service. Reducing these expenditures allow a firm to charge industry-average price.
On the other hand, the second one is to charge prices lower than the industry average while also reducing costs. This specific manner of achieving cost leadership is intended to maximize profit by increasing the customer base or market share.
Regardless of which one of the two approaches a business utilizes, the main goal is to reduce its costs, thereby becoming a cost leader in a particular industry or market. Businesses that can do so often have a sizeable capital at their disposal and an efficient supply chain.
Another one of the four Porter’s Generic Strategies is differentiation. Note that a differentiations strategy is part of a product strategy and a sub-element of an overall marketing strategy. The aim is to make a product with unique features to make it as exclusive as possible.
Furthermore, differentiation aims to make it as attractive as possible through its unique features and functionalities, as well as uncontested durability, after-sales support, and branding. All of these collectively represent the unique selling proposition of the product.
There are three general factors needed to approach and pursue a differentiation strategy: competent research and development capabilities, the capacity of the firm to deliver high-quality goods or services, and effective sales and marketing strategies.
3. Cost Focus
Remember that Porter divided “focus” into two: cost focus and differentiation focus. The former should not be confused with a cost leadership strategy because it is intended to direct attention toward a particular segment of the market or a specific market niche.
Take note that cost focus requires not only targeting a focused market or a niche but also developing a low-cost product to offer low prices for that particular segment or niche. A firm pursuing this strategy essentially maximized the earning or profit potential of a particular market segment or niche.
It is also important to highlight the fact that this strategy can help a business become a market leader and achieve a first-to-market advantage, which in turn, can help build and maintain strong brand loyalty across its customer base.
4. Differentiation Focus
A differentiation focus is also another one of the four generic strategies identified by Porter. When compared with cost focus, this specific generic strategy centers on identifying and developing the differentiation or unique selling points of a product.
However, it is imperative to remember that a differentiation focus is different from a differentiation strategy. A differentiation strategy is aimed at developing a highly differentiated product within the same established market.
A differentiation focus still puts weight on developing a differentiated product but there is an intention to do so in consideration of a niche market and even a new market or product category. A focused market is at the core of the “focus” strategy.
Similar to cost focus, it is not enough for a business to cater to a niche or focused market. The goal is to offer a product that provides an additional value and serves a specified market. Both cost and differentiation focus are ideal for small businesses.
Criticisms of Porter’s Generic Strategies: Limitations Due to the Absence of Specificity and Flexibility According to Critics
Porter has introduced numerous concepts and models that have become useful in strategic management. However, several critics have raised concerns. Consider Porter’s Five Forces as an example, which has its fair share of criticisms despite its applications.
His Generic Strategies are also no exemption. Remember that Porter stressed the need for a business to only utilize one of the four strategies he identified to avoid a “stuck in the middle” scenario. He argued that these strategies are inherently incompatible.
As an example, a firm cannot pursue a cost focus and differentiation focus at the same time. Developing a differentiated product requires substantial capital input, thereby making it a costly pursuit and defeating the goal of a cost focus strategy.
Several commentators and even studies have noted that businesses can still utilize multiple strategies at once. There are different strategies for a business to minimize its costs while also developing and offering a product with unique selling propositions.
The aforesaid statement can be exemplified by manufacturers in the consumer electronics industry. Industry leaders such as Microsoft, Apple, and Samsung, among others, have repeatedly demonstrated both cost leadership and differentiation strategies.
Another criticism of the generic strategies of Porter is that they can be too limiting due to their lack of specificity. Each of the four strategies is considerably rigid despite being too generic, thus making it inapplicable to real-world situations.
There are market conditions that would require using hybrid strategies. An example is the highly competitive and saturated smartphone market. Several new players have emerged that offer differentiated devices and low prices using efficient manufacturing capabilities.