Porter's Generic Strategies

Abstract

In the early 1980s, Harvard Business School professor Michael Porter first proposed a deceptively simply approach that would permit a company to define its competitive strategy. He proposed that competitive presence had little to do with luck or serendipity. Porter distinguished three basic (he termed them generic) elements essential to any competitive strategy protocol applicable to virtually any kind of business that provides services or goods: 1) cost, 2) market appeal, and 3) product. By examining and defining each, a business can choose how to grow and maintain its market presence.

Overview

Whatever the goods produced or the service provided, a company needs to devote enormous attention and resources to maintaining its market share, defining and refining a market presence. According to Cambridge University’s Institute of Business Management Technology (Porter’s Generic Competitive Strategies, 2015), "The fundamental basis of above average profitability in the long run is sustainable competitive advantage." Porter repurposed the basic elements of competition by applying to them the basic principles of economics—how a business defines its product/service against others is related to its economic well-being. In doing so, he reconstructed how business executives should view the opportunities of the market. The approach, radical as it was, had none of the earmarks associated with revolutionary business paradigms. Porter was hardly charismatic or flashy, hardly the type to launch a revolution. Porter was an academic, his work published by academic presses and in text books; he pursued the classroom dynamic as a way to engage and test his developing theories; he gathered anecdotal evidence and foundational data. He was first and foremost a student of the dynamics of economics as it impacted business growth and durability.

Beginning in the 1970s, in the midst of a global recession, Porter approached the puzzling reality of so many middling companies never finding their way to a long-term market presence, never quite competing or at least sustaining a competitive advantage. They stayed in the middle, never collapsing into financial ruin, but never advancing into a dominant market presence either. What intrigued Porter was that such companies were not doing anything wrong—they were attempting to manage costs, to produce an attractive product or an efficient service, and to locate and work an appropriate market.

Cost, product, market—these had long been the essential elements of any company’s economic profile. Consequently, conventional business wisdom made little distinction between a small neighborhood shoe repair shop specializing in repairing European shoes and a major discount store specializing in designer shoes; no difference between a retail outlet that included shoes as one of its departments and a major shoe manufacturing plan that made and shipped thousands of pairs of shoes weekly. Companies were companies; competition was competition.

Porter revisited those assumptions. Importantly, he brought to his theoretical work a background in both sports and engineering. An avid golfer while an undergraduate at Princeton, he was also an accomplished athlete in baseball and basketball. As an athlete, Porter understood the concept of levels of competition, that one game plan could not work for all teams at all levels of competition, that a team, whatever their division of play, needed to define what element of the game it was best equipped to develop and then use that to define itself and establish its identity and its place in the competitive landscape. As a mechanical engineer, Porter understood that one type of engine could not be expected to drive a variety of vehicles, the engine for a car, for instance, could do little for a truck.

Specialization, determined and defined ahead of time, made sense—that is, define the reach and goals of a specific engine before production and then work toward that goal and, in turn, make that engine efficient, competent, and ultimately sufficient. Porter posited that like a sports franchise, a business needed to maintain a competitive edge by approaching its resources and its potential honestly and clearly. Like a finely tuned engine, a business had to determine its best fit, how it wanted to compete, where its resource pool and its revenue margin could most efficiently and effectively perform.

Applications

Porter’s framework offered companies three generic strategies: 1) cost leadership; 2) differentiation; or 3) specialization. By deliberately and consciously selecting a development strategy, a company could package itself far more effectively. What was perhaps most revolutionary (and most controversial) about Porter’s paradigm was his insistence that a company must select a strategy and then work it exclusively, that the problems companies had encountered for generations was the determination to do it all, to provide low costs, to be different and better, and to be unique, all at once. To optimize market presence, Porter argued, a company needed to make a choice (Gopalakrishna & Subramanian, 2001). Far from being ambitious or savvy, that scheme, Porter argued, was destructive to a company as it robbed it of its brand and committed resources and time to attempting to realize goals that were in fact deeply and profoundly contradictory. He termed that misguided protocol as the "Middle of the Road" Strategy.

"Since the publication of this model in 1980, Porter …has confirmed his belief that firms should pursue one of his recommended strategies in order to succeed. From the firm's point of view, the most relevant and important aspect of the competitive environment is the industry in which the firm competes…. the industry is the ‘arena’ where competition takes place" (Ormanidhi & Stringa 2008). To sustain a long-term competitive edge in that arena, Porter argued, a company selects its most advantageous strategy and that, in turn, becomes its identity and centers all network-wide endeavors (and business decisions) as a way to make the company profitable, efficient, and effective over a long-term.

Cost Leadership

Porter termed that strategy cost leadership. A company can commit itself to producing the products (or providing goods or services) cheaply and efficiently by managing all stages of the processes involved in their production and their distribution and by keeping their own costs as low as reasonable and in turn handing on that lower price to the widest possible reach of the market. Thus, the company could maintain a long-term market presence by maintaining a scrupulous attention to all its in-house base expenses and logistics and pursuing the newest and most innovative methods for production and no-frills operations management.

Inevitably, businesses must work to succeed in a wide market—volume sales would keep the business competitive and profitable. Porter stressed that for this strategy to succeed, the company must be committed to offering the lowest price in the market, a strategy that becomes the company’s identity, the company brand, as it were, in a competitive and always volatile free market.

The most widely recognized type of business committed to the large-scale movement of low-priced units, businesses that, in turn, emphasize cost leadership, are the discount department store chains such as Costco or Walmart. Walmart best fits Porter’s theoretical model because the chain is known market-wide for providing the lowest prices and the widest range of goods. Walmart maintains that competitive edge by monitoring its expenditures, developing a massive (and highly effective) marketing campaign, buying items in bulk, sustaining a highly developed network for delivery of their goods, maintaining a wide network of retail outlets, outsourcing critical elements of production, and (most controversially) managing its workforce to sustain the highest level of productivity for the lowest possible investment.

The challenge faced by companies who dedicate themselves to cost leadership is the ever-present fear of other businesses in the same field dropping their prices to create a no-win price war. In addition, businesses committed to cost leadership must always be tuned to innovations in production and distribution to ensure continued market presence.

Differentiation

Porter theorized a business might want to be known for providing that same wide market a more unique good or service. By developing its own brand, the company would in turn market their product or service as distinct from all the others. A company using this models would define one or two attributes or characteristics consumers might be looking for in a market otherwise crowded with competing businesses. By selecting these target attributes and then centering the entire production process and marketing scheme around those one or two signature attributes, a company could forge its own identity and use that as its competitive mantra. Porter termed this strategy differentiation. Recognizing a wide need in a broad market, a company, interested in developing differentiation, would turn to its Research and Development teams to create innovative, cutting edge products or to enhance an available service or good in ways that, often drawing on the newest technology, would differentiate that company and its products from others in the market.

McDonald’s is a successful example of the differentiated product model. Since the mid-1950s, as busy Americans turned more and more to restaurants for family dining, the restaurant field became crowded and highly competitive. But McDonald’s committed itself early on to one attribute it was certain would find widespread acceptance in that broad market: fast service. That would differentiate it from all the other restaurants. That perception—that McDonald’s provided speedy service whatever the order, whatever the time of day—became its brand and was the cornerstone of nearly thirty-five years of catchy and highly effective advertising. As with all companies who commit to differentiation, however, problems arose when competitors adopted McDonald’s operations model.

Beginning in the early 2000s, McDonald’s began to drift away from the differentiation strategy, in essence struggling against its own brand identity because that brand had been copied by too many other food franchises that were now outselling McDonald’s. McDonald’s toyed with the idea of offering a kind of coffee house ambience for leisurely dining or even a full-service sit-down restaurant experience. The strategy, of course, had uneven results because, as Porter theorized, a company needs to commit to a single strategy.

Specialization, or Focus

A third model rejected entirely the concept of a broad market. Porter recognized the legitimacy and viability of relatively smaller business operations that sought to define highly specialized goods or services, something unique or very specific. Porter termed this strategy of specialization "focus." "Focus strategies grow market share through operating in a niche market or markets not attractive to, or overlooked by, larger competitors" (Allen, Helms, Takeda & White, 2007). Those businesses could tailor highly specialized goods or services to a very narrow market (a so-called niche market). The limited potential customer base usually results in a high-end market, whose customers are willing to pay top dollar.

Specialized goods or services are perceived as having a higher value, which is integral to the buyer’s selection process. In other words, the consumer buys the perception of the product’s prestige. This, in turn, develops (and sustains) a narrow but deep brand loyalty. Porter further posited that focus itself could be divided into two different levels of emphasis. For example, a company might want to provide a highly specialized, market-specific good or service but emphasize maintaining a viable and attractive cost (termed cost focus); alternatively, a company might want to market the difference in cost itself as a measure of unrivaled status, thus teasing the unit price upward (differentiation focus). When dealing with Ralph Lauren fashions or Mercedes-Benz automobiles or Chopard watches, consumers pay a premium price for the prestige of the brand.

Pepsi-Cola is often used to exemplify the focus strategy with an emphasis on cost. For years, Pepsi had struggled in the considerable market shadow of Coke. Pepsi appeared doomed to second-class status, just another soft drink without a clear competitive advantage. In the early 1980s, however, Pepsi underwent a considerable repurposing. The idea, an application of Porter’s theory of focus, was to create the impression that Pepsi was for the younger generation, twenty-somethings, and that only older people, baby boomers, drank Coke. Using MTV-style commercials with pop music instead of jingles, recasting its logo, recruiting pop culture figures to serve as commercial spokespeople, underwriting hip concert series and popular sporting events, Pepsi went after a narrower market—the demographics of the millennials—and captured it and quickly outpaced Coke in that niche. Pepsi never overtook Coke, but rather than going wide, it went deep and found in that demographic its competitive strategy.

Viewpoints

Porter’s theories, published in the early 1980s, generated considered debate. Critics, bothered by the deceptively simple nature of Porter’s dynamics, dismissed the entire paradigm as reductive. No business could afford to focus on a single strategy for its market presence (Wright & Parsinia, 1988; Klein, 2001). Porter’s paradigm further gave little impetus for a company to evolve, to develop its brand, to widen its operations. Rather it was seen as a theory that justified, even encouraged a business to maintain the status quo but just do it self-consciously and deliberately.

According to Gurau (2007), "Probably the most important limitation of this theory is the rigid and static nature of the strategic concepts proposed by Porter, while in reality the management science is permanently evolving" (1). And with the advent of the Internet and the re-structuring of the business environment to a global enterprise, critics have found Porter’s theories quaintly nostalgic, a business model for an earlier, simpler time. However, some research on competitive advantage in so-called cybermalls, has indicated that with some modification Porter’s strategies can still be applicable in the era in which companies now compete within a digital environment (Kim, Nam & Stimpert, 2004).

However, the implications of Porter’s model have reshaped how businesses perceive the dynamic of competition and how companies view their own identity. His model has become a standard theoretical paradigm for business schools. Porter insisted that at the foundation of his theory of generic strategies was the necessity of a business to conduct its own inventory of its strengths and weaknesses as a way to define where in the marketplace it might best succeed and where in the marketplace it might be vulnerable to economic overreach. Porter has since applied his model of generic strategies successfully to other network models from healthcare to education, from government services to personal fitness care.

Terms & Concepts

Differentiation: In business management, the act of deliberately designing key elements of a product or service with the intent of distinguishing that good or service and in turn make it more attractive within a highly competitive market.

Generic: A trait, characteristic, or element common to a wide group or classification of things.

Base Expenses: The sum total of fundamental costs a business invests in the production of a good or service, including labor, parts, transportation, and marketing, often considered to be the minimum outlay a company can expect to put into a line of products or a service.

Logistics: The careful design of a complicated network of operations, labor, facility management, and supplies within a business, the coordination of which is vital to the company’s efficient operation.

Niche Marketing: In business, the decision to target a relatively narrow element of a wider demographic and to deliberately push a particular good or service to that narrow market using advertising, pricing, and distribution.

Brand Loyalty: The feeling a consumer develops toward a particular good or service and, in turn, the expectation that, in return for their long-term patronage, the company will maintain the status (and quality) of those same goods or services.

Outsourcing: In business management, the decision to relocate critical elements of production in domestic operations to locations (other states, other regions, even other countries) where economic conditions are such that those same goods can be produced more cheaply.

Bibliography

Allen, R., Helms, M., Takeda, M., & White, C. (2007). Porter’s generic strategies: An exploratory study of their use in Japan. Journal of Business Strategies, 24(1), 69–90. Retrieved December 5, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=25336839&site=ehost-live

Gopalakrishna, P., & Subramanian, R. (2001). Revisiting the pure versus hybrid dilemma: Porter’s generic strategies in a developing economy. Journal of Global Marketing, 15(2), 1–20. Retrieved December 5, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5670383&site=ehost-live

Gurau, C. (2007). Porter’s generic strategies: A re-interpretation from a relationship marketing perspective. Marketing Review, 7(4), 369–383. Retrieved December 5, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=28097888&site=ehost-live

Kim, E., Nam, D., & Stimpert, J. (2004). Testing the applicability of Porter’s generic strategies in the digital age: A study of Korean cyber malls. Journal of Business Strategies, 21(1), 19–45. Retrieved December 5, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=13572813&site=ehost-live

Klein, J. (2001). A critique of competitive advantage. Critical Management Studies Conference, Manchester, UK. Retrieved December 5, 2015 from http://www.mngt.waikato.ac.nz/ejrot/cmsconference/2001/Papers/Strategy/Klein-ACritiqueofCompetitiveAdvantage.pdf.

Ormanidhi, O. & Stringa, O. (2008). Porter’s model of generic competitive strategies. Business Economics, 43(3), 55–64. Retrieved December 5, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=34488542&site=ehost-live

"Porter’s generic competitive strategies and ways of competing." Cambridge University Department of Engineering, Management Technology Policy. Retrieved December 5, 2015 from http://www.ifm.eng.cam.ac.uk/research/dstools/porters-generic-competitive-strategies.

Wright, P., & Parsinia, A. (1988). Porter’s synthesis of generic business strategies: A critique. Industrial Management, 30(3), 2014. Retrieved December 5, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4983026&site=ehost-live

Suggested Reading

"About Michael Porter." Harvard Business School. Retrieved 2 December 2015 from www.isc.hbs.edu.

Grant, R., & Jordan, J. (2015). Foundations of strategy. 2nd ed. Hoboken, NJ: Wiley.

Porter, M. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: Free Press.

Tripes, S., Komarkova, L., Pirozek, P., & Dvorak, J. (2014). Determinants of a Successful Differentiation Strategy. Proceedings Of The European Conference On Management, Leadership & Governance, 330-336. Retrieved January 3, 2016, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=99239867&site=ehost-live