Porter’s Generic Strategies

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Porter’s generic strategies describe how a company pursues competitive advantage across its chosen market scope. There are three/four generic strategies, either lower cost, differentiated, or focus. A company chooses to pursue one of two types of competitive advantage, either via lower costs than its competition or by differentiating itself along dimensions valued by customers to command a higher price. A company also chooses one of two types of scope, either focus (offering its products to selected segments of the market) or industry-wide, offering its product across many market segments. The generic strategy reflects the choices made regarding both the type of competitive advantage and the scope. The concept was described by Michael Porter in 1980. — Wikipedia

Porter wrote in 1980 that strategy targets either —

• Cost leadership
• Differentiation leadership
• Focus leadership (Segmentation or niche strategy)

Cost Leadership

Walmart is a classic example of cost leadership. The cornerstone of Walmart’s business strategy is its everyday low prices. The brand sells a very large range of products and its focus always remains on providing the least prices. The millennial customers are interested in three things. They are convenience, low prices and product quality.

Walmart has decided to fight not only on the basis of prices but to get an even bigger share of the pie, it will also focus more on customer convenience. It is why it has raised the bar for operations and customer service across its stores. Among the other several things that have helped Walmart carry out its business strategy is also its reputation for being the most customer friendly brand. The question is — “what are the most important factors that have kept driving Walmart’s growth”.

Four Important factors driving growth of Walmart

• Large sales volume made possible by a large customer base and scale of operation.
• A highly efficient supply chain system that maximizes productivity and reduces outlays.
• Low operational and overhead costs
• Use of bargaining power to grab the least prices from the suppliers (a very important strength for a large scale retailer that plays the most important role in its price advantage).

Differentiation Leadership

“The three most important words in differentiating your brand: focus, focus and focus.” -Marty Neumeier

Today’s winning brands aren’t playing it safe. They never say “that’s how we’ve always done it.” They know their brands are more — way more — than just a sleek logo or a cool website.

Differentiation is a strategy in which a company distinguishes its products and services by its features and benefits from its competitors. Through differentiation, a company creates a product or service that customers perceive as unique in the industry. As a result, you are able to charge a premium price and earn profits with above average margins. Companies that have succeeded with a differentiation strategy include Apple, BMW, and Nike.

Apple

has been a market leader, initially in the PC market and now in the smartphone domain. Infact, even today almost all smartphones are derived from the first iPhone design launched by Steve Jobs. Unmatched design accompanied by seamless user experience has helped Apple maintain its dominant position in the market. Apple was able to maintain this until recently through cutting edge technologies and extensive R&D.

Nike

has created a strong brand loyalty and undoubtedly is one of the most loved brands on the planet. Let’s see how nike has achieved this:

• branding, the creation of a strong image among its teenage customer base — a must have mentality that allows the company to charge premium price over its competitors.
• scale, the cost savings associated with a larger corporate size. Nike has close to $29 billion in revenues, almost twice its closest competitor, Adidas AG.
• scope, the cost savings associated with offering different products by a single corporation for sale, rather than products by different corporations. Nike has a broad range of shoes, clothing, and gear, catered to men, women, and children.
• customization, the benefits associated with offering customer-tailored solutions. NikeiD allows customers to customize some of the products they buy.
• innovation, the discovery of new products that have a number of distinct features separate from those of conventional competing products — features that stir up emotion and desire, seducing consumer fantasy.

Nike’s products have all these characteristics, and then some — they usually carry the names of professional athletes like Nike Air Jordan Retro XI sneakers, modeled after the 1996 originals designed for Michel Jordan when he played for the Chicago Bulls.

Focus leadership

Focus is a strategy that enables a company to dominate a niche. Through a focus strategy, your company concentrates on a limited part of a market. Companies that succeed with a focus strategy understand the dynamics and unique customer needs of their market niche. As a result of developing and promoting “niche” products and services, you can attract a higher share of customers in that market segment than competitors. Plus, you can earn above average profits and reduce the threat of competitors entering the niche.

Focus on a Narrow Target Market

When you focus on a narrow target market, you have the best chance to become the leader of that niche. This is especially true when you target a segment that is less vulnerable to substitutes or where the competitive landscape is weak. You can choose the customer segment based on marketing trends, demographics, psychographics, and customer needs. You can also decide on the best types of product and service solutions to sell to this niche.

By focusing on a narrow target market, you also are able to contain costs. You are able to advertise and promote your products and services in media that focuses on your target group. Plus, you are able to contain costs of manufacturing products or delivery of services.

Not surprisingly, some of the world’s most successful companies started out by focusing on narrow target markets. Walmart began by focusing on serving rural towns where larger retailers such as Sears and Kmart did not sell. Amazon started by focusing on consumer book buyers with Internet access. Facebook began as a service for Harvard students.

A focus strategy enables your company to earn profits in both the short and long term. In fact, a focus strategy is often more profitable than a strategy that supports expansion. Look what happened when Xerox expanded its technology expertise to make and sell computers. It lost its focus and was not successful in the new market. The same thing happened to Yahoo! The former search engine leader, whose focus was on Internet search, lost its dominance when it expanded into other online services. Google soon took over as the leader.

The bottom line is to focus on a niche in which you can create and sustain a competitive advantage. By doing so, you can be the king of your niche, rather than a pawn in a crowded market.

Next step is deciding the best strategy for your business — Choosing the Right Generic Strategy

Sukant Kumar is a Product / Marketing leader in tech. I am passionate about tech and product and creating memorable user experiences. Connect with me on LinkedIn, mentioning this story. If you liked this story do let me know in comments and don’t forget to clap a dozen times 😎