Porter’s Generic Strategies – Simplified

In his 1980 book Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter developed a methodology for analyzing an individual company’s strategy.  In this analysis, the industry is irrelevant, which is why the strategies are called generic strategies.   In the original format, Porter originally laid out three generic strategies that a business could pursue.  Over time, those strategies have been enhanced and refined.  It is his original work and subsequent enhancements that offer an excellent approach to how business owners can look at their competitors in a market, and also glean tactics from players in other markets to carry out their own strategy.

Over time, as Porter’s concepts have been updated and appended, the strategies have largely evolved to five general strategies.  It is this look at Porter’s concept that has value for a start-up business – or any business for that matter – to determine how they should approach the marketplace.  Generally, this model is utilized in academic circles and large corporations.  However, this model provides invaluable insight specifically for small business owners when thinking about how to approach a market.  

Most businesses inherently know who they want to be in the marketplace, but they have a hard time approaching the market with specific tactics that support who they want to be.  The value to performing the exercise of analyzing the generic strategies is to strengthen the approach that a business should take to fulfill how they are perceived.  As an example, inexperienced businesses often believe they need to compete on price, but this is not always so and a look at the generic strategies may indicate the need for a different approach.

Below is a simplified look at the five strategies  The following depicts the model in a linear format.

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Linear View of Generic Business Strategies

<——1—————2——————-3——————–4————–5——>

<——Cost                                            Differentiation——>

1. Focus Cost
2. Cost Leadership
3. Hybrid
4. Differentiation
5. Focus Differentiation
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Reading from left to right, businesses can focus on an extreme low-cost strategy at one end of the spectrum.  This means the business is competing solely on price.  Price competition is an easy concept and unfortunately one that small business owners often think they must choose.  Businesses that start by competing strictly on price should slowly move to the right and evolve into more of a cost/differentiation hybrid strategy in the middle of the spectrum.  

When thinking about companies with a focus on cost, consider retailers that focus strictly on cost.  Some low cost providers do not even furnish their shoppers with bags.  Additionally, dollar discount stores sell a lot of items, but the options are limited.  Thus, characteristics of an extreme cost approach means there are no frills attached.

The opposite approach is to start with a differentiation strategy.  A business can choose to start at the right end of the spectrum, focusing on a extreme differentiation strategy and moving to the left toward a differentiation/cost hybrid strategy.  Luxury items are differentiated items.  One-of-a-kind products with above average costs are differentiated products.  

Generally, the more individual or superior the product, the more that differentiation is involved.  With extremely differentiated products, price is of little concern.  The smallest details are well-thought-out.  And subsequently, the price reflects the greater attention to detail.

When initially thinking about this model, a business can boil the model down to two approaches, and must consider whether it is going to start with a price strategy or a differentiation strategy.  The differentiation approach is more complex, but it is the sweet spot for many successful businesses, as competing purely on price can create profitability problems.  

Price wars rarely result in a winner for the businesses involved.  Generally the competitor with the greater access to resources (money) wins a price war in the long run.  Nonetheless, companies often must enter the market as a cost competitor.  If this is the case, they should have a plan for moving away from solely relying on price tactics and moving toward more differentiation techniques.

While the generic strategies may seem confusing at first, they become easier to identify with practice.  When directly interacting with products and businesses, it is quickly evident as to which generic strategy they are utilizing.  Looking at the details of how a business operates and the culture of the business will generally make their generic strategy evident.  

See if you can identify which strategy each of the following brands use.  When you look at them, do you automatically think “low cost” or “differentiation”?

• Apple

• Amazon

• McDonald’s

• Ruth’s Chris Steak House

• Safe Auto

• Lloyd’s of London

• Maserati

• Kia

• Wal-Mart (“Save Money, Live Better” slogan)

• Macy’s

• Econo Lodge

• Ritz-Carlton

Some of these examples were not so easy to answer, but most were evident immediately.  In some cases, businesses such as Amazon utilize different strategies for different product lines.  Amazon will sometimes use a cost strategy to enter the market, and slowly move the product over to a differentiated product.  In their case, Amazon is masterful at altering their strategy to first gain market share, and then move to a more profitable model for a particular business.

For any business, the point is that in a specific product or service that they are involved in, they should be able to identify exactly which generic strategy each of their competitors is employing.  By identifying their competitors’ implemented strategies, an organization should be able to approach the market in a way that positions itself to target its ideal audience with consistent activity and simultaneously exploit weaknesses in the way their competitors approach the market.

What Is Business Strategy?

Business strategy is a nebulous business concept. Especially for small businesses.  Few small businesses can identify their strategy, let alone understand whether they are discussing strategy, tactical, or operational concepts.  Few understand their vision and mission, and how those relate to their strategy.  Then, when it comes down to performing daily tasks, they may perform duties that are the antithesis of their strategy.  So, it is no wonder that so many businesses fail.  Even giants like General Motors and Kmart are not immune from losing sight of their strategy, and ultimately losing themselves.

Without a clear strategy, the reality is that in the midst of the dogfight called daily life it is easy for a business to get off track.  It is easy when customers are continually pounding you with complaints and problems to get off track.  Some even learn to dislike the very people they have vowed to serve.  Truly, sometimes customers don’t know what is best for them, and it is your strategy that will prevent you from being susceptible to their whims.  Successful businesses know the direction in which they are headed.

That does not mean that a business should not be flexible, but it does mean that it should be principled.  The truth is that brand gets built over time.  For those that recognize their strategy, every action rolls up into that objective.  There is no shortcut to that concept.

In thinking about a business strategy,there are some steps that a business can take to lay out its strategy.

1. Lay Out the Vision and Mission:  So, where should a business begin.  Well, an easy way is with a vision and mission.  A vision is a simple statement that lays out what the organization thinks it is.  The mission is what the business is doing right now to accomplish that vision.  The mission is susceptible to change as a results of market realities.  However, the vision should stand steady across time.

2. Determine Your Generic Strategy:  Identify if you are going to compete on price or quality, also known as generic business strategies.  In the lifespan of a company, organizations typically start by competing on price, and slowly move to a model based on quality.  Truly, until a reputation is established, you may have to compete on price.  But what is the long-term objective?  Identify if in the long run you will be a price or quality competitor.  At heart, those a counter objectives.

3. Choose Measurements:  Identify some simple things you can measure.  In the long run, you should be able to measure some key items that identify how you are performing.  It could be as simple as profitability initially, but in the long run it may be tied to customer performance.   Younger and smaller companies rarely identify metrics that they can use to manage the business.

4. Look for Strategy-to-Activity Gaps:  Preventing gaps is critical to executing strategy.   If a business identifies strong customer service as a core value, but chooses to use an automated system to greet the world, then that is a strategy-to-activity gap.  In essence, preventing gaps means walking the walk.

5. Understand the Competition:  Why should a plumber care about his competitors?  Simply, understanding the enemy: 1. helps identify opportunities, 2. solidifies the mission, and 3. helps identify gaps.  Most businesses believe they do not want competition.  All businesses need competition.  Without competition, there is no incentive to innovate.  Understanding that the competition does and what you do enables you to look for opportunities.

While these may seem like fairly advanced concepts, they really are not.  In honesty, businesses are already doing some mix of these activities.  However, it is about thinking top-down to be what you want to be, but then working from the bottom-up to properly execute.

Also, these activities do not have to involve highly technical methodologies.  With measurements as an example, a company does not have to depend on highly sophisticated software to track key metrics and information.  In some cases, financial software such as Quicken or QuickBooks may provide the needed information, but in other cases Microsoft Excel can be setup to track information.  In fact, Excel can be fairly extensive in capturing information.  And the assistance of a local college student may enable a less technical business owner to become more intricate in data collection.

Ultimately, the key is to identify the gaps.  Only the visionary – the business owner – can know what the vision is.  Until that is established, no one can know the gaps.  You can see, each of the five steps above is tightly integrated with the others.  However, one must take the initial step of identifying why the business exists.  It is all about The Vision.