The three generic strategies proposed by Michael Porter are: global leadership in costs, differentiation and focus or concentration, through them a company can face the five forces that shape competition in a sector and achieve a sustainable competitive advantage that allows it outperform rival firms.
Porter's three generic strategies. Source: Porter, p.81
In the global cost leadership strategy, the company must have the ability to reduce costs in all the links of its value chain, in such a way that the reduction of expenses results in a better price for the consumer and consequently in a greater market share.
In the differentiation strategy, the company must produce exclusive services / products that are thus perceived by consumers, who are willing to pay more for having them.
With a focus or concentration strategy (segmentation or specialization), the company focuses on satisfying well-defined segments, population, products or geographies.
The first two, leadership in costs and differentiation, seek the general advantage in their sector, while the third, focus, seeks to have the advantage within a target market.
Following is a brief bibliographic review to expand the concept of each of the three generic strategies.
The three generic strategies
Global cost leadership
This strategy requires a detailed and in-depth knowledge of the activities of the value chain to identify those in which cost advantages can be achieved. The analysis of activities in the value chain is performed from the point of view of cost drivers. The main driver in the cost leadership strategy is the experience curve, according to which the unit cost of production decreases with the accumulated number of units produced. This advantage is considered sustainable, since it is not easy for followers to imitate as long as production technology does not change. In contrast, economies of scale can be more easily imitated. (French, p.107)
Differentiation
It implies that the business unit offers something unique, unmatched by its competitors, and valued by its buyers beyond simply offering a lower price. It is necessary to understand the central potential source of differentiation that arises from the activities of the value chain and the deployment of the necessary expertise for these potentialities to become a reality. Differentiation requires the creation of something that is perceived as unique in the entire industry. Differentiation approaches can take many forms: brand design or image, technology, features, customer service, broker network, or other dimensions. (Hax and Majluf, p.163)
Focus or concentration (segmentation or specialization)
The concentration strategy (both based on costs and differentiation) is characterized by the prior choice of a segment, local market, phase of the production process, etc. and for adjusting an optimal strategy that responds to the specific needs of the chosen clients. Consequently, it is not about being the best (in cost or differentiation) on the market, but it is about being the best in the chosen segment. Concentration can be based on the existence of different types of buyers (with different purchasing strategies), on the existence of different distribution channels (direct sales, by retailers, by representatives, by mail, etc., etc.) and on the possibility of offering different varieties of products (size, quality, price, performance, etc.). (Larrea, p.98)
Risks of generic strategies
Each generic stance carries its own risks (De Kluyver, p.100):
Cost leaders must be concerned with technological change capable of nullifying past investments in economies of scale or accumulated learning. In an increasingly global economy, cost leadership is particularly vulnerable to new entrants from other parts of the world who can take advantage of lower factor costs. Until recently, inflation threatened to reduce the differential cost of prices that leaders could maintain against competitors using differentiation strategies.
The biggest challenge for differentiators is imitation, which reduces real and perceived differentiation. If that happens, shoppers can change their mindset about what constitutes differentiation, and thus change their loyalties and preferences.
The biggest challenge posed by generic positions is creating sustainability. For cost leaders, this means continually improving efficiency, searching for less expensive sources of supply, and finding ways to reduce manufacturing and distribution costs. For differentiators, the challenge is to raise entry barriers around their unique character, use multiple sources of differentiation and, when possible, create critical costs for customers. From an organizational perspective, a differentiation strategy requires a strong coordination between R&D, product development and marketing, and incentives for value creation and creativity.
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Here is a series of video-lessons (4 videos, 36 minutes), from the Miguel Hernández University of Elche, through which you can delve into learning Porter's generic strategies, cost leadership, differentiation and focus.
Bibliography
- De Kluyver, Cornelis A. Strategic Thinking: A Perspective for Executives, Pearson Education, 2001. French, Antonio. Strategy and plans for the company: with the balanced scorecard, Pearson Educación, 2006.Hax, Arnoldo Cy Majluf, Nicolás. Strategies for competitive leadership, Ediciones Granica, 2004.Larrea, Pedro. Quality of service: from marketing to strategy, Ediciones Díaz de Santos, 1991. Porter, Michael. Competitive Strategy, Ediciones Pirámide, 2009.
