Michael Porter’s Generic strategies

Michael Porter suggested that businesses can secure a sustainable competitive advantage by adopting one of three generic strategies. He also identified a fourth strategy "middle of the road" strategy, which although adopted by some businesses, is unlikely to create a competitive advantage.

Cost Leadership Strategy This strategy involves the organisation aiming to be the lowest cost producer and/or distributor within their industry. The organisation aims to drive cost down for all production elements from the sourcing of materials, to labour costs.

To achieve cost leadership a business will usually need large scale production so that they can benefit from "economies of scale". Large scale production means that the business will need to appeal to a broad part of the market. For this reason a cost leadership strategy is a broad scope strategy. A cost leadership business can create a competitive advantage:

By reducing production costs and therefore increasing the amount of profit made on each sale as the business believes that its brand can command a premium price or - by reducing production costs and passing on the cost saving to customers in the hope that it will increase sales and market share Low cost producers include Easy Group, Ryan Air, and Walmart, Big Bazaar.

Differentiation Strategy To be different, is what organisations strive for; companies and product ranges that appeal to customers and "stand out from the crowd" have a competitive advantage. Porter asserts that businesses can stand out from their competitors by developing a differentiation strategy. With a differentiation strategy the business develops product or service features which are different from competitors and appeal to customers including functionality, customer support and product quality.

For example Brompton folding bicycles when folded are more compact than other folding bikes. Folding bikes are usually purchased by people with limited storage space at home or on the move; a compact bike is therefore a valued product feature and differentiates Brompton bicycles from other folding bicycles.

Under a focus strategy a business focuses its effort on one particular segment of the market and aims to become well known for providing products/services for that segment. They form a competitive advantage by catering for the specific needs and wants of their niche market. Examples include Roll Royce, Bentley and Saga a UK company catering for the needs of people over the age of 50. Once a firm has decided which market segment they will aim their products at, Porter said they have the option to pursue a cost leadership strategy or a differentiation strategy to suit that segment. Focus (Niche) Strategy Under a focus strategy a business focuses its effort on one particular segment of the market and aims to become well known for providing products/services for that segment. They form a competitive advantage by catering to the specific needs and wants of their niche market. Examples include Roll Royce, Bentley and Saga a UK company catering for the needs of people over the age of 50. Once a firm has decided which market segment they will aim their products at, Porter said they have the option to pursue a cost leadership strategy or a differentiation strategy to suit that segment.

A focus strategy is known as a narrow scope strategy because the business is focusing on a narrow (specific) segment of the market.

Middle of the road Some businesses will attempt to adopt all three strategies; cost leadership, differentiation and niche (focus). A business adopting all three strategies is known as "stuck in the middle". They have no clear business strategy and are attempting to be everything to everyone. This is likely to increase running costs and cause confusion, as it is difficult to please all sectors of the market. Middle of the road businesses usually do the worst in their industry because they are not concentrating on one business strength.

To create a competitive advantage businesses should review their strengths and pick the most appropriate strategy cost leadership, differentiation or focus. Although each of these strategies are known as generic strategies (because they can be applied to every industry) they will not suit every business. For example small businesses may find it difficult to generate the economies of scale needed for broad scope cost leadership but a smaller customer base may enable them to offer a personalised service through a narrow scope focus strategy.

Conversely, a larger business may not be able to generate sufficient revenue through a focus strategy but be able to pursue aggressive broad scope cost leadership because of the size of the business. Whatever strategy a business decides to adopt they should make sure that it isn't middle of the road because one business can not do everything well.

Intensive growth strategies

The Ansoff matrix

Market penetration seeks to achieve four main objectives: Maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling Secure dominance of growth markets, increase in distribution channels Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors Increase usage by existing customers – for example by introducing loyalty schemes

Market Development There are many possible ways of approaching this strategy, including: New geographical markets; for example exporting the product to a new country New product dimensions or packaging New distribution channels (e.g. moving from selling via retail to selling using e-commerce and mail order) Different pricing policies to attract different customers or create new market segments Market development is a more risky strategy than market penetration because of the targeting of new markets.

Product Development Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets. A strategy of product development is particularly suitable for a business where the product needs to be differentiated in order to remain competitive. 

A successful product development strategy places the marketing emphasis on: Research & development and innovation Detailed insights into customer needs (and how they change) Being first to market

Diversification Diversification is the name given to the growth strategy where a business markets new products in new markets. This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience. For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.  However, for the right balance between risk and reward, a marketing strategy of diversification can be highly rewarding.

The objective is which question marks can be turned to Stars, and Analyzing the current business portfolio Using; growth share matrix developed by Boston consulting Group ( BCG) The objective is which question marks can be turned to Stars, and Which stars can be turned into cash flows, and clear decisions about dogs Stars High growth market & high share Profit potential “May require heavy investment to grow” Question Marks High growth, low market share “Require a lot of cash to hold market share” ? Cash Cows Low growth market, high share we have to establish, successful SBU’s “ Less investment, but a lot Of cash” Foundations of a company Dogs Low growth market & share Low profit potential “ low cash flow may be generated”

The GE/ McKinsey Matrix This is a form of portfolio analysis used for classifying product lines or strategic business units within a large company It was developed by McKinsey for the US General Electric Company It assesses areas of the business in terms of two criteria: The attractiveness of the industry/market concerned The strength of the business

How does it differ from the Boston Matrix? There are similarities: Two dimensions are used to create a matrix Each cell suggests an appropriate strategy In both cases we are concerned with the future strategy for a particular area (eg a division) within the firm There are major differences The GE matrix involves a wider analysis of the firm’s operations The dimensions of the GE matrix are industry attractiveness and business strength (rather than market share and market growth) There are nine cells and a wider choice of strategies The Boston Matrix focuses on products within the firms product range The GE matrix can be extended to look at strategic business units

The matrix Arranges the company’s SBUs in three bands and nine boxes Band X - Successful SBUs – in which the business is strong and the industry is attractive Band Y - Mediocre SBUs – in which either the industry is less attractive and/or the business is lacks strengths Band Z - Disappointing SBUs - in which the business is weak and the industry unattractive

The GE/ McKinsey Matrix High strength Medium strength Low strength High attractiveness X Cell 1 Y Cell 2 Y Cell 3 Medium attractiveness Y Cell 4 Y Cell 5 Y Cell 6 Low attractiveness Y Cell 7 Y Cell 8 Z Cell 9

Recommended strategies Grow -strong business units in attractive industries -average business units in attractive industries -strong units in average industries Hold -average business units in average industries -strong units in weak industries -weak units in attractive industries Harvest -weak units in unattractive industries -average units in unattractive industries -weak units in average industries