Michael Porter proposed the concept of three generic (or ‘catch all’) strategies in his 1985 book, “Competitive Advantage: Creating and Sustaining Superior Performance”. The basic proposal of Porter’s Generic Strategies are that there are three main approaches that organisations can follow when operating in a competitive market. These are dependent on the size of the market being targeted (broad vs. narrow target audiences) and whether the organisation decides to pursue a strategy of cutting costs and generating efficiencies to offer the best prices in the market, or invests in marketing spend to differentiate the organisation or product offering.
Porter’s Three Generic Strategies
The three main generic strategies detailed by Porter are:
1) Cost Leadership: no frills, offering the lowest pricing within the market such as EasyJet),
2) Differentiation: creating uniquely desirable products and services that stand out versus competition such as Virgin Atlantic.
3) Focus or Niche: offering a specialised services in a niche market such as Flexjet which offers private, exclusive flights.
Porter subdivides the Focus (or ‘Niche’) strategy into two parts: Cost Focus and Differentiation Focus. He proposes that companies can follow either a lowest cost strategy within a niche market or a clearly differentiated positioning in a niche market.
Financially, it is questionable as to whether a ‘Cost Focus’ strategy is attainable within a niche market, as by definition niche markets offer small volumes and pursuing lowest cost (or price) often requires volume in order to maintain a suitable profit. ‘Differentiation Focus’ strategies tend to have a higher pricing model than the other two generic strategies and therefore generate higher profit margins at lower volumes.
Figure 1: Porter’s Generic Strategies (Porter, 1985)
Applying Porter’s Generic Strategies
When starting to consider a strategic direction for an organisation as a whole or a new product/service launch, it is useful to refer to Porter’s Generic Strategies to clarify whether the organisation is targeting a broad or niche audience as this will significantly impact the pricing strategy and financial operations.
It is also worth considering whether a cost strategy would be either suitable or attainable within the market or if another competitor already owns this position. Longer term, it can be tricky to maintain a cost leadership position, all elements of product design, pricing, process and people need to consider lowest cost options or ways to take cost out of the business compared to competitor processes and offerings at all times.
Many companies opt for differentiation, which requires clear investment around a relevant, resonating value proposition that your organisation or product can own into the longer term. In some cases, sub-brands or new services can be developed from a differentiation strategy, maintaining the main value proposition. For example, Tesco ‘Every Little Helps’ differentiation message runs through all of its product and service offerings, but each offering then builds an additional motivating need within their value proposition. For example, Tesco.com continues to focus on developing its service within the ‘Every Little Helps’ messaging, but with the focus on convenience at the heart of its delivery strategy with the latest launch of Whoosh.
Using Porter’s Theory to Create Organisational Strategy
Porter’s generic strategies can often be a springboard as a foundation strategy for your organisation or product, where other potential strategies can then be laid over the generic strategy. Such as, pursuing a differentiation strategy could be pursued alongside a market penetration strategy (Ansoff, 1957), a customer loyalty strategy or brand development strategy. In this fashion, you create a multi-layered strategic direction most suitable for your current situation, with a clear foundation on whether the basic strategic focus is differentiation or cost, and whether you intend to gain a broad range of customer segments or specialise in meeting the needs of a specific segment of the market.
This article was written by Fiona Eriksen-Coats (MCIM DipM Business Science Hons). If you are interested in learning about marketing strategies, our range of CIM qualifications may be for you. For more information about our range of CIM marketing courses, get in touch with our team.