Porter's generic strategies

Porter's generic strategies describe how a company pursues competitive advantage across its chosen market scope.

Porter defined two types of competitive advantage: lower cost or differentiation relative to its rivals.

He also wrote: "The two basic types of competitive advantage [differentiation and lower cost] combined with the scope of activities for which a firm seeks to achieve them lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation and focus.

"[2] In general: The concept of choice was a different perspective on strategy, as the 1970s paradigm was the pursuit of market share (size and scale) influenced by the experience curve.

This strategy involves the firm winning market share by appealing to cost-conscious or price-sensitive customers.

To succeed at offering the lowest price while still achieving profitability and a high return on investment, the firm must be able to operate at a lower cost than its rivals.

Higher levels of output both require and result in high market share, and create an entry barrier to potential competitors, who may be unable to achieve the scale necessary to match the firms low costs and prices.

The third dimension is control over the value chain encompassing all functional groups (finance, supply/procurement, marketing, inventory, information technology etc..) to ensure low costs.

For example, a local restaurant in a low rent location can attract price-sensitive customers if it offers a limited menu, rapid table turnover and employs staff on minimum wage.

Examples of the successful use of a differentiation strategy are Hero, Asian Paints, HUL, Nike athletic shoes (image and brand mark), BMW Group Automobiles, Perstorp BioProducts, Apple Computer (product's design), Mercedes-Benz automobiles.

These could include patents or other Intellectual Property (IP), unique technical expertise (e.g. Apple's design skills or Pixar's animation prowess), talented personnel (e.g. a sports team's star players or a brokerage firm's star traders), or innovative processes.

It is more appropriate for big companies to apply differentiation in any one or several of the functional groups (finance, purchase, marketing, inventory etc.).

The choice of offering low prices or differentiated products/services should depend on the needs of the selected segment and the resources and capabilities of the firm.

The firm typically looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency.

A focused strategy should target market segments that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on investment.

Porter stressed the idea that only one strategy should be adopted by a firm and failure to do so will result in “stuck in the middle” scenario.

[8] He discussed the idea that practising more than one strategy will lose the entire focus of the organization hence clear direction of the future trajectory could not be established.

[8] Two focal objectives of low cost leadership and differentiation clash with each other resulting in no proper direction for a firm.

However, contrary to the rationalisation of Porter, contemporary research has shown evidence of successful firms practising such a “hybrid strategy”.

As to Wright and other (1990 cited by Akan et al. 2006, p. 50) multiple business strategies are required to respond effectively to any environment condition.

In the mid to late 1980s where the environments were relatively stable there was no requirement for flexibility in business strategies but survival in the rapidly changing, highly unpredictable present market contexts will require flexibility to face any contingency (Anderson 1997, Goldman et al. 1995, Pine 1993 cited by Radas 2005, p. 197).

Though Porter had a fundamental rationalisation in his concept about the invalidity of hybrid business strategy, the highly volatile and turbulent market conditions will not permit survival of rigid business strategies since long-term establishment will depend on the agility and the quick responsiveness towards market and environmental conditions.

If a firm's business strategy could not cope with the environmental and market contingencies, long-term survival becomes unrealistic.

Diverging the strategy into different avenues with the view to exploit opportunities and avoid threats created by market conditions will be a pragmatic approach for a firm.

Consistent and superior performance over competition could be reached with stronger foundations in the event “hybrid strategy” is adopted.