Porter's Generic Strategy

Background

Michael Eugene Porter (born May 23, 1947) is an American businessman and professor at Harvard Business School. He was one of the founders of the consulting firm The Monitor Group  and FSG, a social impact consultancy

Porter identified four possible competitive strategies in the book "Competitive Advantage" from 1985 in order to achieve a better result than the competition in the industry.

These four strategies should be seen as a continuation of Porter's Five Forces.

But now it's specifically about how a firm can achieve a favorable competitive position in the industry.

About the model

The figure has two main divisions.

One of them is competitive scope – which defines the breadth of the firm's target within its industry.

Competitive scope sometimes also called the industry or the market.

The firm has a broad target scope and serves many or all segments in the industry or has a narrow target where the firm focus on customers in selected segments

The second is the competitive advantage

The two divisions of competitive advantage is:

Lower costs

 - the firm offers a comparable product cheaper than the competition in the industry or the selected segment.

Differentiation

- the firm offers a service or a product that is perceived as unique compared to competitors.

The firm isolates themselves in relation to the rivalry in the industry and thereby customers become loyal and therefore less price sensitive.

The model is divided into four fields:

• Cost Leadership
• Differentiation

Two focus areas:

• Cost Focus
• Focus Differentiation.

Cost leadership -  is perhaps the clearest of the generic strategies.

In it a firm sets out to become the low-cost producer in its industry – also called the cost leader

Differentiation

The firm offers something unique compared to the other firms in the industry Focus strategy is quite different from the previous two because it rests on the assumption that the exist a narrow competitive scope within an industry and tailors its strategy to serving them to the exclusion of others.

Cost focus

Which exploits differences in cost behavior in some seperated segments - bottled water instead of tap water - the company is still cost conscious in these segments.

Criticism

It is difficult to define an industry the boundaries of an industry are almost always moving