Porter's Generic Strategies - Mind Tools

The Cost Leadership Strategy · Increasing profits by reducing costs, while charging industry-average prices. · Increasing market share by charging ... MENU JointheClubFor$1! Login SkillAreas Back SkillAreas LeadershipSkills TeamManagement StrategyTools ProblemSolving DecisionMaking ProjectManagement TimeManagement StressManagement CommunicationSkills CreativityTools LearningSkills CareerSkills LearningFormats Back LearningFormats Bite-SizedTraining BookInsights(Audio) CareerCafe ExpertInterviews(Audio) Forums Infographics Learningstreams MindToolsApp MyLearningPlan Quizzes TemplatesandWorksheets Videos ForYourOrganization Newsletter Blog AboutUs HomeStrategyToolsStrategicOptionsPorter'sGenericStrategies BytheMindToolsContentTeam BytheMindToolsContentTeam (197) 197ratings 11MINREADPorter'sGenericStrategiesChoosingYourRoutetoSuccess   Whichdoyoupreferwhenyoufly:acheap,no-frillsairline,oramoreexpensiveoperatorwithfantasticservicelevelsandmaximumcomfort?Andwouldyoueverconsiderasmallcompanywithjustafewroutes? Thechoiceisuptoyou,ofcourse.Butthepointwe'remakinghereisthatwhenyoucometobookaflight,therearesomeverydifferentoptionsavailable.Whyisthisso?Theansweristhateachoftheseairlineshaschosenadifferentwayofachievingcompetitiveadvantageinacrowdedmarketplace. Inthisarticleandvideo,we'lllookatthreeapproachesdescribedbyMichaelPorter. Clickhere   toviewatranscriptofthisvideo. Theno-frillsoperatorshaveoptedtocutcoststoaminimumandpasstheirsavingsontocustomersinlowerprices.Thishelpsthemgrabmarketshareandensuretheirplanesareasfullaspossible,furtherdrivingdowncost.Theluxuryairlines,ontheotherhand,focustheireffortsonmakingtheirserviceaswonderfulaspossible,andthehigherpricestheycancommandasaresultmakeupfortheirhighercosts. Meanwhile,smallerairlinestrytomakethemostoftheirdetailedknowledgeofjustafewroutestoprovidebetterorcheaperservicesthantheirlarger,internationalrivals. GenericStrategies Thesethreeapproachesareexamplesof"genericstrategies,"becausetheycanbeappliedtoproductsorservicesinallindustries,andtoorganizationsofallsizes.TheywerefirstsetoutbyMichaelPorterin1985inhisbook,"CompetitiveAdvantage:CreatingandSustainingSuperiorPerformance." Portercalledthegenericstrategies"CostLeadership"(nofrills),"Differentiation"(creatinguniquelydesirableproductsandservices)and"Focus"(offeringaspecializedserviceinanichemarket).HethensubdividedtheFocusstrategyintotwoparts:"CostFocus"and"DifferentiationFocus."Theseareshowninfigure1below. Tip: Theterms"CostFocus"and"DifferentiationFocus"canbealittleconfusing,astheycouldbeinterpretedasmeaning"afocusoncost"or"afocusondifferentiation."RememberthatCostFocusmeansemphasizingcost-minimizationwithinafocusedmarket,andDifferentiationFocusmeanspursuingstrategicdifferentiationwithinafocusedmarket. TheCostLeadershipStrategy Porter'sgenericstrategiesarewaysofgainingcompetitiveadvantage–inotherwords,developingthe"edge"thatgetsyouthesaleandtakesitawayfromyourcompetitors.TherearetwomainwaysofachievingthiswithinaCostLeadershipstrategy: Increasingprofitsbyreducingcosts,whilechargingindustry-averageprices. Increasingmarketsharebycharginglowerprices,whilestillmakingareasonableprofitoneachsalebecauseyou'vereducedcosts. Tip: RememberthatCostLeadershipisaboutminimizingthecosttotheorganizationofdeliveringproductsandservices.Thecostorpricepaidbythecustomerisaseparateissue! TheCostLeadershipstrategyisexactlythat–itinvolvesbeingtheleaderintermsofcostinyourindustryormarket.Simplybeingamongstthelowest-costproducersisnotgoodenough,asyouleaveyourselfwideopentoattackbyotherlow-costproducerswhomayundercutyourpricesandthereforeblockyourattemptstoincreasemarketshare. FindingThisArticleUseful? Youcanlearnanother144strategyskills,likethis,byjoiningtheMindToolsClub. JointheMindToolsClub Today! GettheFreeNewsletter Learnessentialcareerskillseveryweek,plusgetabonusEssentialStrategyChecklist,free! ReadourPrivacyPolicy You,therefore,needtobeconfidentthatyoucanachieveandmaintainthenumberonepositionbeforechoosingtheCostLeadershiproute.CompaniesthataresuccessfulinachievingCostLeadershipusuallyhave: Accesstothecapitalneededtoinvestintechnologythatwillbringcostsdown. Veryefficientlogistics. Alow-costbase(labor,materials,facilities),andawayofsustainablycuttingcostsbelowthoseofothercompetitors. ThegreatestriskinpursuingaCostLeadershipstrategyisthatthesesourcesofcostreductionarenotuniquetoyou,andthatothercompetitorscopyyourcostreductionstrategies.Thisiswhyit'simportanttocontinuouslyfindwaysofreducingeverycost.OnesuccessfulwayofdoingthisisbyadoptingtheJapaneseKaizen   philosophyof"continuousimprovement." TheDifferentiationStrategy Differentiationinvolvesmakingyourproductsorservicesdifferentfromandmoreattractivethanthoseofyourcompetitors.Howyoudothisdependsontheexactnatureofyourindustryandoftheproductsandservicesthemselves,butwilltypicallyinvolvefeatures,functionality,durability,support,andalsobrandimagethatyourcustomersvalue. TomakeasuccessofaDifferentiationstrategy,organizationsneed: Goodresearch,developmentandinnovation. Theabilitytodeliverhigh-qualityproductsorservices. Effectivesalesandmarketing,sothatthemarketunderstandsthebenefitsofferedbythedifferentiatedofferings. Largeorganizationspursuingadifferentiationstrategyneedtostayagilewiththeirnewproductdevelopmentprocesses.Otherwise,theyriskattackonseveralfrontsbycompetitorspursuingFocusDifferentiationstrategiesindifferentmarketsegments. TheFocusStrategy CompaniesthatuseFocusstrategiesconcentrateonparticularnichemarketsand,byunderstandingthedynamicsofthatmarketandtheuniqueneedsofcustomerswithinit,developuniquelylow-costorwell-specifiedproductsforthemarket.Becausetheyservecustomersintheirmarketuniquelywell,theytendtobuildstrongbrandloyaltyamongsttheircustomers.Thismakestheirparticularmarketsegmentlessattractivetocompetitors. Aswithbroadmarketstrategies,itisstillessentialtodecidewhetheryouwillpursueCostLeadershiporDifferentiationonceyouhaveselectedaFocusstrategyasyourmainapproach:Focusisnotnormallyenoughonitsown. ButwhetheryouuseCostFocusorDifferentiationFocus,thekeytomakingasuccessofagenericFocusstrategyistoensurethatyouareaddingsomethingextraasaresultofservingonlythatmarketniche.It'ssimplynotenoughtofocusononlyonemarketsegmentbecauseyourorganizationistoosmalltoserveabroadermarket(ifyoudo,youriskcompetingagainstbetter-resourcedbroadmarketcompanies'offerings). The"somethingextra"thatyouaddcancontributetoreducingcosts(perhapsthroughyourknowledgeofspecialistsuppliers)ortoincreasingdifferentiation(thoughyourdeepunderstandingofcustomers'needs). Tip: Genericstrategiesapplytonot-for-profitorganizationstoo. Anot-for-profitcanuseaCostLeadershipstrategytominimizethecostofgettingdonationsandachievingmoreforitsincome,whileonepursuingaDifferentiationstrategywillbecommittedtotheverybestoutcomes,evenifthevolumeofworkitdoes,asaresult,issmaller. LocalcharitiesaregreatexamplesoforganizationsusingFocusstrategiestogetdonationsandcontributetotheircommunities. ChoosingtheRightGenericStrategy Yourchoiceofwhichgenericstrategytopursueunderpinseveryotherstrategicdecisionyoumake,soit'sworthspendingtimetogetitright. Butyoudoneedtomakeadecision:Porterspecificallywarnsagainsttryingto"hedgeyourbets"byfollowingmorethanonestrategy.Oneofthemostimportantreasonswhythisiswiseadviceisthatthethingsyouneedtodotomakeeachtypeofstrategyworkappealtodifferenttypesofpeople.CostLeadershiprequiresaverydetailedinternalfocusonprocesses.Differentiation,ontheotherhand,demandsanoutward-facing,highlycreativeapproach. So,whenyoucometochoosewhichofthethreegenericstrategiesisforyou,it'svitalthatyoutakeyourorganization'scompetenciesandstrengthsintoaccount. Usethefollowingstepstohelpyouchoose. Step1: Foreachgenericstrategy,carryoutaSWOTAnalysis   ofyourstrengthsandweaknesses,andtheopportunitiesandthreatsyouwouldface,ifyouadoptedthatstrategy. Havingdonethis,itmaybeclearthatyourorganizationisunlikelytobeabletomakeasuccessofsomeofthegenericstrategies. Step2: UseFiveForcesAnalysis   tounderstandthenatureoftheindustryyouarein. Step3: ComparetheSWOTAnalysesoftheviablestrategicoptionswiththeresultsofyourFiveForcesanalysis.Foreachstrategicoption,askyourselfhowyoucouldusethatstrategyto: Reduceormanagesupplierpower. Reduceormanagebuyer/customerpower. Comeoutontopofthecompetitiverivalry. Reduceoreliminatethethreatofsubstitution. Reduceoreliminatethethreatofnewentry. Selectthegenericstrategythatgivesyouthestrongestsetofoptions. Tip: Porter'sGenericStrategiesofferagreatstartingpointforstrategicdecision-making. Onceyou'vemadeyourbasicchoice,though,therearestillmanystrategicoptionsavailable.Bowman'sStrategyClock   helpsyouthinkatthenextlevelofdetails,becauseitsplitsPorter'soptionsintoeightsub-strategies.YoucanalsouseUSPAnalysis   andCoreCompetenceAnalysis   toidentifytheareasyoushouldfocusontostandoutinyourmarketplace. KeyPoints AccordingtoPorter'sGenericStrategiesmodel,therearethreebasicstrategicoptionsavailabletoorganizationsforgainingcompetitiveadvantage.Theseare:CostLeadership,DifferentiationandFocus. OrganizationsthatachieveCostLeadershipcanbenefiteitherbygainingmarketsharethroughloweringprices(whilstmaintainingprofitability)orbymaintainingaveragepricesandthereforeincreasingprofits.Allofthisisachievedbyreducingcoststoalevelbelowthoseoftheorganization'scompetitors. CompaniesthatpursueaDifferentiationstrategywinmarketsharebyofferinguniquefeaturesthatarevaluedbytheircustomers.FocusstrategiesinvolveachievingCostLeadershiporDifferentiationwithinnichemarketsinwaysthatarenotavailabletomorebroadly-focusedplayers. ApplyThistoYourLife Askyourselfwhatyourorganization'sgenericstrategyis.Howdoesthisaffectthechoicesyourmakeinyourjob? Ifyou'reinanorganizationcommittedtoachievingCostLeadership,canyoureducecostsbyhiringlessexpensivestaffandtrainingthemup,orbyreducingstaffturnover?Canyoureducetrainingcostsbydevisingin-houseschemesforsharingskillsandknowledgeamongstteammembers?CanyoureduceexpensesbyusingtechnologysuchasvideoconferencingovertheInternet? IfyourorganizationispursuingaDifferentiationstrategy,canyouimprovecustomerservice?CustomerExperienceMapping   mayhelphere.Canyouhelptofosteracultureofcontinuousimprovementandinnovationinyourteam? Andifyou'reworkingforacompanythathasachosenaFocusstrategy,whatknowledgeorexpertisecanyouuseordeveloptoaddvalueforyourcustomersthatisn'tavailabletobroadmarketcompetitors? Thissiteteachesyoutheskillsyouneedforahappyandsuccessfulcareer;andthisisjustoneofmany toolsandresourcesthatyou'llfindhereatMindTools.Subscribetoour freenewsletter,or jointheMindToolsClubandreallysuperchargeyourcareer! AddthisarticletoMyLearningPlan MarkarticleasComplete ShowRatings HideRatings Ratings Ratethisresource Freeloginneeded. Login / CreateLogin. JointheMindToolsClubandGet4FreeWorkbooks! TheMindToolsClubgivesyouexclusive tipsand toolstoboostyourcareer-plusafriendlycommunityandsupportfromour careercoaches!  FindOutMore JointheMindToolsClub SignupforourFREEnewsletter Comments(26) Overamonthago BillTwrote HiEmran, Greattoheartheresourcehelpedyououtinsomeway. Thankyouforthegreatfeedback. BillT MindToolsTeam Overamonthago Emranwrote Thoseinformationreducedmyexamtension,quiteeasytounderstand. Thanksahuge. EmranAhmed Overamonthago Yolandewrote HiGeo15, WepublishedthisarticleonOctober19,2007. Yolande, MindToolsTeam ViewAllComments PreviousArticle Previous NextArticle Next GettheFreeNewsletter Learnessentialcareerskillseveryweek,plusgetabonusEssentialStrategyChecklist,free! ReadourPrivacyPolicy GettheFreeNewsletter Learnessentialcareerskillseveryweek,plusgetabonusEssentialStrategyChecklist,free! 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