One of the most prevalent models in the Strategic Marketing theory is Porter’s Generic Strategies which as its name implies was developed by Michael Porter in the early 1980s. The model attempts to examine the competitive behaviors and positioning of a firm that leads to a strategic competitive advantage. The generic strategies are positioning options plotted on two dimensions; the scope of the market and the basis of competitive advantage. Based on these, Porter has proposed three possible generic competitive strategies:
Cost Leadership Strategy
As its name implies, the cost leadership strategy involves cost efficiencies through the manipulation of production costs. One way to achieve this is by casting the business as a low-cost alternative in order to attract customers, boost sales and gain market share. Another way to achieve cost efficiencies is by reducing cost in order to increase profits. Yet it is important to note that a minimum level of quality must be maintained in order to be acceptable to the customer. This strategy is especially beneficial when the customer base is price sensitive.
Product Differentiation Strategy
A very different approach is the Product Differentiation strategy in which a firm aims to be the highest value provider within the market. This can be achieved through high quality product and services, rigorous marketing activities, after-sales service and continuous research and innovation. On this basis of being higher valued, the business can charge higher prices than the industry average. This strategic option is primary focused on customer loyalty and retention and therefore seeks to create long-term customer relationships.
While the Cost Leadership and Differentiation strategies focus on a broad customer base, the Focus strategy strives to build a competitive advantage by engaging in a smaller portion of the market. This model is based on the belief that by focusing on a narrow segment a firm can deliver better specialized service. Although penetrating a niche market might be considered risky, it often captivates customers with high loyalty and retention levels and leads to increased profits. Within the Focus strategy, there are two variants:
- Cost Focus: Here, firms are aiming for a cost advantage by tapping into a narrow market segment also known as ‘niche’ market.
- Differentiation Focus: Here, firms aim to provide customers a higher perceived value for their products or services, usually at a premium price. This strategy is intended for a narrowly defined market segment.
Through his work, Porter has argued that a firm’s strengths fall into one of the headings discussed above and therefore the respective positioning should be followed. Yet, the choice of strategy depends upon the firm’s strategic objectives, orientation and long-term vision. All factors must be considered in order for a business to make the right choice of a positioning strategy without being ‘stuck in the middle’, as this accordPorter’s Generic Strategiesing to Porter (1985), will lead to the lack of ability to compete effectively.