Generic strategies

Some businesses have a competitive advantage in their industry – they consistently make more money than others. Generic strategies are the fundamental decisions that companies make to achieve competitive advantage – low cost, differentiated, and targeted.

When to use it

● To decide how to position your company or product in the market.
● To research your competitors' strategies.
● To create an organization and a set of skills to support your selected role.

Origins

The concept of generic tactics was created by Michael Porter. There had been previous study on diverse strategies (for example, in the late 1970s, Ray Miles and Charles Snow discussed 'analysers, defenders, and prospectors'), but Porter's 1980 book, Competitive Strategy, characterized the way we talk about strategies today. Based on his beliefs on industry structure, he believed that a company should take one of three main stances to defend itself against the 'five factors' that determine industry profitability: differentiation, low cost, or focus. He claimed that failing to choose one of these general positions would result in a company becoming trapped in the middle and condemned to low profitability.

Porter's views were expanded upon by many researchers, who demonstrated that they were (in general) validated by actual evidence. However, Porter was chastised by other observers, who pointed out that some enterprises are both distinctive and low cost, such as Toyota cars in the 1970s and 1980s, which were both cheaper and of superior quality than their American or European rivals. Today, it is widely agreed that Porter's arguments are accurate for mature businesses in a'steady state,' but that there is room for differentiation and low cost in industries in transition, where the rules of the game are unknown.

Porter went on to create a number of theories regarding how a company should carry out its general plan. He proposed the concept of a 'value chain' of interconnected operations in 1985, all of which should be oriented around the chosen strategic stance. He proposed the concept of an activity system in 1996. (the set of interlinked elements that the firm controls). The more this system is adapted to a certain strategy, the more difficult it is for another organization to reproduce it in its entirety, and the larger the firm's competitive advantage.

What it is

Generic strategies are the fundamental decisions a company makes about how it competes in a certain market in order to get a competitive advantage. Lower cost, differentiation, and focus are the three generic tactics. Porter claims that a company must choose only one of the three or risk wasting resources and confusing customers and staff.

There are several potential segments to target in any market, but Porter distinguishes between a 'focus' strategy centered on one segment and a 'broad-based' strategy covering multiple segments to make things simple. There's also the fundamental decision of how you want to position yourself against competition. When you combine these two dimensions, you get three generic strategies:

● A 'costleadership approach' is defined as offering the lowest price to clients in multiple segments.
● A 'differentiation strategy' involves segmenting clients based on factors other than price (such as higher quality or service).
● A focus approach is when you concentrate on one or a few sectors. This can be further divided into a cost-focused or differentiation-focused strategy.

Porter suggests that you pick one of these tactics and stick with it. Companies that fail to make a choice and try to be everything to everyone wind up caught in the middle. GM and Volkswagen, for example, were significantly less profitable than Toyota (low cost) or Mercedes (differentiated) in the 1980s and 1990s, while Nokia in phones and Tesco in the retail industry have recently fallen into this trap.

While these fundamental choices may appear obvious today, they represented a significant shift from the prevalent viewpoint at the time they were developed. At the time, most businesses were concentrating on size and scale (market share) as a means of lowering costs as they progressed up the experience curve. Porter's generic techniques served as a reminder to businesses that being better and more focused than competitors might be just as effective as being cheaper.

Generic strategies are intended to assist you in making fundamental decisions about where and how to compete in a certain market. These decisions entail establishing the characteristics of the product or service you're delivering first, and then putting together an internal set of activities and capabilities to deliver on that offering.

Here are some basic guidelines for the attributes of the product or service you're selling: ● Cost leadership entails reducing the overall costs of a product or service, which entails examining all aspects of your cost structure for ways to reduce or eliminate them. For many years, Dell was the obvious cost leader in the PC/laptop business since they sold directly to customers, eliminating many of the usual expenditures (such as retailer mark-up). Cost leaders can either charge the same as their competitors and make more money, or they can lower their prices to capture market share and force competitors out.
● Making your products or services more appealing than those of your competitors is what differentiation is all about. Customers will pay a premium if you are successful in your endeavor. A differentiation strategy can take various forms. Some companies prioritize R&D to improve their ability to develop, while others provide excellent service or market their products based on exclusivity and branding. In each of these circumstances, additional funds are invested in the hopes of being more than repaid by the ability to charge a premium.
● Focus refers to focusing on a certain niche and being able to nurture loyalty and charge more by knowing the specific demands of the clients in that area better than anyone else. Focus strategies are frequently based on personal relationships or the provision of a specific set of services that a more generalist competitor cannot afford. The problem with focusing on a specialty is that niches are frequently small, making expansion difficult.

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Further reading

Miles, R.E. and Snow, C.C. (1978) Organizational Strategy, Structure and Process. Redwood City, CA: Stanford University Press.

Porter, M.E. (1980) Competitive Strategy. New York: Free Press.

Porter, M.E. (1996) ‘What is strategy?’, Harvard Business Review, November– December: 61–78.