Porter's Generic Competitive Strategies

1. Porter's Generic Competitive Strategies (ways of competing)

Competitive advantage can be described in two ways in terms of a Firm's performance, which is low cost of differentiation. A firm's position in the market will be determines whether a firm's profitability is low or high or just average by its performance. The generic competitive strategies is further divided into three other parts which is called Cost leadership, differentiation and focus. The focus strategy has two variant, cost focus and differentiation focus.

A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage 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. The focus strategy has two variants, cost focus and differentiation focus.

matrix of competitive advantage vs. scope

1. Cost Leadership

In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average.

2. Differentiation

In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions it to meet those needs. It is rewarded for its uniqueness with a premium price.

3. Focus

The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.

The focus strategy has two variants.

(a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments.


Michael Porter has described a category scheme consisting of three general types of strategies that are commonly used by businesses to achieve and maintain competitive advantage. These three generic strategies are defined along two dimensions: strategic scope and strategic strength. Strategic scope is a demand-side dimension (Porter was originally an engineer, then an economist before he specialized in strategy) and looks at the size and composition of the market you intend to target. Strategic strength is a supply-side dimension and looks at the strength or core competency of the firm. In particular he identified two competencies that he felt were most important: product differentiation and product cost (efficiency).

Empirical research on the profit impact of marketing strategy indicated that firms with a high market share were often quite profitable, but so were many firms with low market share. The least profitable firms were those with moderate market share. This was sometimes referred to as the hole in the middle problem. Porter's explanation of this is that firms with high market share were successful because they pursued a cost leadership strategy and firms with low market share were successful because they used market segmentation to focus on a small but profitable market niche. Firms in the middle were less profitable because they did not have a viable generic strategy.

Combining multiple strategies is successful in only one case. Combining a market segmentation strategy with a product differentiation strategy is an effective way of matching your firm's product strategy (supply side) to the characteristics of your target market segments (demand side). But combinations like cost leadership with product differentiation are hard (but not impossible) to implement due to the potential for conflict between cost minimization and the additional cost of value-added differentiation.

Since that time, some commentators have made a distinction between cost leadership, that is, low cost strategies, and best cost strategies. They claim that a low cost strategy is rarely able to provide a sustainable competitive advantage. In most cases firms end up in price wars. Instead, they claim a best cost strategy is preferred. This involves providing the best value for a relatively low price

Cost Leadership Strategy

This strategy emphasizes efficiency. By producing high volumes of standardized products, the firm hopes to take advantage of economies of scale and experience curve effects. The product is often a basic no-frills product that is produced at a relatively low cost and made available to a very large customer base. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. The associated distribution strategy is to obtain the most extensive distribution possible. Promotional strategy often involves trying to make a virtue out of low cost product features.

To be successful, this strategy usually requires a considerable market share advantage or preferential access to raw materials, components, labour, or some other important input. Without one or more of these advantages, the strategy can easily be mimicked by competitors. Successful implementation also benefits from:

Examples include retailers such as Wal-Mart and KwikSave as well as IT firms such as Dell and Lenovo.

When a firm designs, produces and markets a product more efficiently than competitors such firm has implemented a cost leadership strategy (Allen et al. 2006, p.25,). Cost reduction strategies across the activity cost chain will represent low cost leadership (Tehrani 2003, p.610, Beheshti 2004, p. 118). Attempts to reduce costs will spread through the whole business process from manufacturing to the final stage of selling the product. Any processes that do not contribute towards minimization of cost base should be outsourced to other organisations with the view of maintaining a low cost base (Akan et al. 2006, p.48). Low costs will permit a firm to sell relatively standardised products that offer features acceptable to many customers at the lowest competitive price and such low prices will gain competitive advantage and increase market share (Porter 1980 cited by Srivannboon 2006, p.88; Porter 1979;1987;1986, Bauer and Colgan 2001; Hyatt 2001; Anon 1988; Davidson 2001; Cross 1999 cited by Allen and Helms 2006, p.435). These writings explain that cost efficiency gained in the whole process will enable a firm to mark up a price lower than competition which ultimately results in high sales since competition could not match such a low cost base. If the low cost base could be maintained for longer periods of time it will ensure consistent increase in market share and stable profits hence consequent in superior performance. However all writings direct us to the understanding that sustainability of the competitive advantage reached through low cost strategy will depend on the ability of a competitor to match or develop a lower cost base than the existing cost leader in the market.

A firm attempts to maintain a low cost base by controlling production costs, increasing their capacity utilization, controlling material supply or product distribution and minimizing other costs including R&D and advertising (Prajogo 2007,p.70). Mass production, mass distribution, economies of scale, technology, product design, learning curve benefit, work force dedicated for low cost production, reduced sales force, less spending on marketing will further help a firm to main a low cost base (Freeman 2003, p.86; Trogovicky et al. 2005, p.18). Decision makers in a cost leadership firm will be compelled to closely scrutinise the cost efficiency of the processes of the firm. Maintaining the low cost base will become the primary determinant of the cost leadership strategy. For low cost leadership to be effective a firm should have a large market share (Robinson and Chiang 2000, p.857; Hyatt 2001 cited by Allen and Helms 2006, p.435). New entrants or firms with a smaller market share may not benefit from such strategy since mass production, mass distribution and economies of scale will not make an impact on such firms. Low cost leadership becomes a viable strategy only for larger firms. Market leaders may strengthen their positioning by advantages attained through scale and experience in a low cost leadership strategy. But is their any superiority in low cost strategy than other strategic typologies? Can a firm that adopts a low cost strategy out perform another firm with a different competitive strategy? If firms costs are low enough it may be profitable even in a highly competitive scenario hence it becomes a defensive mechanism against competitors (Kim et al. 2004, p.21). Further they mention that such low cost may act as entry barriers since new entrants require huge capital to produce goods or services at the same or lesser price than a cost leader. As discussed in the academic frame work of competitive advantage raising barriers for competition will consequent in sustainable competitive advantage and in consolidation with the above writings we may establish the fact that low cost competitive strategy may generate a sustainable competitive advantage. However, this is not true in all cases.

Further in consideration of factors mentioned above that facilitate a firm in maintaining a low cost base; some factors such as technology which may be developed through innovation (mentioned as creative accumulation in Schumpeterian innovation) and some may even be resources developed by a firm such as long term healthy relationships build with distributors to maintain cost effective distribution channels or supply chains (inimitable, unique, valuable non transferable resource mentioned in RBV). Similarly economies of scale may be an ultimate result of a commitment made by a firm such as capital investments for expansions (as discussed in the commitment approach). Also raising barriers for competition by virtue of the low cost base that enables the low prices will result in strong strategic positioning in the market (discussed in the IO structural approach). These significant strengths align with the four perspectives of sustainable competitive advantage mentioned in the early parts of this literature review. Low cost leadership could be considered as a competitive strategy that will create a sustainable competitive advantage.

However, low cost leadership is attached to a disadvantage which is less customer loyalty (Vokurka and Davis 2004, p. 490, Cross 1999 cited by Allen and Helms 2006, p.436). Relatively low prices will result in creating a negative attitude towards the quality of the product in the mindset of the customers (Priem 2007, p.220). Customer's impression regarding such products will enhance the tendency to shift towards a product which might be higher in price but projects an image of quality. Considering analytical in depth view regarding the low cost strategy, it reflects capability to generate a competitive advantage but development and maintenance of a low cost base becomes a vital, decisive task.

Differentiation Strategy

Differentiation is aimed at the broad market that involves the creation of a product or services that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product. This specialty can be associated with design, brand image, technology, features, dealers, network, or customers service. Differentiation is a viable strategy for earning above average returns in a specific business because the resulting brand loyalty lowers customers' sensitivity to price. Increased costs can usually be passed on to the buyers. Buyers loyalty can also serve as an entry barrier-new firms must develop their own distinctive competence to differentiate their products in some way in order to compete successfully. Examples of the successful use of a differentiation strategy are Hero Honda, Asian Paints, HLL, Nike athletic shoes, Perstorp BioProducts, Apple Computer, and Mercedes-Benz automobiles. Research does suggest that a differentiation strategy is more likely to generate higher profits than is a low cost strategy because differentiation creates a better entry barrier. A low-cost strategy is more likely, however, to generate increases in market share. This may or may not be true.

Variants on the Differentiation Strategy

The shareholder value model holds that the timing of the use of specialized knowledge can create a differentiation advantage as long as the knowledge remains unique [1]. This model suggests that customers buy products or services from an organization to have access to its unique knowledge. The advantage is static, rather than dynamic, because the purchase is a one-time event.

The unlimited resources model utilizes a large base of resources that allows an organization to outlast competitors by practicing a differentiation strategy. An organization with greater resources can manage risk and sustain losses more easily than one with fewer resources. This deep-pocket strategy provides a short-term advantage only. If a firm lacks the capacity for continual innovation, it will not sustain its competitive position over time.

Focus Strategy

The firm focuses on a few target markets (also called a segmentation strategy or niche strategy). It is hoped that by focusing your marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets, you can better meet the needs of that target market. The firm typically looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency. It is most suitable for relatively small firms but can be used by any company. A focus strategy should target market segments that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on investment.

Examples of firm using a focus strategy include Southwest Airlines, with provides short-haul point-to-point flights in contrast to the hub-and-spoke model of mainstream carriers, and Family Dollar, which targets poor urban American families who can not drive to Wal-Marts in the suburbs because they do not own a car.

Recent developments

Michael Treacy and Fred Wiersema (1993) have modified Porter's three strategies to describe three basic "value disciplines" that can create customer value and provide a competitive advantage. They are operational excellence, product leadership, and customer intimacy.

Criticisms of generic strategies

Several commentators have questioned the use of generic strategies claiming they lack specificity, lack flexibility, and are limiting.

In particular, Miller (1992) questions the notion of being "caught in the middle". He claims that there is a viable middle ground between strategies. Many companies, for example, have entered a market as a niche player and gradually expanded. According to Baden-Fuller and Stopford (1992) the most successful companies are the ones that can resolve what they call "the dilemma of opposites".

A popular post-Porter model was presented by W. Chan Kim and Renée Mauborgne in their 1999 Harvard Business Review article "Creating New Market Space". In this article they described a "value innovation" model in which companies must look outside their present paradigms to find new value propositions. Their approach fundamentally goes against Porter's concept that a firm must focus either on cost leadership or on differentiation. They later went on to publish their ideas in the book Blue Ocean Strategy.

An up-to-date critique of generic strategies and their limitations, including Porter, appears in Bowman, C. (2008) Generic strategies: a substitute for thinking? [1]

Option 3:

Generic Strategies - Michael Porter (1980)

Generic strategies were used initially in the early 1980s, and seem to be even more popular today. They outline the three main strategic options open to organization that wish to achieve a sustainable competitive advantage. Each of the three options are considered within the context of two aspects of the competitive environment:

Sources of competitive advantage - are the products differentiated in any way, or are they the lowest cost producer in an industry? Competitive scope of the market - does the company target a wide market, or does it focus on a very narrow, niche market?

The generic strategies are: 1. Cost leadership, 2. Differentiation, and 3. Focus.

1. Cost Leadership.

The low cost leader in any market gains competitive advantage from being able to many to produce at the lowest cost. Factories are built and maintained, labor is recruited and trained to deliver the lowest possible costs of production. 'cost advantage' is the focus. Costs are shaved off every element of the value chain. Products tend to be 'no frills.' However, low cost does not always lead to low price. Producers could price at competitive parity, exploiting the benefits of a bigger margin than competitors. Some organizations, such as Toyota, are very good not only at producing high quality autos at a low price, but have the brand and marketing skills to use a premium pricing policy.

2. Differentiation

Differentiated goods and services satisfy the needs of customers through a sustainable competitive advantage. This allows companies to desensitize prices and focus on value that generates a comparatively higher price and a better margin. The benefits of differentiation require producers to segment markets in order to target goods and services at specific segments, generating a higher than average price. For example, British Airways differentiates its service.

The differentiating organization will incur additional costs in creating their competitive advantage. These costs must be offset by the increase in revenue generated by sales. Costs must be recovered. There is also the chance that any differentiation could be copied by competitors. Therefore there is always an incentive to innovated and continuously improve.

3. Focus or Niche strategy.

The focus strategy is also known as a 'niche' strategy. Where an organization can afford neither a wide scope cost leadership nor a wide scope differentiation strategy, a niche strategy could be more suitable. Here an organization focuses effort and resources on a narrow, defined segment of a market. Competitive advantage is generated specifically for the niche. A niche strategy is often used by smaller firms. A company could use either a cost focus or a differentiation focus.

With a cost focus a firm aims at being the lowest cost producer in that niche or segment. With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment. There are potentially problems with the niche approach. Small, specialist niches could disappear in the long term. Cost focus is unachievable with an industry depending upon economies of scale e.g. telecommunications.

The danger of being 'stuck in the middle.'

Make sure that you select one generic strategy. It is argued that if you select one or more approaches, and then fail to achieve them, that your organization gets stuck in the middle without a competitive advantage.

This lesson looks at ways of increasing the popularity of your website by looking at the internal optimization of the website itself. It considers many important ways of building your traffic, including Search Engine Optimization (SEO) approaches. More. . .

This lesson looks at ways of increasing the popularity of your website by looking at external sources of Internet Advertising

Question 2:

A Strategic Alliance is a formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations.

Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization [1], shared expenses and shared risk

Types of strategic alliances

Various terms have been used to describe forms of strategic partnering. These include ‘international coalitions' (Porter and Fuller, 1986), ‘strategic networks' (Jarillo, 1988) and, most commonly, ‘strategic alliances'. Definitions are equally varied. An alliance may be seen as the ‘joining of forces and resources, for a specified or indefinite period, to achieve a common objective'.

According to Yoshino and Rangan[2] the Internationalisation Strategies can be categorized using the model displayed at the right side.

Stages of Alliance Formation

A typical strategic alliance formation process involves these steps:

Strategy Development: Strategy development involves studying the alliance's feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy.

Partner Assessment: Partner assessment involves analyzing a potential partner's strengths and weaknesses, creating strategies for accommodating all partners' management styles, preparing appropriate partner selection criteria, understanding a partner's motives for joining the alliance and addressing resource capability gaps that may exist for a partner.

Contract Negotiation: Contract negotiations involves determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partner's contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.

Alliance Operation: Alliance operations involves addressing senior management's commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, measuring and rewarding alliance performance, and assessing the performance and results of the alliance.

Alliance Termination: Alliance termination involves winding down the alliance, for instance when its objectives have been met or cannot be met, or when a partner adjusts priorities or re-allocates resources elsewhere.

The advantages of strategic alliance includes:

Allowing each partner to concentrate on activities that best match their capabilities.

Learning from partners & developing competences that may be more widely exploited elsewhere

Adequency a suitability of the resources & competencies of an organization for it to survive.

There are four types of strategic alliances: joint venture, equity strategic alliance, non-equity strategic alliance, and global strategic alliances.

Joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage.

Equity strategic alliance is an alliance in which two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage.

Nonequity strategic alliance is an alliance in which two or more firms develop a contractual-relationship to share some of their unique resources and capabilities to create a competitive advantage.

Global Strategic Alliances working partnerships between companies (often more than 2) across national boundaries and increasingly across industries. Sometimes formed between company and a foreign government, or among companies and governments

^ David C. Mowery, Joanne E. Oxley, Brian S. Silverman, Strategic Alliances and Interfirm Knowledge Transfer (1996) Strategic Management Journal, Vol. 17, Special Issue: Knowledge and the Firm (Winter, 1996), pp. 77-91

^ Yoshino and Rangan, Michael Y. and U. Srinivasa (1995). Strategic Alliances - An entrepreneurial approach to globalization, First Edition. Library of Congress Cataloging-in Publication Data. ISBN 0-87584-584-3.

Retrieved from "http://en.wikipedia.org/wiki/Strategic_alliance"

Question 3

A mode of entry into an international market is the channel which your organization employs to gain entry to a new international market. This lesson considers a number of key alternatives, but recognizes that alteratives are many and diverse. Here you will be consider modes of entry into international markets such as the Internet, Exporting, Licensing, International Agents, International Distributors, Strategic Alliances, Joint Ventures, Overseas Manufacture and International Sales Subsidiaries. Finally we consider the Stages of Internationalization.

It is worth noting that not all authorities on international marketing agree as to which mode of entry sits where. For example, some see franchising as a stand alone mode, whilst others see franchising as part of licensing. In reality, the most important point is that you consider all useful modes of entry into international markets - over and above which pigeon-hole it fits into. If in doubt, always clarify your tutor's preferred view

The Internet

The Internet is a new channel for some organizations and the sole channel for a large number of innovative new organizations. The eMarketing space consists of new Internet companies that have emerged as the Internet has developed, as well as those pre-existing companies that now employ eMarketing approaches as part of their overall marketing plan. For some companies the Internet is an additional channel that enhances or replaces their traditional channel(s). For others the Internet has provided the opportunity for a new online company. More


There are direct and indirect approaches to exporting to other nations. Direct exporting is straightforward. Essentially the organization makes a commitment to market overseas on its own behalf. This gives it greater control over its brand and operations overseas, over an above indirect exporting. On the other hand, if you were to employ a home country agency (i.e. an exporting company from your country - which handles exporting on your behalf) to get your product into an overseas market then you would be exporting indirectly. Examples of indirect exporting include:

Piggybacking whereby your new product uses the existing distribution and logistics of another business.

Export Management Houses (EMHs) that act as a bolt on export department for your company. They offer a whole range of bespoke or a la carte services to exporting organizations.

Consortia are groups of small or medium-sized organizations that group together to market related, or sometimes unrelated products in international markets.

Trading companies were started when some nations decided that they wished to have overseas colonies. They date back to an imperialist past that some nations might prefer to forget e.g. the British, French, Spanish and Portuguese colonies. Today they exist as mainstream businesses that use traditional business relationships as part of their competitive advantage.


Licensing includes franchising, Turnkey contracts and contract manufacturing.

Licensing is where your own organization charges a fee and/or royalty for the use of its technology, brand and/or expertise.

Franchising involves the organization (franchiser) providing branding, concepts, expertise, and infact most facets that are needed to operate in an overseas market, to the franchisee. Management tends to be controlled by the franchiser. Examples include Dominos Pizza, Coffee Republic and McDonald's Restaurants.

Turnkey contracts are major strategies to build large plants. They often include a the training and development of key employees where skills are sparse - for example, Toyota's car plant in Adapazari, Turkey. You would not own the plant once it is handed over.

International Agents and International Distributors

Agents are often an early step into international marketing. Put simply, agents are individuals or organizations that are contracted to your business, and market on your behalf in a particular country. They rarely take ownership of products, and more commonly take a commission on goods sold. Agents usually represent more than one organization. Agents are a low-cost, but low-control option. If you intend to globalize, make sure that your contract allows you to regain direct control of product. Of course you need to set targets since you never know the level of commitment of your agent. Agents might also represent your competitors - so beware conflicts of interest. They tend to be expensive to recruit, retain and train. Distributors are similar to agents, with the main difference that distributors take ownership of the goods. Therefore they have an incentive to market products and to make a profit from them. Otherwise pros and cons are similar to those of international agents.

Strategic Alliances (SA)

Strategic alliances is a term that describes a whole series of different relationships between companies that market internationally. Sometimes the relationships are between competitors. There are many examples including:

Shared manufacturing e.g. Toyota Ayago is also marketed as a Citroen and a Peugeot.

Research and Development (R&D) arrangements.

Overseas Manufacture or International Sales Subsidiary

A business may decide that none of the other options are as viable as actually owning an overseas manufacturing plant i.e. the organization invests in plant, machinery and labor in the overseas market. This is also known as Foreign Direct Investment (FDI). This can be a new-build, or the company might acquire a current business that has suitable plant etc. Of course you could assemble products in the new plant, and simply export components from the home market (or another country). The key benefit is that your business becomes localized - you manufacture for customers in the market in which you are trading. You also will gain local market knowledge and be able to adapt products and services to the needs of local consumers. The downside is that you take on the risk associated with the local domestic market. An International Sales Subsidiary would be similar, reducing the element of risk, and have the same key benefit of course. However, it acts more like a distributor that is owned by your own company.

Internationalization Stages

So having considered the key modes of entry into international markets, we conclude by considering the Stages of Internationalization. Some companies will never trade overseas and so do not go through a single stage. Others will start at a later or even final stage. Of course some will go through each stage as summarized now:

Indirect exporting or licensing

Direct exporting via a local distributor

Your own foreign presences

Home manufacture, and foreign assembly

Foreign manufacture

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