What is Porter's generic strategy? (And how to use it)

By Indeed Editorial Team

Published 30 June 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Porter's generic strategy includes several approaches to business that differ in focus and details. The four include cost leadership, differentiation, cost-focus and differentiation focus. If you're a business professional, learning more about Porter's generic strategy can be beneficial. In this article, we explain what Porter's generic strategy is, provide an overview of generic strategy, review its benefits, detail how to use it and offer examples of the generic strategy.

What is Porter's generic strategy?

Harvard professor, Michael Porter, developed the phrase generic competitive strategies, or GCS, in his business planning and strategising book, Competitive Advantage: Creating and Sustaining Superior Performance. Porter's generic competitive strategy is a framework that is useful for planning the strategic direction of your business that assists in gaining an advantage in the marketplace over your competitors.

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Overview of generic competitive strategy

GCS is composed of three generic strategies: cost leadership, differentiation and focus. A company may decide to select one of two types of competitive advantage. For instance, they may choose to lower costs or differentiate based on what is important to their customers to demand higher prices for products. Conversely, a company may decide to choose between two types of scope. For instance, they may focus on offering products to a select segment of their target market or offer products industry-wide across many market segments. These are some specific types of competitive strategies:

Cost leadership

A business that wants to gain a marketplace advantage by using cost leadership likely needs to develop expertise for lowering costs while maintaining prices. The goal is to maintain the same prices as competitors or even lower pricing while reducing operational costs. For example, a company may look for ways to increase efficiency by scaling up production. The company's objective is to increase profitability by producing less expensive goods than its competitors.

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Differentiation

Adapting to a differentiation strategy means that you focus on finding something unique about an organisation or products, something that differentiates it from the competitor's organisation or products. You could do this by re-branding or developing new specialised products to offer customers under your existing brand and marketing strategy. By being attentive and responsive to your customers' needs and wants, you encourage them to pay premium prices that may be higher than that of your competitors.

Focus

Focus strategy provides the option to use cost leadership or differentiation within a niche market. Companies use this strategy to build product value and generate a loyal but specific client base. Developing a client base that remains loyal to a business's company or brand typically leads to recurring purchases by those customers. If you choose this strategy, you may even want to consider focusing on multiple products and services.

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Benefits of using generic competitive strategy

How useful generic competitive strategies are can depend on the situation and the company that uses them. Each strategy can offer slightly different benefits and effects, but many of them share the same overall objectives. Here is a look at the benefits of using generic competitive strategies:

  • Increase productivity: Using generic competitive strategies can help you improve productivity by defining business goals and helping you identify areas where you can streamline efficiencies to lower costs. This allows team members to regularly evaluate their day-to-day tasks to ensure their work aligns with company goals.

  • Gain a competitive advantage: Gaining a competitive advantage is a primary goal of the competitive strategies. By gaining a competitive advantage, a company can appeal more to its primary market and ultimately increase profitability.

  • Improve market share: Market share refers to how much of a market a company, brand or product occupies. When you own a larger market share, it can be easier to alter prices and control the process of creating materials and generating profit.

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How to use Porter's generic strategies

Learning about how to use Porter's generic strategies can help you implement them in your position and workplace. Understanding how to choose a strategy and create systems for using them successfully can help companies improve their profits and operations. Here are some steps you can follow to use Porter's generic strategies in the workplace:

1. Choose a strategy

The most important step to consider when you use Porter's generic competitive strategies is to select the appropriate strategy for your business. Start by researching and analysing other businesses within your industry, identifying how they maintain a competitive advantage. If you are in a highly volatile industry, it's important to stay on top of trends, even weekly. Gather quality information by asking questions like:

  • How does this strategy help manage supplier power?

  • Does this strategy assist with the reduction of substitution threats?

  • In what ways does this strategy help reduce customer power?

  • What challenges may we face in the upcoming year with regards to employee morale or even technology?

2. Conduct market research into competitors

After choosing a generic strategy to use and thoroughly understanding the principles, conducting market research can help you gather more information. You can conduct market research by learning about how the company operates, the steps it takes to create materials and how it markets products. Learn more about your competitors' target audiences and discover the areas where they overlap with yours.

3. Consider the five industry forces

These are the five industry forces that affect how easily a new company or brand can enter a market:

  • Entry barriers: The ease with which a new organisation can join a market and achieve success determines the strength of the entry barriers to that market. When entry barriers are low, new companies can join without investing a lot of time, energy or money.

  • Buyer power: The number of customers for a product or brand is another industry force to consider. When there are fewer customers, buyer power increases and when there are fewer customers, buyer power decreases.

  • Supplier power: Suppliers provide the materials manufacturers use to create the products they sell. When there are few suppliers with significant power over the market, they can raise and lower the prices of materials as they want.

  • Threat of substitutes: When a product is unique and innovative, there's a smaller likelihood that another company may replicate it and provide a substitute. When it's easy for customers to find different products to use instead of the one your company offers, they may choose cheaper options or those from your competitors.

  • Competitors: How many competitors there are and how powerful they are is another industry force to consider for generic strategies.

4. Be consistent in implementing strategies

After conducting market research and choosing the best strategy for the company you work for, it's important to be consistent when implementing strategies. Create goals that centre around the specifics of the strategy you choose. For example, you may focus on reducing waste or making operations more efficient. Make it clear to team members what the goals are and what they can do to help the organisation meet them.

5. Assess progress and make adjustments to improve

Assessing performance and making adjustments can help you ensure your strategies function properly. Identify and monitor specific metrics to measure progress and changes in the company. Gather information about performance monthly or quarterly and adjust methodology as necessary.

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Examples of Porter's generic competitive strategies

These are some examples of Porter's generic competitive strategies you can review to improve your understanding of how the strategies work:

Example 1: Cost leadership

Super Superstore provides customers with lower prices because they have efficient methods of distribution, large volume discounts from suppliers and they are in control of portions of their manufacturing and inventory. They focus on lowering the cost of production while maintaining economical choices for their customers. Their marketing strategy is to underbid competitors by pricing their products lower.

Example 2: Differentiation

ABC & 123 Beauty Co. differentiates itself from its competitors by offering handmade bath and beauty products that are pure and appeal to the core values of its customers. The organisation appeals to a niche group of customers who are willing to pay more for high-quality ingredients. ABC & 123 Beauty Co. focuses on marketing to this specific audience and gathering their feedback to offer products specifically for them.

Example 3: Cost leadership focus

Focus applies to either cost leadership or to differentiation. Summer & Winter Jewels uses a cost leadership focus by offering inexpensive, nickel-free jewellery, gifts and other accessories to young women ages 18-34. They focus on this target consumer base and develop many products at a time for them.

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