Porter’s Competitive Generic Strategies: Types and Tips

Business strategies are useful for contributing to the sales success of your company. There are a variety of strategies you can employ depending on your business’ needs. Porter’s generic competitive strategies are useful tools that will likely assist with the management, growth and profitability of your business to create a sustainable competitive advantage.

In this article, we discuss what Porter’s generic competitive strategies are, how to use these competitive strategies and the benefits the strategies may present to your business.

What are generic competitive strategies?

Michael Porter, a Harvard professor, developed the phrase “generic competitive strategies (GCS)” in his business planning and strategizing book, “Competitive Advantage: Creating and Sustaining Superior Performance.” Porter’s generic competitive strategy is a framework for planning the strategic direction of your business that assists with gaining an advantage in the marketplace over your competitors. He also claimed that a company must only choose one of the three strategies or risk wasting precious resources.

Related: Ultimate Guide to Strategic Planning

Overview of generic competitive strategy

GCS is composed of three generic strategies: cost leadership, differentiation and focus. Cost leadership and focus are then broken down into two types. A company may select a strategy for a competitive advantage. For instance, it may lower costs, yet retain prices, on popular products. Or it choose between offering products to a select target segment or offer products industry-wide across many segments.

Each strategy uses different methods, and businesses within the same industry may choose different strategies based on their strengths and desired outcome.

To find the best strategy for your business, you should run a competitive analysis in your particular industry. If you don’t know what is out there and who your competitors are, it can be difficult to drive marketing efforts for the optimum return on investment.

3 types of generic strategies

Porter divides strategies into three approaches, including:

1. Cost leadership

A business that wants to gain a market advantage by controlling costs. There are two types of cost leadership: low-cost strategy and best-value strategy. One aims to increase profits by reducing costs while maintaining industry-average prices. The other aims to increase market share by charging lower prices and reducing costs.

Keep in mind consumers' perception of your product. If your only strategy is to be “cheaper” than the competition, your consumers may devalue what you offer. Seek out a medium between pricing your product or service as valuable and still attainable.

Also, consider using promotions and discounts to improve consumer perception. You may price the product higher but offer incentives for purchase via a short-long term discount code, coupon or sale. The consumer still sees the product as valuable but may get excited about the cost savings.

Related: Best-Cost Strategy: Definition and Benefits

2. Differentiation

Adapting to a differentiation strategy means that your company must find something about its products that is special or different from your competitor’s. You could do this by rebranding or developing new specialized products to offer under your existing brand and marketing strategy. By being attentive and responsive to customers’ needs and wants, you encourage them to pay prices that may be higher than your competitors.

To determine your differentiation, you may need to create—or revisit—your mission and values statements. What is your value proposition to the market? How is your product different from the competition? They may be similar, but it is up to you to distinguish how yours is different and better.

To differentiate your product to your target audience, you must understand how they perceive your brand. You can gain insight by analyzing user-generated content on your social media channels. What are people really saying about you—positively and negatively? All feedback is helpful and can help you modify strategies moving forward. You may also want to implement a social media listening tool to alert you to mentions of your company name, brand or specific products.

Related: What Are Points of Differentiation? (With Benefits and Tips)

3. Focus

The focus strategy provides the option to use either cost leadership or differentiation within a niche market. This doesn’t mean that the market will be smaller because your company might be small, but rather that your company wants to build product value and generate a loyal, yet specific client base for future profits and sales.

There are two types of focus: low-cost and best-value. The best-value focus is also known as differentiation focus. The two differ by focusing on either lowest cost possible or best value for the price.

Related: How To Create a Focus Strategy

How to use Porter’s generic strategies

There are many ways to use Porter’s generic strategies in your business. Here are some ways your business may begin using GCS:

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. Consider your business’s strengths and goals—beyond just additional revenue. The best way to choose the right strategy for your business is to:

SWOT analysis

• Create a Strengths, Weakness, Opportunities, Threats (SWOT) analysis for each of the three strategies. This may make it clear which strategy would be most beneficial to your organization.

• Analyze businesses within your industry to determine how to position your own strategy. Consider creating a “Competitive Analysis” document regularly—monthly, quarterly or annually depending on your business’s unique production schedule. If you are in a highly volatile industry, it’s important to stay on top of trends even weekly. If your production phase is much longer, you may only need to review the competition quarterly or annually.

• Compare your SWOT to the results from your analysis of the industry. SWOT analysis can be extremely insightful as you create your marketing, sales and even production plans (as applicable).

Ask key questions

Gather quality information by asking intelligent questions. For example, you could ask:

• 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?

No one can predict the future but by conducting as much research as possible—on your competition and industry—you position your company to succeed. And if you don’t have the time, consider outsourcing to a third-party research or marketing firm.

2. Prioritize

Make a list of your priorities, reassessing according to the strategy you choose. When you prioritize your company’s business dealings based on the chosen strategy, it will assist with the overall success of the plan.

3. Consider the five industry forces

The five industry forces are:

• Entry barriers

• Buyer power

• Supplier power

• Threat of substitutes

• Rivalry

When you use one of Porter’s generic strategies, these five industry forces will likely change based on your selection of one of the strategies. Consider your standings in some of the forces—currently or historically—and determine where you want to be and how a strategy will influence your business.

Related: Using Key Performance Indicators (KPIs) To Achieve Goals

4. Remain firm

Whether you choose a cost leadership or differentiation strategy with an industry-wide focus or a specific market segment, it is important to remain firm in your choices throughout your use of the GCS. For instance, if you chose a cost leadership approach, you want to take an assertive stance in all aspects of your company’s operational costs.

Not only will following through on a strategy provide a quantifiable outcome and a sense of cohesiveness, but it will also support your overall communications strategy. For example, if historically, your brand has never offered discounts or coupons, it may not be in your best interest to start offering them now. Your customer gets the discount and may now expect a discount in future purchases. If you can’t offer regular discounts, you’ll likely end up alienating your customer.

Example:

In 2011, a Chicago start-up created an online platform to explore in-person classes with local artists and makers in Chicago—all classes were priced at $20. Customers could try out glass-blowing for $20, learn about floral arrangements for $20 and take a wine tasting class for $20. Eventually, the company realized that not every class offering—value, perception and cost of materials—allowed the teacher to be profitable at $20 per ticket.

They ended up changing their price model to an adjustable one—determined by the individual teacher—but then, added consistent discount and promo codes. The user base got used to these big discounts and would wait to purchase tickets until they had a big “sale” or “BOGO”—Buy One, Get One Free. The start-up had to supplement the loss of income so the teachers didn’t have to take pay cuts. The consistent promos were just not sustainable.

Examples of Porter’s generic strategies

Here are a few generic examples of each one of Porter’s generic competitive strategies:

Example 1: Cost leadership

“Superstore XYZ is able to provide 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.”

Example 2: Differentiation

“ABC beauty company has differentiated themselves from their competitors by offering handmade, no animal testing, bath and beauty products that are pure and benefit the core values of their customers.”

Example 3: Focus

Focus may be applied to either cost leadership or to differentiation. Here is an example of cost leadership focus:

“Summer Jewelry Company offers inexpensive, nickel-free jewelry, gifts and other accessories to young women ages 18-34.”