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Porter’s Generic Strategies (For Competitive Advantage) – SKCI Business Strategy Tool

Background 

Michael Porter first developed his Generic three strategies in 1980. He argued that there are only three strategies for an organisation to pursue in order to achieve a competitive advantage. 

They are:

  • Cost leader
  • Product leadership
  • Focus on niche markets

When To Use Porter’s Generic Strategies

It is likely you will have numerous strategies that you wish to pursue, but before deciding on which direction to take, you must understand what area of the market you wish to occupy. 

Porter’s model is a useful tool for understanding where your organisation sits in the market. From there you can see if this is the most advantageous position to be in. 

By deciding which generic strategy you wish to follow, you can move your strategy development forward with a sense of clarity about where you are in the market. 

It is possible that in the future you may want to switch positions in the market. And that is okay! Just make sure that this decision aligns with your strategy and your organisation’s goals and values.

How To Use Porter’s Generic Strategies

This tool relies on you analysing your organisation’s market position and making an honest judgement about where you currently sit. 

Therefore, the first thing you need to do is evaluate your organisation’s current strategy, goals and performance. 

Once you have a clear idea about where you are, you can place yourself within Porter’s Generic Strategy grid. 

The three generic strategies are:

  • Cost Leadership: You have focused on efficiency and provide a low-cost product.
  • Differentiation: Your products are more expensive, but you provide a unique service. 
  • Focus: You have claimed a smaller segment of the industry by focusing on a specific market.

Once you have placed your organisation into the grid, you can start to consider how this position is affecting your returns. At this point it is useful to think about where your competition sits within the grid, and how their strategy is benefiting them. Here are some questions you may want to consider:

  • Is your organisation clearly placed in one advantage group?
  • Which category should your organisation fall under?
  • Are you sitting in the middle of the groups? Does this negatively impact your organisation?
  • Are the other groups filled by competitors? Would there be space in the market for you to move?

Porter argues that sitting in the middle of the groups is bad for business because it is how you get lost amongst competitors. This may not be completely true in all cases, and an organisation can certainly move from one advantage to another, but it is a helpful way to consider how you may become stuck with below-average returns.

Worked Example

Let’s consider NewTechNow, an imaginary technology company with a B2B product that includes both software and hardware, within this model.

NewTechNow is working on disruptive technology which is backed by unique intellectual property (IP). It is clear they are looking for differentiation over cost leadership, but they haven’t considered whether they want a broad or narrow scope. This puts them at risk of being squeezed out by competitors on both sides. They must decide what group they are catering for so that they can push forward and become a market leader.

How Does This Fit Into The 5KQ Strategy Framework?

SKCI’s unique 5 Key Question (5KQ) strategy framework gives our clients an effective way of managing strategy development. Porter’s Generic Strategies falls under both question two, Where do we want to go?’, and question three, What are we going to do (differently)?’. 

Our framework allows you to ask the right questions at the right time and provides a clear structure for the development of your strategy. As you will have already gathered insight into your organization in the previous steps, Porter’s Generic Strategies will highlight where you sit in the market and what you should be doing differently to achieve above average returns. As you consider your current position in comparison with your market competitors you can begin to answer the question, what are we going to do (differently)?

Additional Resources

Additional Strategy resources, including blank worksheets in PowerPoint and Word format, are available from the SKCI website: www.skcinv.com/business-strategy-resources

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