There's no singular most effective way to lead the pack in today's highly competitive markets. And so many businesses are keen on going the extra mile in search of that all-important competitive advantage.
The quest to find this elusive competitive edge leads us to Porter's three generic strategies. And this article describes the potential of this strategic framework for market capture and customer lock-in.
What is it?
Porter's three generic strategies deal with the strategic measures a company uses to gain a competitive advantage. These three strategies—cost leadership, differentiation, and focus, are designed to help businesses compete favorably in the market.
Cost Leadership
This involves all the measures taken to reduce the costs of delivering a product/service to the customer. The measures include mass production, economies of scale, and other cost-effective means. And the goal is to make a profit while maintaining low or competitive prices.
Differentiation
This involves measures to distinguish your product or service from your competition. You may achieve it by making your offerings more attractive, functional, durable, innovative, or better performing. Likewise, the goal is to give your brand a uniqueness or special quality that your rivals will find difficult to imitate.
Focus
A focus strategy is used by businesses keen on servicing the customers' unique needs in niche markets. It is derived from a thorough understanding of:
The forces that control such niche markets.
The means to satisfy the customers.
A focus strategy aims to lock in the customer by meeting their unique needs by providing uniquely low-cost or differentiated products. The focus strategy is further broken down into cost and differentiation focus.
When do we use it?
To build a sustainable competitive advantage
The average customer is drawn to a good price. Others like their goods to stand out, and then some people need stuff that's not always available. Delivering products that tick any of these boxes will offer something valuable in the markets. And this is the central theme of Porter's generic strategies.
To improve market performance
The best-performing brands in every market boast products that appeal to the customer's pockets or taste. Porter's three generic strategies tow this same path. And so you can use it to improve your brand positioning and make industry advances.
To build customer loyalty
With Porter's strategies, you can become the market's most trusted provider for special (or niche) products or the go-to for the best prices. This way, you'd have narrowed the customer's choice, leading to sustained patronage of your products.
To make inroads in new markets
Your first moves in a new market can give you a solid footing or leave you grappling. And one way to hold your ground is to send strong statements with price stickers or product quality.
What business questions is it helping us to answer?
Porter's three generic strategies can help answer the following business questions.
How can I lock in the customer?
Porter's generic strategies offer a three-part approach to market positioning. It suggests the means to stoke customer interest and gain a sizable market share. And then it offers to build entry barriers around your position.
How can I get ahead of the competition?
Porter recognizes the importance of gaining a competitive advantage in a contested market space. Hence, his generic strategies revolve around the approach that is less likely to be imitated by your rivals.
How can I do things differently?
Porter's strategies do not necessarily recommend bucking the prevailing market trends or reinventing the wheel. It offers to change the customer's perspective by offering a different look at the offerings on the trend table.
How do I increase my profit margins without harming my stakeholders?
There's no straightforward answer to this question. However, Porter's three generic strategies propose measures to tweak certain market optics to strike a good balance.
How do we use it?
Here's a brief template on selecting a fitting strategy and how best to use it.
Select Your Strategy
Let your choice of strategy reflect your business reality and fit in with your projections. Below are a few tips to help you make the right choice.
Carry out a SWOT Analysis on all three strategies in relation to your business to know which one will benefit you more.
Study the market trends and consumer behavior in your industry
Carry out a thorough analysis of the businesses operating in your industry. Understudy their business practices and market performance.
Carry out due consultation with thought leaders in your industry. Obtain relevant strategy insights from them.
With the information gathered from the above steps, select a strategy.
Shape your strategy
Now that you've chosen a strategy, align your business's goals, operations, and value chain design with the strategy. If you've opted for price leadership, start placing cost control measures across the board. Invest in the technology, logistical support, and low-cost-based optics that'll help you drive down costs.
Execute your strategy
After designing your strategy and defining its guiding principles, you can open your doors to business. Following the previous example, you may roll out prices for your products or services. Spread the word about your offerings (and any added incentives) in the market, using their prices as the major selling point.
Practical Example
A nutritional supplements startup looks to adopt the cost leadership strategy for its latest product line. Its main cost control measures include the mass production of smaller nutrient packs, cost-effective logistics, and other low-cost base measures.
The company can reduce its operational costs to large extents. And so it can beat down the prices of its offerings (below the market average) without suffering any hit to its projected profit margins.
Its cost leadership strategy compensates for low prices by combining economies of scale with tight cost-control measures. This way, its offerings can gain significant market share due to increased customer patronage.
Advantages
It helps in creating sources of competitive advantage
Porter's generic strategies center on creating competitive advantage through cost leadership, differentiation, or a focus strategy. It seeks to establish a superiority of ideas and output over the competition.
It promotes increased profitability
Porter's cost leadership strategy explores critical economies of scale, cost controls, and high production volume to reduce operational servicing costs and increase profit margins. And its differentiation strategy seeks to command higher prices for specialized products.
It creates room for the optimal usage of available resources
Opting for any of porter's three strategies allows you to concentrate all your efforts and resources more effectively. You can now focus all your organizational resources on cost control, quality control, or creating niche markets.
Disadvantages
Lack of flexibility
Siding with any of Porter's three generic may often give off the effect that you're being boxed to a corner. So if you're going for cost leadership, you may find it difficult to commit to product development in the short term, even at the expense of the customer's needs.
Creation of entry barriers
While strong entry barriers are good for your business, customers will not appreciate them. You'll be creating fewer options for the customers if you raise the bar too high in your quest to achieve market supremacy.
More difficult for small businesses
Most businesses compensate for cost leadership by scaling up production. And the resources spent in carving operational niches or product differentiation can take quite a toll. In both scenarios, asking small businesses to deal with these realities would be too much.
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