Do you prefer a luxurious restaurant with authentic delicacies or do you prefer a roadside stall with your local comfort food? Well, everyone might have a different opinion on this question but let us understand why there are such diverse options in the same marketplace. A simple answer to that question is the Porter Generic strategies.
In the above example, the roadside stalls aim to cut costs and provide their services at a minimum price, like using paper plates instead of glass ones. But, on the other hand, luxurious restaurants try to make your experience as sumptuous as possible. So they are targeting two different audiences in the same industry. This is because they are using different components of Porter generic strategies. Let us know more about this.
Meaning of Porter generic strategies:
These Porter generic strategies are called generic strategies because they can be applied to all businesses, irrespective of industry. They were first set out by Michael Porter in 1985 in his book, “Competitive Advantage: Creating and Sustaining Superior Performance”. Porter Generic Strategies is a group of four components used by various businesses, irrespective of their size, organizations, or field, to attract target customers and scale in number. Wonder what these components are? Let us find out.
Components of Porter Generic Strategies:
Cost Leadership Strategies:
This component of Porter generic strategies, allows the business to have a competitive edge over the prices of its competitors. This means the company can corner the market by acting on the price point of the product. There are two main ways of achieving this within a Cost Leadership strategy:
- Lowering the service price to increase the profits – It involves the business reducing the manufacturing costs, shipping costs, and other miscellaneous costs to make more profit out of their business. This component of the Porter generic strategies works well when the business owner increases the profit margin by increasing the selling price and reducing the cost price. A very simple example is Lays potato chips which are making 30-35% profit per sale.
- Lowering the price of products itself – This involves the business reducing the selling price of the product to attract more customers. Many of you might go with roadside stalls just because they are more pocket-friendly. This does reduce the profit margin significantly but it increases the amount of sales per unit of time, therefore, increasing the total revenue.
The cost leadership strategy of Porter generic strategies is all about leading the market due to a better sense of price points. It is not possible to rely on low pricing every time as the competitors might reduce their selling price further to create a better impression. Therefore, this alone is not enough for all industries, especially the competitive ones. To apply this strategy you must have the following arrangements
- Access to the capital or investments needed to invest in modern technology that will bring costs down significantly.
- Very efficient logistics department
- A low-cost base (labor, materials, facilities), and a way of sustainably cutting costs below those of other competitors.
To pursue these Porter generic strategies, it is important to constantly find new ways to reduce the cost further. This is because it is really easy to inculcate the competitor’s strategy and undercut them. Therefore, the source of cost-cutting is not unique and this needs to be kept in mind.
The Differentiation Strategy:
The differentiation strategy of Porter generic strategies involves making your product far more attractive or unique than your competitors. This can be done by innovative thoughts on functionality, durability, support or even improving brand image or customer value. Having modern technology helps with customer acquisition. Small details like the company logo, and product claims are also important to sustain in the market. Adding new features constantly and releasing new models significantly boosts sales.
Again, there are some points you need to consider. These are as follows:
- You should have a department of research and analytics to update you with market trends.
- You should be able to deliver high-quality products that are more unique and functional than your competitors.
- Effective sales and marketing, so that the market understands the benefits offered by your company.
A small part of this component of Porter generic strategies is also to maintain the trade secret. Competitors can copy styles and designs if the process is leaked. Otherwise, they risk an attack on several fronts by competitors. Your competitors might undercut you by pursuing Focus Differentiation strategies in different market segments. Want to know what a focus strategy is? Let us find out.
The Focus Strategy:
Companies that use a focus strategy of porter generic strategies concentrate on niche markets. These companies identify the dynamics of the market, the needs of customers, and the target audience to cover to create a well-designed, functional, and innovative product that suits the marketplace. Because they serve customers in their market uniquely well, a strong brand loyalty is created among the users which helps the company to advance in the field and thrive in the marketplace. This makes their particular market segment less attractive to competitors.
Now, focus strategy can be further classified into cost focus or differentiation focus strategy in porter generic strategies. This classification is important because you need to add something to your marketplace to make the user experience more flavorful. It’s not enough to just serve a niche market just because you cannot fulfill the need of a more competitive and wide-spaced market.
Well, now the dilemma is which focus strategy of porter generic strategies to choose. Well, that entirely depends on your capacity and resources. If you seem to have enough investment or capital to reap the results of modern technology, you can choose a differentiation focus to advance in the industry and corner the market. But, if your company is low on budget then you should opt for a cost focus strategy. This was just the foundation but, the actual decision depends on your company dynamics.
Also Read: Employee Life Cycle Empowerment – Excelling Through with Powerful Decision Making
Learn with DT Evolve:
Are you looking to improve your negotiation skills, so that it can help you manage your team better? Are you looking for a well-designed course that will cover the basics and will leave you with sound strategies to employ while negotiating? Well, look no further because DT Evolve has a course for you. In this course, you’ll learn about the foundation that goes into crafting a successful negotiation, as well as the skills you’ll need to react to highly dynamic situations. You’ll also learn about emotional management, how to ask the right questions to gain the facts you need, and how to negotiate effectively in every situation. Here’s a link to the course, The Art of Negotiation.
It is important to understand the market trends and create a blueprint to thrive in the competitive landscape. You need to study your company dynamics thoroughly to understand and apply a suitable porter generic strategies. By understanding the core principles of cost leadership strategy, differentiation strategy, and focus strategy, of porter generic strategies you can apply these to create a future action plan and eventually monopolize the marketplace. This helps you to have a competitive edge and significantly increase your sales. Applying Porter generic strategies helps you to improve your credibility and customer value due to the high traffic of the target audience. Therefore, try to comprehend and inculcate Porter generic strategies with desired components to your business.
Frequently Asked Questions (FAQs)
Porter’s Generic Strategies is a framework that outlines three fundamental strategies businesses can adopt to achieve a competitive advantage over others: cost leadership, differentiation, and focus. It was developed by Michael Porter, hence the name.
Benefits of differentiation strategy include higher profit margins, decreased sensitivity to price changes, and the potentially strong customer loyalty and brand recognition.
Yes, these strategies can definitely evolve based on shifts in market conditions, technological advancements, and changes in customer preferences. This flexibility is essential for sustained success.
It involves, as the name suggests, targeting a specific segment of the market either through cost leadership or differentiation. Businesses that adopt this strategy generally concentrate on serving a specific customer base exceptionally well.
When using the differentiation strategy, you offer unique and high-quality products or services that stand out from the competition, thereby differentiating yourself.
The cost leadership strategy aims to offer products or services at lower costs than competitors while maintaining decent or acceptable quality. This strategy generally targets a broad market.