Introduction to Porter’s Generic Strategies
Michael Porter’s generic strategies theory is one of the most frequently appearing models in strategic reports and courseworks. This brief guide summarises the key elements of this model, provides real-life examples and identifies the shortcomings of this theory. Michael Porter is currently a professor at the Harvard Business School and a consultant at the Monitor Group. In the 1980s, Porter reviewed the profitability of firms in the US and concluded that only companies with high or low market share were profitable. Businesses with medium market share, on the other hand, tended to lose money (Porter, 1980). Because of this, Porter argued that companies were required to choose among four business strategies, namely cost leadership, differentiation, focus cost leadership and focus differentiation. A failure to commit to any one of these directions meant losing profits.
A Review of Core Generic Strategies
To help you use Michael Porter’s generic strategies framework in your academic assignments, this section reviews each strategy included in this model.
Figure 1: Michael Porter's Generic Strategies
Source: Porter (1980, p.3)
The differentiation strategy requires companies to make their products or services distinct from what is offered by their competitors. In this case, profits are driven by high-income customers able to pay a price premium for high-quality market offerings.
Tesla is one of the most well-known examples of the differentiation strategy. The company does not manufacture traditional diesel or petrol vehicles, instead focusing on high-class electric cars. In Q1 2020, Tesla’s automotive sales were equal to $4.8 billion, making the differentiation strategy valid for developed Western countries in which consumers can bear the increased costs of differentiated products and services (Tesla, 2020). However, using the differentiation strategy requires firms to constantly innovate their offerings; otherwise, this strategy will offer no added value.
Cost Leadership Strategy
In contrast to differentiation, using the cost leadership strategy means that a company decreases its costs and is, therefore, able to establish lower prices than its competitors. While this can mean that the products and services offered via a cost leadership strategy are of inferior quality, this is not always the case.
McDonald’s is a solid example of a cost leadership strategy. The company sells its fast food for lower prices than premium burger restaurants such as Five Guys or MAX Burgers. Despite this, the systemwide sales of McDonald’s were equal to $100 billion in 2019 (McDonald’s, 2019). For a cost leadership strategy to work, a company needs to possess a mechanism of reducing its operational costs. McDonald’s economies of scale are a vital tool for following this strategic approach. By producing food in large quantities, McDonald’s was able to reduce its total operating expenses to just $12 billion in 2019 (McDonald’s, 2019).
Focus strategies (focus differentiation and focus cost leadership) required companies to only sell their products and services to a narrowly-defined market niche. Within this segment, businesses still need to choose between differentiation and cost leadership to be profitable.
Ogilvy is an example of a firm following a focus differentiation strategy. Ogilvy produces premium vodka and cocktail spirits for potato vodka enthusiasts. Because of this, the company is able to charge a price premium; its 0.7-litre bottle of vodka currently costs £35 (Ogilvy, 2020). In contrast to Ogilvy, Stolichnaya Vodka charges €7 for a 0.2-litre bottle and follows a focus cost leadership strategy (Alko, 2020). In both of the above cases, strong spirit drinkers constitute a narrow customer niche.
Using Porter’s Generic Strategies in Academic Works
What Assignments Should I Use Generic Strategies In?
Typically, Porter’s generic strategies are used in strategic or marketing reports. Porter’s theory is a solid analytical tool when you are required to discuss a company’s strategic position or provide recommendations for future development. You can, however, freely use Porter’s model in any other assignments when comparing and contrasting real-life companies. In dissertations, Porter’s generic strategies are relevant in the literature review section or when you need to analyse a link between specific strategic actions (e.g. using open innovation for product differentiation) and company performance.
How Should I Present Porter’s Generic Strategies?
Porter’s generic strategies is a very structured framework; using tables and figures would be best when discussing this model in your assignments. When using a table, be sure to offer brief examples of how the generic strategies relate to your subject of discussion. For instance, in the recommendations section, you could construct a table highlighting what should be done by your company of choice to follow one of Porter’s strategies.
Limitations of Porter’s Generic Strategies
While Porter’s strategic framework is useful for establishing a company’s strategic positions, this model lacks any hybrid strategies (Greckhamer and Gur, 2019). For example, Tesla broadly follows the differentiation strategy but its Model 3 vehicle only costs $35,000, adding focused cost leadership to Tesla’s strategic mix (Tesla, 2020). This case shows that a company is not required to commit to one of Porter’s four strategies to be profitable. Following one strategy without any strategic change also means that firms are unable to react to macro-environmental changes. During the COVID-19 pandemic, many differentiated hospitality outlets (e.g. MAX Burgers) were required to add cost leadership services by partnering with third-party delivery agencies.
Our Services and Porter’s Generic Strategies
Our essay and report writers will be happy to assist you with assignments requiring the use of Porter’s generic strategies framework. If you order a strategic report, we will conduct a SAF (suitability, accessibility and feasibility) analysis of the four generic strategies to your organisation of choice. In dissertations and essays, we will separate generic strategies into specific practices (e.g. using additive manufacturing to reduce operational costs). When making recommendations, we will be able to sketch creative strategies for future business development consistent with Porter’s framework. We will also provide tables and figures to highlight which of Porter’s strategies is the most beneficial for a chosen organisation. Our writers will explicitly demonstrate the limitations of Porter’s theory and apply these criticisms to real-life cases. In short, you are guaranteed to receive a professional Porter’s strategic analysis with supporting visuals. You can check other report samples to make sure our team conduct a thorough business and marketing analysis.
Alko (2020) “Stolichnaya Vodka”, [online] Available at: https://www.alko.fi/en/products/915912/Stolichnaya-Vodka/ [Accessed on 18 May 2020].
Greckhamer, T. and Gur, F. (2019) “Disentangling Combinations and Contingencies of Generic Strategies: A Set-Theoretic Configurational Approach”, Long Range Planning, to be published.
McDonald’s (2019) “Annual Report 2019”, [online] Available at: https://corporate.mcdonalds.com/content/dam/gwscorp/nfl/investor-relations-content/annual-reports/2019%20Annual%20Report.pdf [Accessed on 18 May 2020].
Ogilvy (2020) “Shop”, [online] Available at: https://shop.ogilvyspirits.com/collections/products [Accessed on 18 May 2020].
Porter, M. (1980) Competitive Strategy, New York: The Free Press.
Tesla (2020) “Form 10-K”, [online] Available at: https://ir.tesla.com/static-files/bbc6e137-897a-4543-857a-59c5c2dbeadc [Accessed on 18 May 2020].