Last version published: 12/10/2022 08:14
Publication number: ELQ-92916-20
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Porter's Generic Strategies Matrix Template
Position your company on a Matrix to determine your competitive focus with Porter's Generic Strategies Template.
In 1985, Michael Porter, a world-class American experienced economist, researcher, author, advisor, speaker and teacher, described the Generic Strategies theory in his book ‘Competitive Advantage: Creating and Sustaining Superior Performance’ (available here from Amazon: https://www.amazon.fr/Competitive-Advantage-Creating-Sustaining-Performance/dp/0029250900 and well summarised here: https://culttt.com/2013/07/17/competitive-advantage-creating-and-sustaining-superior-performance-review/ ) .
At the start, the framework had three strategies: cost leadership, differentiation and focus. Later, he divided "focus" into "cost focus" and "differentiationfocus" for better precision and clarity. 😃
Porter's Generic Strategies has the objective of helping an organisation/company determine the global direction of its strategy. To beat the competition on a given market, and to achieve superior economic performance, Porter believes that a clear strategy must be defined and laid out. 💪
The Matrix has two axis:
- Strategic Target (or Competitive Scope): Low Cost Position ->Uniqueness Perceived by The Customer
- Strategic Advantage (or Competitive Advantage): Particular Segment Only - Industrywide
This leads to 5 different outcomes in terms of competitive focus (4 cornered boxes + one central):
- Cost Leadership (Strong Low Cost Position/ Uniqueness Perceived by The Customer + Industrywide)
- Differentiation (High Uniqueness Perceived by The Customer + Industrywide)
- Cost Focus (Strong Low Cost Position + Particular Segment Only)
- Differentiation Focus (High Uniqueness Perceived by The Customer + Particular Segment Only)
- Stuck in the middle (Neither Unique Product/Service nor Low Cost Position, neither industrywide or a particular segmented target)
Let's detail each potential strategic focus and competitive position:
✅ Cost Leadership:
The aim of this strategy is to have the opportunity to offer the lowest price, by becoming the lowest cost producer on market.
Some necessary conditions exist for this strategy to work. For example, you have to be in a market with a strong market demand as to enable economies of scale, and thus structurally low costs. Other factors: heavy investment capabilities, great logistics, economies of scale, proprietary technology, exclusive access to raw goods, low personnel costs, focus on internal processes, providing a "generic" or "no frills" product/service etc.... The aim of an actor choosing this strategy, is to be constantly on the lookout for sources of cost advantage.
To achieve cost leadership, there is actually a second strategy: increasing your market share to be in a position to offer average prices. When in a leadership position, you have the luxury to position your pricing well above your costs, increasing your profit margins. However, in both cases, the pre-requisite is to keep costs as low as possible. The only difference is your ability to change customer prices.
If an actor on market aims for this strategy, there is on the long run only one final winner, and no room for a second low-cost provider. So if a company should aim at this strategy, it should have all the means to be the winner.
One of the key elements is also to make sure that the product/service continues to meet customer demand, despite its low cost. Indeed, the moment a competitor can provide a significantly better service/product, even at a slightly higher costs, consumers switch quite fast to this more appropriate alternative. If such an event happens, the company has two solutions: meet the requirements or drive prices down even further to make price the n°1 reason for purchasing, far above other reasons.
Examples: Southwest Airlines, Wal-Mart, McDonald’s, EasyJet, Costco and Amazon.
With this strategy, a firm aims at providing a unique offering to its target customers by playing along dimensions that are highly valued. Concretely, the company selects one or more characteristics of a product/service that the target customer considers as important, and then positions itself to meet these requirements. The uniqueness/ exclusivity of the product/service created is rewarded with the possibility of imposing a premium price vs competition.
Key Success Factors of this strategy not only includes great R&D, Innovation, flexibility, creative teams, outside focused research, customer success programs, cost management, execution & quality delivery, but also top-tier marketing capabilities so that the target customer/market can grasp the unique benefits linked to the company's product/service.
By contrast to the "Cost Leadership" strategy, a market can have multiple actors with differentiation strategies/products/services, competing one against each other. Indeed, there are many different combinations of important product/service characteristics a company can play with, as well as a general will for customers for diverse products (to feel that their product is unique, or that they belong to a specific exclusive group identity).
Examples: Apple, Harley-Davidson, Nespresso, LEGO, Nike and Starbucks.
✅ Cost Focus:
The gist of this strategy is, at the exclusion of others, to target a niche market or specific customer segment in a larger market (i.e. limited demand, and limited competition or underserved by competition, notably the market leader), and offer, the lowest price possible. The exceptional knowledge of the niche market, its dynamics and customer demand, enables to optimise both costs and the value created. Hence, the product/service on market needs to be highly focused. If not, in the target segment, the company will be threatened by competition that offer a generic product that can meet the needs of the customer.
Examples: Claire’s, Home Depot and Smart.
✅ Differentiation Focus:
This strategy is a "Focus Strategy" (as defined by Porter), and is consequently quite similar to Cost Focus, with the main difference been on focusing on features and needs (especially the unusual ones - ranging from product/service features up to delivery), and not on cost. To work, this strategy usually entails having strong brand loyalty and unique features for the product/service.
Examples: Rolls Royce, Omega, Prada and Razer.
❌ Stuck in the middle:
In his thinking, back in 1996, Michael Porter highlighted that it's not only about deciding which strategy to execute, but also those not to pursue. According to him, no firm could possibly target the needs of different segments of customers in an industry simultaneously.
Thus, according to him, there is a fifth strategy that emerges, and that is not deliberate: "Stuck in the Middle". It is the result of not willing to, or not being able to successfully pursue any of the three/four generic strategies - and generally comes from too much compromise. In other words, the product/service does not have the lowest cost, nor the perception of being really different in the eyes of the customer. This strategy usually results in mediocre profitability (or none), market share, image, and employee satisfaction (unclear priorities, brand positioning etc.). It is thus essential for the firm in this position to make a fundamental decision on its business strategy to jump out of the "stuck in the middle" box. Unfortunately, an industry's natural "center of gravity" tends to be there - so a constant effort is needed by decision makers to remain on the competitive edge.
🤔Limits and criticisms of Porter' s Generic Strategies Framework:
Porter's Generic Strategies model pushes the firm to opt for one single strategy and questions the flexibility of the framework. Indeed, on market, it seems that there are plenty of actors who opt for "hybrid strategies", in particular when in fast changing markets, you have to be able to switch rapidly from one strategy to an other. Having all your eggs in one basket does not make sense to run a successful business.
The "stuck in the middle" strategy is this questioned, for example by Miller ("The generic strategy trap" in The Journal of Business Strategy, 1992). He asserts that there is actually a viable middle ground in the middle of the four "classic" strategies outlined by Porter. For instance, there are many examples of companies having started with a focus strategy (cost or differentiation), and who then expanded gradually to cost leadership or differentiation.
Also, other experts such as Davis (1984) claim that some strategies can be combined, and that you don't necessarily have to choose one specific. It was actually proven by Hill (1988), that competitive leadership is also attained by a combination of both low cost and differentiation.
The lack of flexibility of the framework can be justified by the fact that in the 1980s, the business environment was rather stable, and flexibility was not the most valuable competitive advantage a firm could have. Of course, notably with the arrival of the internet, this has considerably changed since.
- - - -
Given the success of this classic strategy framework, I decided to build a universal template that strategy professionals, management consultants and business leaders can use to evaluate the position of their company's strategy/ or possible strategies on their market(s), as to make strong decisions on competitive strategies, enabling top tier performance.
By assessing from 0 to 1 Strategic Target and Strategic Advantage for all actors/organisations on a given market, a company can easily have a quick picture of where it is positioned vs competition (see Excel Model).
The Best Practice is:
- an editable Microsoft PowerPoint Template Slide (2 Versions - For Market Analysis + Investment Portfolio Analysis)
- 2 attached Excel Models to plot the graphs
- with an online & offline 10 step-by-step methodology, with pedagogical illustrations for each step.
Should you have any questions on using this top tier Management/Strategy Consulting Template slide and framework, you're welcome to reach out to me via Private Message.
Complementary Frameworks by Michael Porter available on my Eloquens Channel:
➡ 5 Forces: https://www.eloquens.com/tool/LQlESvak/strategy/porter-s-five-forces-templates/porter-s-five-forces-framework-strategy-consulting-powerpoint-templates
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This Best Practice includes
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