MICHAEL PORTER’s

FIVE GENERIC
STRATEGIES
The Five Generic Competitive Strategies

• These refer to the five basic competitive strategy options or

approaches suggested by Michael Porter, which can be
employed by a company in its quest for competitive
advantage.
• Competitive strategy is about being different.
• It means deliberately choosing to perform activities
differently or to perform different activities than rivals.
Five Generic Strategies

• There are many routes to competitive advantage, but they

all involve giving buyers what they perceive as superior
compared to the offerings of rival sellers.
• Superior value always requires performing value chain
activities differently than rivals and building competencies
that are not easily matched.
Five Generic Strategies

• According to Michael Porter, the five generic strategies are

based on two major aspects:
• 1) Whether a company’s target market is broad or narrow
and
• 2)Whether the company is pursuing a competitive
advantage linked to lower cost or product differentiation
Five Generic Strategies
Low Cost Provider Strategy

• This is when a company strives to achieve lower overall

costs than rivals and appeal to a broad spectrum of
customers, usually through under pricing rivals.
• This is a powerful competitive approach in markets with
many price sensitive buyers.
• However managers should be careful in including features
that buyers consider essential.
Low Cost Provider Strategy

• Two major ways of achieving a cost advantage:

• 1) Perform value chain activities more cost effectively than
rivals
• 2) Revamp the firm’s overall value chain to eliminate or
bypass some cost producing activities.
Performing Value Chain Activities More
Cost Effectively

• Through e.g Striving to capture all available economies of

scale
• Taking advantage of experience
• Trying to operate at full capacity
• Boosting sales volumes
• Improving supply chain efficiency
Revamping the Value Chain

• Through: Bypassing the activities and costs of distributors

and dealers by selling direct to customers.
• Replacing value chain activities with faster and cheaper
online technologies.
• Streamlining operations by eliminating low value added or
unnecessary work steps and activities.
• Relocating facilities
Situations in which a low cost provider
strategy works best

• Where price competition among rival sellers is vigorous

• When products of rival sellers are essentially identical and
supplies are readily available from many producers.
• Where there are few ways to achieve product
differentiation that have value to buyers.
• Where buyer switching costs are low.
• Where buyers are large
Continuation

• NB: As a rule, the more price sensitive buyers are, the more
appealing a low cost strategy becomes.
Broad Differentiation Strategies

• These work where buyers’needs and preferences are too

diverse to be fully satis fied by a standardised product or
by sellers with identical capabilities.
• The main goal is to be unique in ways that are valuable to a
wide range of customers.
Differentiation ctd

• Successful differentiation allows a firm to do one or more of

the following:
• Command a premium price for its product.
• Increase unit sales through additional buyers won over by
the differentiation features.
• Gain buyer loyalty to its brand.
• NB: Differentiation strategies fail when buyers don’t value
the brand’s uniqueness or when the strategies are easily
copied or matched by its rivals.
Various Differentiation themes

• A unique taste eg Dr Pepper

• Multiple features eg Microsoft Vista, Microsoft office
• Superior service eg FedEX
• Spare parts availability eg Caterpillar
• Quality manufacture eg Toyota, Honda
Differentiation ctd

• Areas along the value chain where differentiation attributes

can be created:
• Supply chain activities
• Product R&D activities
• Production R&D and technology related activities
• Distribution and shipping activities
• Marketing, sales and service activities
Four Routes to Competitive Advantage
via a Broad Differentiation strategy

• 1. Incorporating product attributes and user features that

lower the buyer’s overall costs of using a company’s
product.
• 2. Incorporating features that raise product performance
• 3. Incorporating features that enhance buyer satisfaction in
noneconomic or intangible ways.
Differentiation Routes

• 4. Delivering value to customers by differentiating on the

basis of competencies and competitive capabilities that
rivals don’t have or cann’t afford to match.
• NB: The price premium commanded by a differentiation
strategy reflects both the value actually delivered to the
buyer and the value perceived by the buyer.
Situations where a differentiation
strategy works best

• 1. Where buyer needs and uses of the product are diverse

• 2. Where there are many ways to differentiate the product
or service and many buyers perceive these differences as
having value.
• 3. Where few rivals are following a similar differentiation
approach.
• 4. Where technological change is fast paced and
competition revolves around rapidly evolving product
features.
Situations where a differentiation
strategy may fail to work

• 1. When competitors are able to quickly copy differentiation

aspects.
• 2. When buyers see little value in the unique attributes of a
company’s product.
• 3. When it results in overspending thereby eroding
profitability.
• 4. Overdifferentiating that exceed buyers’ needs.
• 5. Trying to charge too high a price premium
Best Cost Provider Strategies

• These aim at giving customers more value for the money.

• These strategies are based on the ability to incorporate
attractive or upscale attributes at a lower price than rivals.
• The target market for a best cost provider is value
conscious buyers who are also price sensitive.
Best Cost Continued

• A company should adopt a best cost strategy only if it has

the resources, know how, and capabilities to incorporate
eg upscale attributes at a lower cost than rivals
• i.e a winning strategy must always be matched to a
company’s resource strengths and capabilities
Focused Strategies

• These strategies put their attention on a narrow piece of

the total market.
• Various ways can be used to define the target mkt eg:1.
Geographic uniqueness
• 2. product attributes
• 3. demographic aspects etc
A focused Low cost strategy

• A competitive advantage is secured by serving buyers in

the target mkt niche at a lower cost and a lower price than
rival competitors.
• The ways for achieving lower costs are the same with those
of low cost leadership and the difference is on the size of
the buyer group.
A focused Differentiation strategy

• This strategy aims to secure competitive advantage

through offering a product carefully designed to the unique
preferences and needs of a narrow, well defined group of
buyers.
• This strategy depends on the existence of a buyer segment
looking for special product attributes and on a firm’s ability
to stand apart from rivals competing in the same target
market niche.
Situations where focused strategies are
attractive

• 1. When the target market niche is big enough.

• 2. When the niche market is not very important to industry
leaders.
• 3. When it is costly or difficult for multisegment competitors
to meet the specialised needs of buyers in the target mkt
• 4. When the industry has many different niches and
segments
Continuation

• When few other rivals are attempting to specialise in the

same target segment
• When the company has built customer goodwill and loyalty.
• Also look at risks of a focused strategy
Risks of a Focused Strategy

• To Discuss
Conclusion

• Students to explain with the aid of examples, the different

conditions under which the five generic strategies can be
employed
References

• Cole G.A, (2000) Strategic Management, Ashford Colour Press

• Johnson G. and Scholes K. (1997) Exploring Corporate Strategy, Prentice Hall
International.
• Modern T. (1997) Business Strategy and Planning, McGraw Hill Book Company.
• Norton D.P. and Kaplan S.R (1996) Translate Strategy into Action – The
Balanced Scorecard, Havard Business School Press, Boston Massachesettes.
• Porter M.E. (1980) Competitive Strategy, The Free Press
• THOMPSON, A., STRICKLAND III AJ, GAMBLE JE 2010. Crafting and Executing
Strategy: The quest for competitive advantage: Concepts and cases. . Mcgraw-
hill/irwin, new York.
• Read articles on strategic management from different journals and publishing
houses [Link],Organisation Studies Journal -SAGEPUB