Strategy concerns two factors, deciding where you want a business to go, and deciding how to get there. According to Grant (2010) “A firm can achieve a higher rate of profit (or potential profit) over a rival in one of two ways: either it can supply an identical product or service at a lower cost, or it can supply a product or service that is differentiated in such a way that the customer is willing to pay a price premium that exceeds the additional cost of differentiation.” This provides the company with a different type of competitive advantage, either cost or differentiation. To attain cost advantage, a firm must aim to be a cost leader, and minimise expenses and outlays at every stage within the value chain. Porter (1985) wrote that to achieve differentiation advantage, a firm must “provide something unique that is valuable to buyers beyond simply offering a low price” These two strategies form half of Porter’s (1985) generic strategies model, which are contained within the ‘broad’ dimension.
Cost leadership requires key strategy elements such as scale-efficient plants, outsourcing abroad (such as HP computers) and a design process that is heavily focused on the manufacturing of the products. Resources and capabilities should include access to capital, tight cost control and specialisation of jobs and functions, with incentives linked to quantitative targets. Alternatively differentiation requires emphasis on branding, advertising, quality, service and new product development. To accomplish this a firm needs superior marketing abilities, creativity, and strong research and development resources.
The second, ‘narrow scope’, dimension presents the other generic strategies; cost focus and differentiation focus. Companies using focus strategies will target niche markets and, by understanding the dynamics of that market and the unique needs of the customers within it, develop uniquely low cost or well specified products within that market. Tailoring their products for customers tends to lead to a strong brand image, and companies can rely significantly upon their reputation to maintain sales. This can detract new entrants to niche markets with established suppliers. The key to succeed within the focus dimension of Porter’s (1985) box diagram is to make sure the company is adding something of value as a result of serving only a niche market.
Porter’s generic strategies do have various criticisms. Firstly, it is possible for a company to perform to two strategies and succeed, whilst avoiding becoming ‘stuck in the middle’. Nissan in China, for example, try to cater for the low cost and market whilst also offering automobiles for more elite customers. This has proved hugely successful, with high performance cars such as the GT-R (retailing for as much as £120,000) selling just as consistently as the Micra (£10,000). This directly contradicts Porter’s claim that “the firm stuck in the middle is almost guaranteed low profitability. In addition, many companies enter the market focusing on a particular niche, but then their initial success enables them to expand and utilise other generic strategies. A great example of this is McDonalds, who initially targeted children, with the Happy Meal and the character of Ronald McDonald. They realised they were missing out on a huge segment of the market – adults, so each new advertising campaign became more sophisticated until it catered for all ages. Interestingly, the food that is sold has not changed significantly, just the marketing behind it.
Another problem with Porter’s model is that the strategy alone does not guarantee success. For example, a firm cannot generate consistently high profits simply by offering the lowest price due to cost leadership. Low price does not sell products without any other strategy, people may believe that if a product is significantly cheaper, it is therefore of lower quality and not worth buying. The company needs a reputable brand to ensure customers know they are getting value for money and not just being ripped off. Strong marketing is needed to portray the image that the product is at least as good a standard as its competitors while stressing the difference in price. An additional factor is that of imitability. The knowledge provided in Porter’s texts is freely available, so no differential advantage can be gained from them, unless they are interpreted in idiosyncratic ways.
Treacy & Wiersema (1995) put forward an alternative approach to attaining market value advantage. The 3 basic routes were operational excellence, product leadership and customer intimacy. Alternatively Bowmans strategy clock looks at different combinations of price against perceived value of the product. This provides a powerful way of looking how to establish and sustain a competitive position in a market driven economy. However, in a more recent paper, Bowman (2008) argues that whilst Porters generic strategies are useful, they cannot provide all the answers. He claims that at best they are “food for thought”, and at worst they are “a substitute for thinking”.