Porter’s Generic Strategy Model (1985)
According to Michael Porter (1980, 1985) and the Positioning School of Strategy, there are two sources of profitability available to a commercial organisation. First, the firm should locate in an attractive industry which is determined by the five forces (discussed earlier in the chapter). Once the firm has selected an industry, it should then position itself within the industry by selecting an appropriate competitive strategy based on a cost or differentiation advantage. Michael Porter (1985), suggested that firms competed in one of two ways: either through overall cost leadership or through differentiation. Porter also suggested that firms chose to compete in one of two types of market segment: either in a broad segment or in a narrow segment. An organisation would, therefore, seek to supply its goods and services to as wide a range of consumers as possible or it would target a specific, focused group of consumers with specialist needs.
A strategy of overall cost leadership means being the lowest cost operator in an industry (this does not mean being the lowest price operator). Cost leadership strategies involve maximising the benefits of economies of scale and scope, benefiting from the accumulation and deployment of experience and/or the exploitation of superior technology of the organisation to perform the same tasks or to deliver the same goods and services as the competitors - but at a lower operating cost. Broad cost leadership implies selling your products or services to as wide an audience as possible (Grant 2016).
A strategy of differentiation means basing your product or service offering on the difference between your product, service or organisation and those of a competitor. This may involve taking advantage of a strong brand image, exploiting specialist knowledge, skills or particular intellectual property rights (which only the incumbent organisation possesses) or taking advantage of a particular network not available to others.
A focus strategy, based on either cost leadership or on differentiation, is similar to the preceding strategies but narrowly focused on a particular market niche. A focus strategy involves not seeking to sell to a broad market but to target a particular market niche and to aim to dominate that niche by being the lowest-cost provider and exploiting favourable differences between competitors (Porter 1985).
Porter also argued that these generic strategies made it possible for firms to out-perform their competitors depending upon the resources at their disposal and upon the demands of the markets they were seeking to serve. Porter also stated that for a firm to benefit from a generic strategy, it should be pursued in a pure form. The organisation should not seek to be both low-cost and to differentiate because this would result in the firm becoming ‘stuck in the middle’, and therefore, unable to benefit from either strategy.
Porter’s view that generic strategies should be mutually exclusive illustrates the dated nature of the Generic Strategy model (1985) which is largely the result of the era during which it was researched and formulated and the background of the author (Barney 1991). The Generic Strategy model was based on research carried out in traditional manufacturing companies during the capitalist era before the arrival of the Internet, digitisation and high-value services. Porter is also an industrial organisation economist, so the model has been founded on manufacturing principles. This raises concerns relating hermeneutics and
‘distanction’ (Ricoeur 1981) where there is ‘temporal separation’ between the era in which the research was undertaken and the era in which it is actually applied.
In the era of mass production, economies of scale and high utilisation of plant and equipment were essential in order to lower unit costs and achieve an appropriate return on capital (ROCE). In order to achieve these low unit costs, high levels of standardisation and automation were required through the adoption of the moving assembly line known as Fordism. This achieved high cost leadership in the era of undifferentiated marketing. Henry Ford’s famous mantra, Any customer can have a car painted any colour that he wants so long as it is black, summed up the focus on standardisation.
However, if a firm then decided to bring variety into the process and differentiate the product, this would require the temporary stoppage of machines to change them over to new settings (exchange of dies), resulting in lost production time and higher unit costs. This attempt to differentiate a product would remove any advantage achieved from lower costs hence the ‘stuck in the middle’ principle. So from a traditional business perspective, cost leadership and differentiation did appear to be incompatible. Cost leadership, therefore, required standardised products with few unique or distinctive features or services so that costs were kept to a minimum. Alternatively, differentiation was usually dependent upon offering customers unique benefits and features which almost always increased production and marketing costs (Hitt et al. 2003).
Porter’s argument that companies should not try to be both low-cost and differentiated has proven to be very controversial in the ‘Post-Fordism’ era (Ash 1994), particularly in dynamic, complex environments and high technology sectors such as ICT where consumers’ expectations involve differentiated products and services at low prices. This has led many organisations to seek an integrated strategy. The integrated strategy is now possible due to advances in technology and systems design. Mass customisation and flexible manufacturing have enabled firms to differentiate and still remain cost and price competitive. The Internet, digitisation and 3D printing are now driving these trends to a new level.
Hitt et al. (2003) have, therefore, proposed a fifth generic strategy where organisations may attempt to achieve an integrated cost-leadership and differentiation strategy. Several studies have, therefore, challenged Porter’s typology and questioned his claims about the mutual exclusivity of the generic strategies (Karnani 1984).
Hill (1998) argued that sustainable competitive advantage was dependent upon the successful combination of these two strategies. Murray (1988) also criticised Porter’s typology and noted that the development of any successful business strategy should reflect the larger competitive environment. He argued that since industry environments did not specifically prescribe the need for cost leadership or differentiation, there was little reason to conclude that only one strategy should be employed in response to any particular environment.
Furthermore, turbulent global environments were seen to require the adoption of flexible combinations of strategies by firms. Incompatibility between cost leadership and differentiation may be the case in more stable environments but rapidly changing environments required more flexibility and the ability to combine elements of more than one generic strategy. Mass customisation and the development of network organisations both demanded and made possible a flexible combination of multiple strategies (Preiss, Goldman and Nagel 1996).
Evans and Wurster (1999) concluded that the Internet disassembled traditional value chains, introducing new competitive imperatives and required new strategies. According to Afuah and Tucci (2001), the Internet had reduced trade-offs between information richness and information reach and that the Internet’s universality and its ability to reduce information asymmetries and transaction costs had created opportunities to ‘rewrite the rules’ of business strategy.
Merrilees (2001) observed that many online companies had successfully employed a combination of cost leadership and differentiation, and Amazon was offered as a case in point. Amazon’s skills at branding, innovation and channel management and low prices had successfully differentiated it from its competitors. It was, therefore, difficult to classify Amazon as belonging to either strategy type. Amazon had also been innovative in the design of its website which incorporated a straightforward five-step process that made the consumer shopping experience convenient and helpful with prompt delivery as a key hallmark.
Since the earlier research was carried out, it can be seen that within the ICT sector, all the leading Internet-based firms are now successfully pursuing highly integrated cost leadership and differentiation strategies. These firms are able to achieve strong cost leadership advantages by exploiting the superior technologies that they have at their disposal. These include their online Internet platforms, servers and cloud computing capabilities. This has resulted in improved transactional efficiencies particularly in the delivery of financial services, travel, transport and media, etc.
Moreover, by capturing vast amounts of data, they have been able to convert this valuable resource into lucrative advertising revenues and to enter multiple market segments with digitised products. This has resulted in strong network effects (Parker and Van Alstyne 2005) and high economies of scale and scope (Grant 2016). The ability of the Internet firms to use this data to provide customised products and targeted marketing messages also makes them highly differentiated (micro-segmentation). For example, Amazon uses collaborative filtering software to offer its users customised page views based on past searching habits. The software also permits Amazon to engage in anticipatory marketing by suggesting titles that may appeal to customers. Customers also gain benefits such as being able to obtain more market knowledge for criteria comparison.
These firms also have brands that feature in the global top 100 (Millward Brown 2016) as well as owning large and valuable patent portfolios. Amazon features over 200 million products on its website and guarantees both same-day or next-day delivery at low prices. Alibaba, meanwhile, not only operates as an e-commerce marketplace but it has also entered the financial services and transportation markets i. e. taxi apps. App-based aggregator firms such as Uber and Airbnb are also able to offer highly customised and differentiated services to a large customer base at very low cost. By virtue of not owning fixed assets and being data rich, these new ‘Unicorn’ firms are able to pursue low-cost strategies and differentiate at the same time.
Finally, it is also important to consider the classic work of Michael Treacy and Fred Wiersema (1995) entitled The Discipline of Market Leaders. Similar to Porter’s (1985) original generic strategy theory, Treacy and Wiersema (1995) said that businesses should align their strategic goals along one (and only one) of three value disciplines. These were: cost (operational excellence), constant innovation (product leadership) or customised offerings (customer intimacy). According to Treacy and Wiersema (1995), a failure to specialise in a single value discipline would mean ‘ending up in a muddle’. However, modern data-rich Internet firms are now able to achieve all three value disciplines simultaneously. Through the use of cloud platforms and GPS, digitised content, smartphone apps and customer data, they are able to disrupt markets with new value propositions on all three dimensions. For example, the navigation tools and mapping market was disrupted by Google some years ago. When the
Google Maps Navigation app was introduced (Arrington 2009) it offered virtually all the features of high-end GPS devices (such as Garmin and Tom Tom) and cost nothing (being just another add-on for the free Android operating system). It competed with standalone GPS devices on all three value disciplines (Downes and Nunes 2013). It was also the cost leader, and it continuously updated itself with re-releases, making it the leading innovator. It also offered seamless integration with mobile phone contact lists, the web, e-mail and apps such as Yelp. It, therefore, scored top marks in terms of customer intimacy. This further reinforces the limitations discussed earlier when analysing Porter’s (1985) generic strategy model.