BUSINESS

Porter’s Strategy Is Still Relevant for Competitive Advantage

A discussion about business model strategies for leaders, founders, entrepreneurs, and startups.

A strategy is a direction, the scope of an organization. It can be short, medium, or long term, but designed to achieve competitive advantage in an ever-changing environment.

Porters’ Generic Strategies are quite specific. Johnson and Scholes (2005) elaborated, detailing the variety of “levels” such as:

• Corporate-level
• Business-level, and
• Operational

Business-level strategy is concerned with “how to compete successfully in particular markets, or how to provide best value services in public services. This concerns which products and services should be developed in which markets and how advantage over competitors can be achieved in order to achieve the objectives of the organization” (Johnson et al, 2005).

A business-level strategy is about obtaining and sustaining a competitive advantage. In other words, unique discoveries implemented to compete and differentiate from rivals — “advantages sustained over time” (Porter, 1980).

This article will discuss Porter’s competitive advantage strategies.

Porter’s Generic Strategies

Porter (1980) pioneered competitive advantage thinking when he proposed three his Generic Strategy model:

1. Cost leadership
2. Differentiation, and
3. Focus, hybrid or niche

Let’s look at all three in more detail.

1. Porter’s Generic Strategies — Cost Leadership

A cost leadership strategy focuses on price, perceived product/service benefits targetting a price-sensitive segment of consumers (Johnson et al, 2005).

This segment is prevalent when a product or a service is a commodity, where consumers are not concerned with value. As such, price becomes the primary competitive driver that can “shape strategy.”

“A market that contains price-sensitive customers who cannot afford to buy higher-quality goods.” (Johnson et al, 2005).

Companies adopt a low-price strategy, consistent with cost leadership theory, to undercut competitors while maintaining perceived product and/or service benefits compared to those offered by other market players.

Common criticisms of this strategy include:

1. Tactical advantage may be gained by reducing price, but is easily replicated by competitors or new entrants
2. A Cost Leadership Strategy curtails the ability to reinvest as a result of the loss in perceived benefits and reduced margins
3. Over the long-term, a Cost Leadership Strategy is impossible without a low-cost base, such as off-shore contractors

That said, low cost should not be considered as the basis for advantage. Leaders often pursue low-cost strategies that fail to deliver a competitive advantage because they fail to focus on costs.

“If the company lacks a low-cost position or a unique product, selling to everyone is self-defeating because the more sales it achieves, the more vulnerable it becomes.”

— Michael Porter

The key challenge is to figure out how costs can be reduced in ways that others can't match, in a price-driven marketplace, sector, or segment, in order to be considered a sustainable advantage.

2. Porter’s Generic Strategies — Differentiation

A differentiation strategy strives to differentiate product or service benefits from competitors, and valued by consumers (Johnson et al, 2005).

The ideal objective is to achieve a competitive advantage by offering better products/services, at the same or a higher price, with better margins.

That said, there is a hybrid strategy that seeks to simultaneously achieve differentiation at a lower price than competitors (Johnson et al, 2005).

Hybrid success is highly dependant on the ability to deliver consumer benefits at low prices, with sufficient margins, which is critical for reinvestment to maintain a differentiation model (Johnson et al, 2005).

3. Porter’s Generic Strategies — Niche or ‘Focus’

Theoretically, if differentiation can be achieved there should be no need to compete on price, considering that its possible to get a higher price or at least that equal to competitors in a niche space. As a result, higher margins.

The iPhone is an example of a ‘niche’ or ‘focus’ strategy, certainly when it was first launched. A niche’ strategy does have a shelf-life, as new entrants or existing competitors will strive to exceed through innovation.

Final Thoughts

Porter (1980) pioneered competitive advantage thinking when he proposed his three “Generic Strategies”, now decades old.

Its proposition progress and performance will be probed much more in the coming years as we emerge from the global pandemic.

In contrast, Treacy and Wiersma (1993) offered three “value-based” propositions to deliver value for the consumer and competitive advantage.

The value-based model

1. Operational excellence — This strategy is predicated on production, the delivery of products and services on time every time. The aim is to lead the industry on price, trust, reliability, and convenience.
2. Product innovation — A strategy grounded in innovation, designing, and building products and services to fit ever-evolving customer expectations. The end-goal is customer loyalty and profitability.
3. Consumer intimacy — This strategy focuses on consumer engagement and delivering a constant stream of innovative products and services. The primary objective is the rapid-commercialization of new ideas.

Excellence implies world-class manufacturing, sales, marketing, fulfillment, and distribution. Customer intimacy, staying close to the customer to build long-term loyalty, is at the heart of this model.

Innovative brand leadership today hinges around market R&D, consumer insights, as well as business agility.

Porter, Treacy, Wiersma, Bland, and Osterwalder have all brought different versions of business strategies, each with their own unique merits.

All of which are relevant today.

The only question that business leaders, founders, entrepreneurs, or startups need to answer is this: What strategy is right for my business?