Updated: Jun 8, 2020
Michael Porter wrote in 1980 that strategy targets either cost leadership, differentiation, or focus.These are known as Porter's three generic strategies and can be applied to any size or form of business. Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources. Porter's generic strategies detail the interaction between cost minimization strategies, product differentiation strategies, and market focus strategies of firm
1) What is Strategy
Strategy is the creation of a unique and valuable position, involving different set of Activities
Strategy requires you to make trade-offs in competing—to choose what not to do.
Strategy involves creating “ fit ” among many of company’s Activities .
The essence of strategy is choosing a unique and valuable position rooted in systems of activities that are much more difficult to match.
2) Why Strategy is important today's World
Strategy is meant to shape future and gain a competitive advantage Over Rivals.
It helps reach future goals of individuals and organizations and thus move ahead of competition
Strategy is a mandatory in today’s world , Ones with it , do better than those who do not.
It helps learn to do trade off decisions, based on priorities.
It is future oriented and helps trade offs between present and future, across functions, short term-long term, serving stakeholders interests
Since strategy implementation is simultaneous rather than sequential to formulation as all levels of managers are involved.
It is about costs, revenues and profits and thus need everybody’s contribution in synchronised manner.
3) Analysis Of The Industry
The word industry is used to refer to a group of firms whose products are sufficiently close substitutes for each other that the member firms are drawn into competitive rivalry to serve the same needs of some or all the same types of buyers.
In analyzing an industry, it is also useful to determine if the industry is a global industry, that is, an industry that requires global operations to compete effectively.
Industries differ widely in their economic characteristics, competitive situations, and future outlooks. Understanding industry structure is the logical starting point for strategic analysis at the business level.
While formulating the Strategies, both External Environment and Internal Environment to be analysed and align the resources to get the Competitive Advantage, where Rivals find it difficult to match.
The key concerns in the industry environment are as follows:
The elements of the industry structure ( Porter's 5 Forces Model )
The stage in the life cycle of products in the industry.
The direction the industry is headed (for example, overcapacity, requiring rationalization).
The forces (for example, political, social, economic, technological) driving the industry in a particular direction.
The underlying economics and performance of the business (for example, cost structures, profit levels).
The key success factors (for example, cost, delivery).
Demand segments and strategic groups.
4 ) SWOT Analysis of the Company ( Internal Environment )
This is the method ( SWOT ) used to analyse and rationalise internal scenario of the Companies within the Industry while devising the Strategies.
5 ) Generic Strategies
Porter described an industry as having multiple segments that can be targeted by a firm. The breadth of its targeting refers to the competitive scope of the business. Porter defined two types of competitive advantage: lower cost or differentiation relative to its rivals. Achieving competitive advantage results from a firm's ability to cope with the five forces better than its rivals. Porter wrote: "Achieving competitive advantage requires a firm to make a choice...about the type of competitive advantage it seeks to attain and the scope within which it will attain it."
He also wrote: "The two basic types of competitive advantage ( differentiation and lower cost ) combined with the scope of activities for which a firm seeks to achieve them lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation and focus. The focus strategy has two variants, cost focus and differentiation focus." In general:
If a firm is targeting customers in most or all segments of an industry based on offering the lowest price, it is following a cost leadership strategy;
If it targets customers in most or all segments based on attributes other than price (e.g., via higher product quality or service) to command a higher price, it is pursuing a differentiation strategy. It is attempting to differentiate itself along these dimensions favorably relative to its competition. It seeks to minimize costs in areas that do not differentiate it, to remain cost competitive; or
If it is focusing on one or a few segments, it is following a focus strategy. A firm may be attempting to offer a lower cost in that scope (cost focus) or differentiate itself in that scope (differentiation focus).
A Company can Outperform Rivals only if it can establish a difference that it can preserve.
It must deliver greater value to customers or create comparable value to customers at lower cost , or do Both .
Strategic Positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about the company. It Means performing different activities from Rivals, or performing similar activities in different ways.
Listen to Michael Porter on , The Five Competitive Forces That Shape Strategy
In summary, A strategy is to gain and sustain competitive advantage over rivals.