Michael Porter, an economic researcher, examined the competitive behaviors that comprise successful businesses. In the early 1980s, he set out to uncover the ways companies maintain long-term advantages over their competitors. Through this work he created Porter’s Generic Strategies, three interconnected concepts that most organizations use to develop key operating procedures and outmaneuver competitors. Understanding the ins and outs of Porter’s techniques will offer burgeoning entrepreneurs insight into the mechanisms that create and dictate most business models.
1. Cost leadership
As its name might imply, cost leadership allows a competitive edge by manipulating production costs. It does this in two important ways:
- Charging lower prices to increase market share. This is done by casting the company as a low-cost alternative, which increases both sales and the company’s profile.
- Reducing costs to increase profits. With fewer expenses on the books, organizations can move money into other avenues, like salaries or product research.
Just how do companies go about implementing the Cost Leadership strategy? It often depends on the specifics of their given industry. Many business ventures will have access to capital for investing in technology and infrastructure. These kinds of adjustments and innovations help businesses bring down costs. It also helps to minimize the standard operating expenses. As an extension of that, proper logistics are crucial. Companies must be able to effectively manage the flow of products between the point of creation and respective storefronts.
One real-world business who has championed Cost Leadership is Wal-Mart. The conglomerate has built its model partly on low prices, continually promising to beat those of its competitors. Executives are able to do that because Wal-Mart has an especially efficient supply chain, often sourcing products from less expensive foreign markets.
Price is an important consideration when attracting customers. However, the Differentiation method looks to develop product uniqueness and attractiveness to engage customers. Once again, there are a number of concepts involved in this approach, and each one is all about playing to customers’ perceptions. That might include promoting a product’s durability and general utility, which appeals to a customer’s sense of value. It could also involve touting the support system for a service or product, which creates a certain air of accountability. Finally, there is also the notion of brand image, creating meaningful connections with customers to ensure long-term loyalty. Companies that differentiate want to meet customers’ unique needs, and are rewarded with premium prices.
To properly implement the Differentiation strategy, a company needs the following:
- Marketing and promotions teams. These individuals are on the frontlines of defining a brand and emphasizing its uniqueness.
- Delivering high-quality products. Customers won’t stay loyal if the reality doesn’t meet the company’s promises.
- Ongoing research and innovation. Only by pushing technological boundaries can a company hope to maintain relevancy.
One of the more successful examples of the Differentiation approach is McDonald’s. Over the years, the fast food giant has used technology and research to gain consistently loyal customers, including efforts to reduce wait times and marketing directly to children.
In many ways, both Cost Leadership and Differentiation are all about appealing to the widest customer base possible. The Focus approach, however, eschews mass appeal, instead layering efforts toward one niche market. Companies who choose to adopt this strategy are taking a deliberate risk. On the one hand, by engaging a specific demographic – many of which are often underserved – the company is able to captivate an increasingly loyal pool of consumers. Unfortunately, research has shown that catering to only a select group of people might prove unattractive to those outside the group. Thus, these companies become almost solely dependent on the spending habits of a very small percentage of people.
Within the Focus strategy, there are two distinct variants:
- Cost Focus: Here, companies are looking to find a cost advantage in their intended market segment.
- Differentiation Focus: These companies work to find as unique of a market as possible in order to maximize efforts.
Regardless of the specific variant, Focus is all about balancing the relationship between production costs and delivery. Cost Focus intends to find those markets where costs are optimal, while Cost Differentiation emphasizes the buyer’s unique needs.
PepsiCo is among the largest consumer packaged goods companies in the U.S. It achieved this by absorbing a number of smaller companies that helped it develop an edge in the beverage industry. The company’s subsidiaries include Tropicana, Naked Juice, Frito-Lay and the South Beach Beverage Company.
Other strategies exist beyond Porter’s, but his provide the foundation on which many others are built. By investigating these three strategies accompanied by real-world examples, it becomes evident that no one strategy is better than another. Every company must look at the entire market from their unique perspective to choose an appealing market segment for its product and decide the most effective way to dominate that market.