Three Generic Competitive Strategies

It's time to do a series of postings on strategy as a way to motivate myself to understand it. Michael Porter's (even if he is from Harvard Business School :) ) Competitive Strategy: Techniques for Analyzing Industries and Competitors  (originally published in 1980) still stands as the classic work in the field. Unlike most management books, it's free of jargon and clearly written.

Porter notes that ultimately there are three approaches (i.e. strategies) for outperforming other competitors in the industry.

1. overall cost leadership
2. differentiation
3. focus

Overall Cost Leadership. A couple of years ago I visited Dell Computer for an Executive Briefing. One theme came across loud and clear in everyhing they do. They are relentless in cost cutting. What penny pinchers I thought! But Dell has written and re-written the book on seizing overall cost leadership. First, they started with desktops, then laptops, then servers, then printers, and the list goes on and on. As Porter notes, "a cost leadership strategy can sometimes revolutionize an industry". Dell has and continues to do so in the way it manages its supply chain.

Differentiation. Differentiating a product or service means creating a product or service which is perceived industrywide as being unique. How about that iPod? Apple's iPod is not unique as a digital entertainment device. But its style and design are. This results in brand loyalty and lower sensitivity to price. I'm willing to pay extra for my iPod!

Focus. The third generic competitive strategy is focus. It can take many forms but the basic objective is to focus on a particular market segment or buyer group. Adobe (not now but in its original reincarnation) focused relentlessly on the "prosumer" (blend of professional and consumer) market by turning out high end products for graphic designers, artists, and publishers. Adobe hit a nice sweet spot by serving not only professionals but a wider market of those who want goods of a better quality than consumer items but can't afford professional items (hence the term prosumer). (note: Adobe is in the midst of reinventing its strategy to target the enterprise.)

Now here's Porter's most important point. "The three generic strategies are alternatives [emphasis mine], viable approaches to dealing with the competitive forces. The converse of the previous discussion is that the firm failing to develop its strategy in at least one of the three directions -- a firm that is "stuck in the middle" -- is in an extremely poor strategic situation."