Overview of Porter's generic strategies
Porter’s generic strategies are broad approaches for competing. There are two elements – the market breadth targeted and the cost point that you are serving. For market breadth, this is whether the firm is targeting a broad audience as opposed to a focused narrow market segment. For the price point, this is whether the firm is competing as a cost-leader, seeking customers that are purchasing primarily on the basis of price, or whether the firm is including more premium features that increase the customer’s willingness to pay and allow the firm to charge a higher price.
Broad Market Aproaches
Companies with a broad market approach are less specialized on a particular niche of customers, instead, trying to get a large base of customers. Within this, there are cost-leaders, that provide a potentially more limited product at a lower price point, and differentiators, that provide a more premium product at a higher price point.
Cost leaders are those firms where the primary reason why customers are buying the product is based on it being the lowest price point. Cost leaders gear their entire firm around achieving the lowest price point. There may be some sacrifice on performance, but the company is not competing on this dimension – instead, customers are willing to trade off some features or services for the lowest priced product.
Differentiators are those firms that are pushing up a customer’s willingness to pay – additional features and services that are willing to pay a premium for better service. While price may still be a component of what such customers are buying based upon, it is not the only criteria – rather, customers value other dimensions beyond price.
Some examples of dimensions that customers may be willing to pay a premium for include:
- Additional features
- A more durable or robust product
- After-sales support
While a broad market targets a large group of customers, a focused strategy narrows down on a narrow niche of customers. There may be certain customers that have quite different demands. A broad market approach does not allow you to meet the specific demands of a narrow audience, rather you are attracting a broad audience with quite different demands. In comparison, when a firm narrows down on a specific market segment, they can better target that segment than the broader focused firms.
Focused Cost leadership
A focused cost leader may be able to identify a segment of customers where it is possible to develop a more cost-effective approach that meets the more limited market needs of the specific segment. For example, while most customers may demand a certain feature set, there may be certain customers who do not need certain dimensions – allowing a focused firm that specifically targets these customers to develop an even cheaper product by focussing on a narrower customer segment and scrapping these dimensions.
A focused differentiator is a company that is focused on a specific market segment, but instead of attracting customers based on the price point, instead has a more premium price point. There may be specific features that better align with the needs of this market segment, and by including these features companies are able to better meet the demands of the niche than broader targetted companies.