Getting into the core tools that everyone needs in their Strategy Toolkit, it is impossible to ignore the impact that Michael Porter had on Business Strategy in the 1970s. For an introduction to this series and links to the other articles please read my previous article here. Porter developed several tools that were revolutionary in the way they made businesses think about their positioning in the market, or their Strategic Fit. We will discuss two other tools in the next article, but we start with Porter’s 3 Generic Strategies.
3 (or is it 4?) Generic Strategies Matrix
Although called the 3 Generic Strategies, named for the main strategies of Differentiation, Overall Cost Leadership, and Focus, the latter is actually broken down into Cost-Focus and Differentiation-Focus, as shown in the graphic below.
It is important to understand the term Focus here – it is being specific about the market you serve. For example, centring on a subset of customers with specific desires. The first two (top row) are industry-wide, while Focus is particular to a segment. Looking vertically, Differentiation is uniqueness perceived by the customer and Cost Leadership is just that – lowest cost at all times.
1. Differentiation – make your products or services distinctly different from your competitors. No ‘me too’ here, this is where you clearly set out your stall to be different and, hopefully, attract customers because they prefer your solution. Think of Lexus or Mercedes (or most large luxury brands) in the automotive industry.
2. Overall Cost Leadership – seems pretty clear, be the low-cost solution at all times. Walmart and other big-box retailers come to mind.
3. Differentiation Focus – still pursuing differentiation but for a specific sub-set of customers within a given market. Great examples are Porsche and Lamborghini, who focus specifically on high-end sports car enthusiasts with a limited set of products, as opposed to the luxury cars mentioned earlier. (One could argue that both are moving away from this focus with the addition of SUVs and sedans to their line-ups!)
4. Cost Focus – just like overall cost leadership, but again, for a specific market. Ikea is one of the best examples of this, focusing on low-cost home décor, though self-service and self-assembly to keep costs down. Some of my students argue that they are moving away from overall cost leadership and are no longer the low-cost leader they once were. They also now provide value-added services like delivery and assembly (through sub-contractors, however).
The big warning clearly marked in this chart is to beware of being “stuck in the middle” (!) There is nothing worse than a lack of clarity when it comes to your market focus. Looking at the examples above, Porsche and Ikea (and many others) need to be careful as they move amongst these strategies in order not to get stuck in the middle!
The 3 Generic Strategies is an exceedingly simple way to look at how you can place products or services into your market. A concept that has arisen more recently and gained popularity for its usefulness is that of Strategic Fit, or simply put, how your product or service sits within the market. Perhaps think of this model is an outside-in view, where the generic strategies are inside, looking out.
There are 4 types of Strategic Fit:
- Commodity strategy – targets a mass market with a single, standardised product. There is low substitution cost in this kind of strategy, customers can start buying Scott vs Charmin toilet paper with no extra effort (they’re next to each other on the shelves). Price is often the main driver in choosing commodity products or services.
- Segmentation strategy – targets a segmented market with a range of products, geared to each of the different segments. Here we see large fast-moving consumer goods (FMCG) companies like Proctor & Gamble and Unilever. They have virtually everything you need as a consumer, broken down in segments; low-cost/generic brand right up to high-end (and high priced!) products targeting status sensitive consumers.
- Niche strategy – targets a small isolated market segment with a sharply delineated product. A niche is a well-defined sub-segment of a larger market. Think about QuickBooks and its success in small to medium businesses (SMBs), versus larger packages used by large companies. SMBs can afford Oracle or SAP and QuickBooks is not powerful enough for the big boys.
- Customisation strategy – (the ultimate in both niching and segmentation) designs or tailors each specific product to one particular need. A market of one. If you hire an architect to design you a home for scratch, that is full customisation for a niche segment of one family.
I think applying these two views at the same time as a single tool provides the most complete view of how your products or services are offered to and sit in the market(s) you serve.
I’d love to hear your feedback and don’t hesitate to get in touch if there is a particular topic you would like to see in this series or to discuss directly!