Penetration Pricing or Market Share Pricing is a pricing strategy intended to gain as much market share as possible when introducing a new product by entering the market with a relatively low price and targeting a broader market segment. In this approach, the price of a product is initially set low in an effort to penetrate the market quickly, since potential customers are enthused to switch brands because of the lower price. The price might be raised later once enough market share is gained. Low prices and low margins also act as a deterrent or entry barrier, preventing potential rivals from entering the market since they would have to undercut the low margins to gain a foothold. Penetration Pricing is the opposite of Skimming.

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Porter’s Generic Strategies is an answer to one of two central questions underlying the choices companies have with regard to competitive strategy. The first question is about the attractiveness of industries for long-term profitability and how to choose which industry to enter as a company. We are all familiar with the framework that Porter came up with to determine this: the Five Forces Model. The second question is about the determinants of a company’s relative competitive position in an industry after a certain industry is chosen to enter. Because, in order to be a successful company, being active in an attractive industry alone is not enough: you will need to acquire a dominant competitive position by choosing among three generic strategies: Differentiation, Cost Leadership and Focus. Failing to choose between one of these strategies will result in strategic mediocrity and below-average performance, or as Porter describes it: ‘being stuck in the middle’. This article will go into Porter’s Generic Strategies with the aid of examples.

Figure 1: Porter’s Generic Strategies: Cost Leadership, Differentiation and Focus

Differentiation

Differentiation is a type of competitive strategy with which a company seeks to distinguish its products or services from that of competitors: the goal is to be unique. A company may use creative advertising, distinctive product features, higher quality, better performance, exceptional service or new technology to achieve a product being perceived as unique. A differentiation strategy can reduce rivalry with competitors if buyers are loyal to a company’s brand. Companies with a differentiation strategy therefore rely largely on customer loyalty. Because of the uniqueness, companies with this type of strategy usually price their products higher than competitors. Examples of companies with differentiated products and services are: Apple, Harley-Davidson, Nespresso, LEGO, Nike and Starbucks.

Cost Leadership

Cost Leadership is a type of competitive strategy with which a company aggressively seeks efficient large-scale production facilities, cuts costs, uses economies of scale, gains production experience and employs tight cost controls to be more efficient in the production of products or the offering of services than competitors: the goal is to be the low-cost producer in the industry. A low-cost position also means that a company can undercut competitors’ prices through for example 

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Focus

Focus is a type of competitive strategy that emphasizes concentration on a specific regional market or buyer group: a niche. The company will either use a differentiation or cost leadership strategy, but only for a narrow target market rather than offering it industry-wide. The company first selects a segment or group of segments in an industry and then tailors its strategy to serve those segments best to the exclusion of others. Like mentioned, the focus strategy has two variants: Differentiation Focus and Cost Focus. These two strategies differ only from Differentiation and Cost Leadership in terms of their competitive scope. Examples of companies with a differentiation focus strategy are: Rolls Royce, Omega, Prada and Razer. Examples of companies with a cost focus strategy are: Claire’s, Home Depot and Smart.

Stuck in the Middle

A company that tries to engage in each generic strategy but fails to achieve any of them, is considered ‘stuck in the middle’. Such a company has no competitive advantage regardless of the industry it is in. As a matter of fact, such a company will compete at a disadvantage because the ‘cost leader’, the ‘differentiators’ and the ‘focusers’ in the industry will be better positioned to compete. It may be the case, however, that a company that is stuck in the middle still earns interesting profits simply because it is operating in a highly attractive industry or because its competitors are stuck in the middle as well. If one of the two exceptions are not present it will be very hard for companies to engage in both differentiation and cost leadership, Porter argues, because differentiation is usually costly. Each generic strategy is a fundamentally different approach to creating and sustaining superior performance and requires a different operating model.   

Other interpretations of Porter’s Generic Strategies

Like many business frameworks, Porter’s Generic Strategies Model has both proponents and opponents. Among others, Miller (1992) has questioned Porter’s notion of having to pursue one single strategy or else being caught ‘stuck in the middle’. He claims that there is a viable middle-ground between strategies and uses the example of Caterpillar Inc, which differentiated itself by producing the highest quality earth-moving equipment in the world while paying attention to cost-efficiency. Miller argues that strategic specialization, as Porter suggests, has the danger of becoming inflexible and blind to customer needs. Also Chan Kim and Mauborgne (2005) abandon the ‘value-cost’ trade-off that a company needs to choose between certain strategies. With their Blue Ocean Strategy they advice companies to pursue differentiation and low cost simultaneously: it is about driving costs down while simultaneously driving value up for buyers. However, there are also popular authors who do believe in Porter’s idea of competitive choice. Treacy and Wiersema (1995) for example build further on Porter’s idea and modified Porter’s Generic Strategies into the Value Disciplines. They advice companies to choose between Operational Excellence, Product Leadership and Customer Intimacy

Business-level strategy addresses the question of how a firm will compete in a particular industry (Figure 5.2 “Business-Level Strategies”). This seems to be a simple question on the surface, but it is actually quite complex. The reason is that there are a great many possible answers to this question. Consider, for example, the restaurants in your town or city. Chances are that you live fairly close to some combination of McDonald’s, Earls, Boston Pizza, The Keg, and dozens of other national chains, and a variety of locally based eateries that have just one location. Each of these restaurants competes using a business model that is at least somewhat unique. When an executive in the restaurant industry analyzes her company and her rivals, she needs to avoid getting distracted by all the nuances of different firm’s business-level strategies and losing sight of the big picture.

One solution is to think about business-level strategy in terms of generic strategies. A generic strategy is a general way of positioning a firm within an industry. Focusing on one generic strategy allows executives to concentrate on the core elements of firms’ business-level strategies and avoid competing in the markets better served by other generic strategies. The most popular set of generic strategies is based on the work of Professor Michael Porter of the Harvard Business School and subsequent researchers that have built on Porter’s initial ideas (Porter, 1980).

According to Porter, two competitive dimensions are the keys to business-level strategy. The first dimension is a firm’s source of competitive advantage: whether a firm seeks to gain an edge on rivals by keeping costs down or by offering something unique in the market. The second dimension is a firm’s scope of operations: whether a firm tries to target customers in general or seeks to attract just a segment of customers. Four generic business-level strategies emerge from these decisions: (1) cost leadership, (2) differentiation, (3) focused cost leadership, and (4) focused differentiation. In rare cases, firms are able to offer both low prices and unique features that customers find desirable. These firms are following a best-cost strategy. Firms that are not able to offer low prices or appealing unique features are referred to as “stuck in the middle,” where competition is greatest.

Understanding the differences that underlie generic strategies is important because different generic strategies offer considerably different value propositions to customers. A firm focusing on cost leadership will have a different value-chain configuration than a firm whose strategy focuses on differentiation. For example, marketing and sales for a differentiation strategy often requires extensive effort while some firms that follow cost leadership such as Denny’s are successful with limited marketing efforts. This chapter presents each generic strategy and the “recipe” generally associated with success when using that strategy. When firms follow these recipes, the result can be a strategy that leads to superior performance. But when firms fail to follow logical actions associated with each strategy, the result may be a value proposition configuration that is expensive to implement and does not satisfy enough customers to be viable.

Limitations of Generic Strategies

Examining business-level strategy in terms of generic strategies has limitations. Firms that follow a particular generic strategy tend to share certain features. For example, one way that cost leaders generally keep costs low is by not spending much on advertising. Not every cost leader, however, follows this path. While cost leaders such as Smitty’s Restaurants spend very little on advertising, Walmart spends considerable money on print and television advertising despite following a cost leadership strategy. Thus, a firm may not match every characteristic that its generic strategy entails. Indeed, depending on the nature of a firm’s industry, tweaking the recipe of a generic strategy may be essential to cooking up success.

Key Takeaways

• Business-level strategies examine how firms compete in a given industry. Firms derive such strategies by executives making decisions about whether their source of competitive advantage is based on price or differentiation and whether their scope of operations targets a broad or narrow market.

Exercises

1. What are examples of each generic business-level strategy in the apparel industry?
2. What are the limitations of examining firms in terms of generic strategies?
3. Create a new framework to examine generic strategies using different dimensions than the two offered by Porter’s framework. What does your approach offer that Porter’s does not?

References

Porter, M. E. 1980. Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: Free Press; Williamson, P. J., & Zeng, M. 2009. Value-for-money strategies for recessionary times. Harvard Business Review, 87(3), 66–74.

Image descriptions

Figure 5.2 image description: Business-Level Strategies

Firms compete on two general dimensions – the source of competitive advantage (cost or uniqueness) and the scope of operations (broad or narrow). Four possible generic business-level strategies emerge from these decisions. An example of each generic business-level strategy from the retail industry is illustrated below.

• Broad target and advantage in cost: Walmart’s cost leadership strategy depends on attracting a large customer base and keeping prices low by buying massive quantities of goods from suppliers.
• Board target and advantage in uniqueness: Holt Renfrew builds its differentiation strategy around offering designer merchandise and providing exceptional service.
• Narrow target and advantage in cost: In using a focused cost leadership, The Great Canadian Dollar Store does not offer a full array of consumer goods, but those it does offer are priced to move.
• Narrow target and advantage in uniqueness: M.A.C. cosmetics, founded in Toronto in the mid-1980s, follows a focused differentiation by selling a wide variety of cruelty-free products for the everyday consumer: eyeshadows, lipsticks, lip gloss, foundations, concealer, nail polish, mascara and stage makeup. MAC also sells fragrances and make-up brushes. They sell skin care products as well.

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Why should I do business with you… and not your competitor?
Whether you are a retailer, manufacturer, distributor, or service provider – if you cannot answer this question, you are surely losing customers, clients and market share. This eye-opening book reveals how identifying your competitive advantages (and trumpeting them to the marketplace) is the most surefire way to close deals, retain clients, and stay miles ahead of the competition.

The five fatal flaws of most companies:

• They don’t have a competitive advantage but think they do
• They have a competitive advantage but don’t know what it is—so they lower prices instead
• They know what their competitive advantage is but neglect to tell clients about it
• They mistake “strengths” for competitive advantages
• They don’t concentrate on competitive advantages when making strategic and operational decisions

The good news is that you can overcome these costly mistakes – by identifying your competitive advantages and creating new ones. Consultant, public speaker, and competitive advantage expert Jaynie Smith will show you how scores of small and large companies substantially increased their sales by focusing on their competitive advantages. When advising a CEO frustrated by his salespeople’s inability to close deals, Smith discovered that his company stayed on schedule 95 percent of the time – an achievement no one else in his industry could claim. By touting this and other competitive advantages to customers, closing rates increased by 30 percent—and so did company revenues.

Jack Welch has said, “If you don’t have a competitive advantage, don’t compete.” This straight-to-the-point book is filled with insightful stories and specific steps on how to pinpoint your competitive advantages, develop new ones, and get the message out about them. 

Review

“So many companies think that differentiation is the key to success. It isn’t. The key is knowing how to articulate what’s different or better about your product. Creating Competitive Advantage is a must-have for any CEO’s library.”
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About the Author

JAYNIE L. SMITH is the founder of ICS Marketing, and president of Smart Advantage, Inc., a management consultancy whose clients include hundreds of middle-market businesses. She also serves as the Florida chair for the Executive Committee (TEC), an international network of over 11,000 CEO. She resides in Hollywood, Florida. WILLIAM G. FLANAGAN has been a writer and editor at Forbes, the Wall Street Journal, BusinessWeek, Esquire, and New York magazine. His last book was Dirty Rotten CEOs (Citadel).

Excerpt. © Reprinted by permission. All rights reserved.

DELIVERING “THE RIGHT STUFF ”

Your customers, or would-be customers, need to be informed and reminded of what added values you provide them–extras that can save them money, time, and aggravation. Yet too many business owners and managers can be ignorant of what those competitive advantages are. The seafood supplier didn’t communicate that he was selling fresher salmon with longer shelf life, and thus enhancing his customers’ bottom lines, until a competitor threatened his market share.

You could be providing a lot of extras to your customers without realizing how much you are actually saving them. Or, if you do not provide meaningful extras now, you might consider adopting them. They can be critical competitive advantages. Consider the following:

Terms. I f you are a small or medium-size company up against a category killer, you might have flexible financing terms that the big guys can’t match. For example, a lumber company in the Northeast enjoyed a robust business with little substantial competition until Home Depot began to close in. One Home Depot box opened twenty miles away, and then another just ten miles down the road. Observers predicted that the lumber company would soon be bulldozed out of business.

Surely, it couldn’t compete on price, not against Home Depot ’s buying power. Lumber is lumber. So it concentrated on hitting Home Depot where it was vulnerable. It offered more – flexible credit arrangements for its most important customers–small contractors who often lack lines of credit from banks. The lumber company didn’t have to drop its prices to stay in business. It adopted new competitive advantages.

Guarantees. It is common for attendees at my seminars to tell me that their companies are “the only ones in our industry offering multi-year guarantees” on their products. But when I ask if they make a big deal about the guarantee to prospective buyers, most admit they do not.

The reason is usually the same: “If we emphasize the guarantee, too many customers may take advantage of it.”

That’s a pretty lame excuse. Either you offer a guarantee or you don’t. If you are confident enough in the product to guarantee it in the first place, make a selling point of it. Statistics show that a very small percentage of customers in any business actually use the guarantee. But the guarantee takes a lot of risk out of the buying decision and clinches a lot of deals.

Inventory turns. One of my favorite stories about inventory turns involves a clothing manufacturer who sold women’s clothes to boutiques around the country. When I asked him what differentiated him from his competitors, he said he thought his clothes were “wearable.”

“As opposed to what?” I asked, trying not to laugh. He began to talk about design, fabric, cut, and so on. When I queried what his competitors we re saying, he shrugged and said, “I suppose the same thing . . . but I know my stuff sells much better.”

I asked him what his customer, the boutique owner, cares about most. “Whether or not it sells,” he said. So I asked if his shop owners measured inventory turns. He answered that some did, some did not. I suggested that he teach them how to measure inventory turns and then he could prove to the shop owners his clothes sold better.
My point was that he should stop selling “wearable clothes” like everyone else and start selling inventory turns. Moving the goods is what matters.

Note: Be sure you can back up your boast. Your buyers will know soon enough if you can’t. As with any competitive advantage you claim, make sure you deliver.

Materials. One client in the home-improvement business who sold siding knew his product was “stronger and better” because of the materials he used. But he didn’t know how to convey that without sounding biased and subjective. Upon asking his employees a series of questions I learned from one of his engineers that the company’s product has a higher wind load rating than any competitive product. In many geographic markets, the higher load rating influences buying decisions. So if your materials are stronger and provide customers with a benefit, shout about it in a way that is measurable.

Delivery. I f you provide the same product as your competitors but you offer better delivery service, you have a competitive advantage. But how important is it? The Compleat Company, which sells promotional products, decided to find out. The Seattle-based company polled its customers about the importance of its on-time delivery. It found that its customers not only valued that service highly, they had a pretty low tolerance for being late.

Eighty-eight percent of its customers defined “on-time delivery” as being on schedule 97 percent of the time or better. Only 4 percent of its customers would accept an on-schedule rate of less than 93 percent. A manager from Compleat told me that the company is now focusing its energy and resources to make sure it meets that expectation. When Compleat’s customers want their deliveries, they will get them.

Information. In business as in war, intelligence can be priceless. In Business @ the Speed of Thought (Warner, 1999), Bill Gates writes: “The most meaningful way to differentiate your company from your competition, the best way to put distance between you and the crowd, is to do an outstanding job with information. How you gather, manage, and use information will determine whether you win or lose.”

Knowing what your competitors are doing, and keeping up with trends in your industry, are basic forms of intelligence, and essential if you are going to run a successful business. So is listening to your customers. (Your own and your competitors’.)

The more competitive the business you are in, the more important the role of intelligence. You can’t afford to get caught fl a t footed if, say, a labor strike shuts off deliveries of critically needed material. Or if commodity prices suddenly spike or drop. Or consumer confidence sinks. Or if new products being developed by your competitors threaten your markets.

No matter what business you are in, failing to keep a weather eye on changes in your industry can be fatal. A lot of this “intelligence” is hardly proprietary. It simply amounts to smart business practices born out of experience. If you are a B-to-B supplier who sells to retailers, your customers’ success determines how well you do, too. Your experience can help your clients avoid common mistakes.

Small and medium-size businesses are often in the dark about key developments in their industries. They lack the time, money, and expertise to gather and evaluate that information. But that doesn’t mean it isn’t important. Consider the prices they pay for the goods or services they buy. Advance word of radical price shifts, or new products that will make others obsolete, can save them from missing a buying opportunity, or from laying in inventory that will soon become obsolete.

Keeping your customers informed of trends can only make them healthier, and in turn create more business for you. Word of mouth from your sales force is one time-honored way to accomplish this. But in this age of t h e Internet there are other effective ways, too, from e-mail to Web sites that keep clients posted on prices and other industry developments.

One of my former clients, the Institute for Trend Research, in Concord, New Hampshire, analyzes market and economic trends and makes accurate predictions as to when those trends will change. Its business is its forecasting expertise in a wide range of sectors, from industrial construction and agricultural market movement to interest rates, commodity prices, and inflation.

Subscribers to the company’s publication EcoTrends get an important bonus: a discount on EcoCharts. EcoCharts, using raw data that the subscribers provide themselves, tells them which indicators included in EcoTrends correlate c o r relate best to their specific businesses. ITR has defined four phases of economic movement; if t h e t rends that affect your industry are in Phase C, then you are expecting a downturn. Your actions might include a reduction in inventory and training, an avoidance of long-term purchase commitments, and deeper concentration on your cash and balance sheet. On the other hand, during Phase B, an upward trend, you would accelerate training, increase prices, consider outside manufacturing, and open distribution centers. This kind of information can provide companies with powerful competitive advantages.

Training. Many large companies offer specialized training for their customers, free or at cost, so they can run their business better. McDonald’s runs its own academy for new franchise owners, for example, so they can learn to avoid common pitfalls and maximize the return on their investments. The company draws on the experiences of thousands of other franchise owners and shares that knowledge, because it is vital to their own business. I often recommend to clients that if they invest heavily in training they should make a competitive point of it. For example, “We invest half a million dollars each year training our employees” or “. . . training our customers.”

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