One of the classic business strategy models is Porter's Generic Competitive Strategies, a set of generic strategies that could be applied to all products or services in B2C or B2B businesses to gain competitive advantage and grow a business. It's a logical extension of his earlier model – Porter's Competitive Forces Model (otherwise known as the Five Forces Model) that analyses a business in terms of five competitive forces. These five forces shape every industry and every market, determining their profitability and attractiveness. The five forces are:
- Bargaining Power of Suppliers
- Bargaining Power of Customers
- Threat of New Entrants
- Threat of Substitutes
- Competitive Rivalry between Existing Players
To ‘fight' the five forces, the model suggests there are three possible strategies to choose from.
- Overall Cost Leadership
- Differentiation
- Focus
We are going to look at these strategies – along with a more modern, hybrid approach – and examine how they impact marketing and how they can lead to growth.
Cost Leadership
This approach is mainly a budgetary management approach which concentrates on manufacturing your product or delivering your service while incurring the least possible costs. It's about the efficiency of processes and delivery, about minimising waste and cost control. The aim is to produce the same product or service as your competitors but at a lower cost. This gives you higher profitability and allows you flexibility on price and promotion.
It usually requires a relatively high market share so that economies of scale can be achieved and it requires capital investment in the latest most efficient processes and in the right people to manage the implementation of the strategy.
Its main impact on marketing is mainly budgetary; it's important not to spend too much on marketing and to market efficiently. Today's abundance of analytical data and the movement towards quantifiable marketing channels makes this somewhat easier than in the past.
Marketing automation and integrated inbound marketing and sales software such as HubSpot are transforming the way companies undertake marketing; offering them greater efficiency and effectiveness.
The danger with this approach is always that costs will be cut too far in crucial areas such as customer support, quality, service and marketing. Another potential pitfall is the temptation to use the cost savings to lower prices, which will erode profitability and make it harder to invest in more efficient processes in the future.
But a radical redesign of products or services to make them more cost-efficient to deliver can shake up an industry and provide high levels of growth.
Differentiation
This strategy is the one whose success is perhaps most linked to marketing. It's the idea that your product or service is in some way unique. This can be achieved in a variety of ways, through branding, technology, features, customer service, dealer network, support, consultancy, training, durability and many more. Many businesses will use a number of factors to differentiate themselves from their competitors. Take Apple, for example, they differentiate using their brand image, their price and their ease of use. Others might focus on only one area – Dyson, for example, sells on its technological innovation.
There are two elements to this strategy – setting up the business to deliver differentiation, and the selling of the differentiation – after all, it's no good having a technologically advanced product if you don't tell anyone about it and its advantages.
What's more, differentiation can actually consist only of marketing. It's possible to position yourself with just a well-constructed brand image and convincing content – persuading your customers that you are in some way superior or different to your competitors. Many companies have taken this route – noticeably in B2C industries where creating a ‘lifestyle' brand is easier than in B2B. Fashion companies are perhaps the most obvious example of this – they produce goods that are basically no different in any physical way to that of other companies, but command a premium because of the perceived brand image.
B2B is perhaps a tougher market in which to achieve this; so a real, tangible form of differentiation, combined with effective marketing, is a more practical approach here.
Depending on market forces and the competition, you may be able to command a higher price through differentiation.
Focus
As its name suggest Focus is all about focussing on a particular segment of the market. It is the classic niche market strategy. By understanding, specialising in and serving a particular market you can gain a competitive advantage over companies that have more general products or services.
Marketing is also a key factor in the success of this approach, firstly in the deep understanding of the target market and secondly in the promotion of the ‘specialist' angle.
The principles of content marketing are pertinent here – the concept of the buyer persona is completely applicable to the targeting of a niche market. The whole approach of content marketing lends itself to the need to educate, inform and cultivate a specialist market.
The goal for marketing a focus strategy is to persuade the buyer that only you understand his issues, only you can provide the right solution to his problem and only you can support him in the future.
The downside to this approach is the limitations it puts on the potential overall market share. Niche markets are by necessity, relatively small, so there will be a trade-off between the volume of sales and profitability. This may be mitigated by pricing – it's possible you may be able to charge a higher price for a specialist product or service.
Hybrid Approach
Michael Porter put forward his Generic Competitive Strategies model in 1980 and has since been criticised on a number of counts. The model was proposed in a period of relative stability – today's market conditions are far more volatile and can change rapidly. Over the years, research has shown that many companies managed to do quite well pursuing a path between two of the strategies, and a good deal of successful companies pursued a combination Differentiation and Cost Leadership approach.
With modern production techniques and organisational structures, it is possible to achieve both high quality and productivity, allowing an approach that combines differentiation with cost leadership. Likewise, with modern approaches such as agile planning, just in time delivery, rapid tooling and integrated software systems, a company can serve several niche markets at the same time.
In fact, if you can, as a business, combine cost leadership with either of the two other strategies, then you are clearly at a great advantage to your competitors, providing you are able to maintain profitability.
Any hybrid approach will require an investment in marketing and a concentration on content marketing to deliver either Differentiation or Focus.
Another issue raised against the model is that many companies successfully start with one strategy and then move into another, as they increase market share and improve profitability. So one business might start in a niche market, and then branch out into related niche markets, then more markets – until they become more about differentiation than focus. Others might start with differentiation and then move to cost focus as their market share and process refinements allow.
So two more modern approaches are therefore suggested:
- A Simultaneous approach – where you combine two strategies
- A Sequential approach – where you pursue one strategy then make a planned transition into another
Today, an important feature of any strategy is the need to be flexible and adapt your approach as market conditions change. This also requires you to be keenly aware of what the market is doing and review your strategy regularly to deal with threats and take advantage of opportunities.
When he put the model forward, Porter urged companies to pick one strategy and to stick with it to avoid being "stuck in the middle" – not having any real strategy. He also felt that the three strategies were mutually exclusive. However, in practice, many companies have shown that this is not necessarily true.
And modern buyers are now demanding everything – they want differentiated, high-quality, specialised products combined with excellent service at a low price. The ability to search the Internet, to easily compare prices and offerings, make this a more realistic goal. The Internet has levelled the playing field, and peer review sites along with social media have made it more or less impossible to hide a poor product behind impressive marketing.
Whatever strategy you choose for growth, whether it be one of the three classic strategies put forward by Porter or a hybrid combination, make sure that your marketing strategy and investment is up to the task and that you review your strategy in the light of market forces.
