The Business Book

180

...the cheapest

product or service

on the market. This is

the strategy of cost

leadership.

...a product or service

that is outstandingly

good in some way.

This is the strategy

of differentiation.

C

onsumers have choice.
And different consumers
will choose differently—
some like to pay the most for the
luxurious option, while others will
always opt for the cheapest.
Companies recognize this and
pitch their business at a particular
group of consumers. This is
because it is never wise for a
company to be caught between
groups of customers.
Harvard Business School
professor Michael Porter proposed
“generic strategies” for gaining
competitive advantage, explaining

his idea in Competitive Advantage:

Creating and Sustaining Superior

Performance (1985). Porter used a

four-celled matrix to represent the

four different generic strategies

in his theory.

Companies generally choose

between two generic strategies:

either “cost leadership,” where they

aim to be the cheapest in the

market; or “differentiation,” where

they create unique products or

services. However, there is another

element that can be added to these

two generic strategies: a company

might choose to pursue a “focus

strategy,” offering a specialized

service in a niche market. This

position can be applied to both

of the initial generic strategies,

resulting in a cost-focus strategy

(where the company aims to be

cheapest within a niche market) or a

differentiation-focus strategy (where

the company offers unique products

or services within a niche market).

Cost-leadership strategy

Companies pursuing a cost-

leadership strategy have two

options. They can choose to sell

products at average industry prices

PORTER’S GENERIC STRATEGIES

IN CONTEXT

FOCUS

Business strategy

KEY DATES

1776 UK economist Adam

Smith introduces the concept

of comparative advantage,

where one party has the ability

to produce a particular good or

service at a lower marginal

cost than another.

1960 US economist Theodore

Levitt says that rather than

finding a customer for their

existing product, businesses

should find out what customers

want, and produce it for them.

1985 Michael Porter publishes

Competitive Advantage.

2005 Professors W. Chan

Kim and Renée Mauborgne

recommend a “blue ocean”

strategy for generating growth

and profits, in which new

demand is created in an

uncontested market space.

Companies need to find a competitive advantage.

They can do this by offering customers...

Be the cheapest or the best;

don’t get caught in the middle.