The Business Book

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good research and development, an
innovative culture, and the ability to
deliver consistently high-quality
products or services. This needs to
be supported by effective marketing,
so that the differentiation is
positioned and communicated to
customers. Brand image is integral,
and is often strengthened by the
nature of the differentiation.

Focus strategy
Companies pursuing a focus
strategy choose a particular niche
market. They have to understand the
dynamics of that market and the
unique needs of customers within it,
and then develop either low-cost or
well-specified products or services.
They also tend to serve their
customers well, and so build strong
brand loyalty. This makes their
particular market segment less
attractive to potential new entrants.
Ferrari is an example of a
company in a niche market that has
chosen to differentiate itself. The
company targets the limited high-
performance sports-car segment,
and its cars are differentiated
through high-spec design, high-
performance, and the company’s
Grand Prix association.

Whichever focus a company

chooses, it must do so on the basis

that it can successfully compete

on the strength of a particular

ability or competence that will

help it in its chosen market niche.

If the company aims for cost

leadership in a niche market, for

example, it has to be based on

distinctive relationships that have

been developed with specialized

suppliers. If the company goes for

differentiation in a niche market,

on the other hand, it has to be on

the strength of a deep understanding

of customer needs. However, a

company that chooses to focus on

a small market segment because

it is too small to serve the larger

market risks being sidelined by

bigger companies with distinctive

abilities, which enable them to

better position their offerings.

Airline strategies

The airline industry illustrates

Porter’s idea. Consumers have a

choice when they book an airline

ticket. They can choose between a

no-frills airline or a more expensive

operator offering better service,

quality, and comfort. There may also

be a third option: a small airline that

PORTER’S GENERIC STRATEGIES

offers only a few routes. Airlines

tend to focus on a particular group

of travelers as an effective way of

achieving competitive advantage in

a crowded market, for example by

offering discounted travel or a more

luxurious traveling experience.

Low-cost, Ireland-based airline

Ryanair has championed the idea

of cost leadership, and describes

itself as “Europe’s only ultralow

cost carrier.” The notion of a low-

cost airline was pioneered by

Texas-based Southwest Airlines,

and Ryanair followed with similar

principles: use a single plane type

to keep costs down, constantly

review overheads, turn aircraft

around as quickly as possible, and

do not offer a loyalty plan.

Ryanair bought 100 Boeing 737-

800 passenger jets at a significant

discount in 2002. Starting with

newer, more fuel-efficient planes

than many rivals, Ryanair could

afford to fill its planes with

passengers buying low-price tickets.

However, Ryanair could make a

profit because passengers would also

spend money on areas such as

on-board food and hotel reservations.

Ryanair is able to increase profits

year after year since it continually

looks for ways to keep costs down

and charge customers for extras.

Porter’s generic

business strategies

fall within two basic

categories: lowest

cost or marked

differentiation.

Companies can

choose between

these approaches

whether they are

small or large, and

whether they are

operating in broad

target markets, or

niche ones.

COMPETITIVE SCOPE

SOURCE OF COMPETITIVE ADVANTAGE

Large markets

Niche markets

Lowest cost Markedly different

Cost leadership

Cost focus

Differentiation

Differentiation

focus

Every company competing

in an industry has a

competitive strategy,

whether explicit or implicit.

Michael Porter