Understanding Porter's Generic Competitive Strategies

A company's business strategy is, naturally, incomplete when it fails to consider how it will tackle and overcome the strengths in its competitors and macro environment. 

After all, business and entrepreneurship is all about delivering value to the customer in various creative ways. How can you remotely expect to effectively achieve that- and efficiently so- if you don't know even understand the dynamics and advantages surrounding the incumbents in the market? And, how can your business succeed if you don't have a system in place to deal with the existing (and potential) competition? 

One prominent framework to address this- and that has stood the test of time- is Porter's Generic Competitive Strategies. These strategies, devised by American Academic and Economist Michael Porter, provide businesses with a roadmap to achieve competitive advantage in their respective market. 

What Is A Competitive Strategy? 

Competitive strategies are the comprehensive plans and approaches that businesses employ to outperform their competitors and achieve competitive advantage.

A "Competitive Advantage" is the collection of conditions or factors that allow a business to outperform its competitors and attract more customers. It is equivalent to the leverage a business has over its rivals in the marketplace.

As such, a competitive strategy encompasses a range of initiatives aimed at differentiating a company from its rivals through various means. 

Start by Understanding Your Competitive Landscape 

If you're serious about being an entrepreneur and growing your business, you WILL consider the broader industry and market. In doing so, you will assess your competitive environment.

Porter created a framework called the 5 Forces that help determine the intensity of competition and profitability in an industry. By understanding these forces, businesses gauge a historical understanding of the market and can better position themselves to conduct analyses like SWOT and develop strategies to gain a competitive advantage.

Porter's 5 Forces include: 

(1) Competitive Rivalry 

• Refers to the intensity of competition within the industry.
• High competitive rivalry means companies are aggressively vying for market share, which can lead to price wars, innovation, and aggressive marketing tactics.
• Factors influencing competitive rivalry include the number and size of competitors, industry growth rate, and differentiation among products.

(2) Threat of New Entry

• Concerns the possibility of new competitors entering the market.
• High barriers to entry, such as high capital requirements, economies of scale, and strong brand loyalty, reduce the threat of new entrants.
• Conversely, low barriers make it easier for new players to enter, potentially intensifying competition and lowering industry profits.

(3) Bargaining Power of Buyers

• Refers to the ability of customers to negotiate prices and terms with firms in the industry.
• High buyer power can result from factors such as a large number of buyers relative to sellers, low switching costs, and the availability of substitute products.
• When buyers have significant power, they can force down prices, demand higher quality, or seek better service, squeezing profit margins for firms in the industry.

(4) Bargaining Power of Suppliers

• Reflects the ability of suppliers to influence the terms and prices of inputs.
• Factors such as supplier concentration, availability of substitutes, and the importance of the supplier's input to the industry affect their bargaining power.
• Strong supplier power can enable them to raise prices or reduce quality, impacting the profitability of firms in the industry.

(5) Threat of Substitutes 

Considers the availability of alternative products or services that can fulfill the same function as those offered by firms in the industry.

• The availability of close substitutes, their quality, and their relative prices influence the threat they pose.
• When substitutes are readily available and offer comparable benefits at a lower price or better quality, they can limit the potential for firms in the industry to raise prices and capture profits

Using Porter's 5 forces is a great foundational step for founders and CEOs/CSOs of small businesses and serial entrepreneurs alike to gauge their competitive environment. It helps them assess whether a market is worthwhile entering, i.e. profitable for them to engage with, and helps complete market penetration initiatives. In general, this framework provides the foundational data required to spot weaknesses, opportunities and threats in the target market. In turn, this data helps inform your business's strategic direction. 

How to Achieve Competitive Advantage

Leverage various tactics, such as utilizing economies of scale, implementing a cost focus strategy, or focusing on product or service differentiation to achieve competitive advantage. By streamlining operations and offering unique value propositions (USPs) to customers, companies can differentiate themselves from competitors and attract a loyal customer base.

Porter's generic competitive strategies is another framework widely used to gain an advantage over their rivals. These strategies encompass a variety of options directing which path to take to achieve this.

Remember that strategic management plays a pivotal role in the successful implementation of these strategies, as it involves making decisions and executing actions that shape the future of your business or organization.

4 Types of Competitive Strategies According to Porter

Porter outlined four main types of competitive strategies that companies can adopt:

1. cost leadership
2. differentiation
3. cost focus
4. differentiation focus

They are designed to help businesses navigate the complexities of the market and carve out a unique position for themselves. By comparing the different strategies, companies may determine the most suitable approach that aligns with their goals and resources.

Competitive Strategy 1: Cost Leadership Strategy

Focuses on achieving the lowest overall costs of operation within an industry. Companies that implement a cost leadership strategy aim to be the most efficient producers of goods or services, allowing them to offer competitive pricing and attract price-sensitive customers.

Key Considerations for Cost Leadership:

• Economies of Scale: Leveraging bulk purchasing, efficient production processes, and standardized offerings to reduce per-unit costs.
• Operational Excellence: Streamlining operations, minimizing waste, and optimizing resource allocation to achieve maximum efficiency.
• Cost Advantage Sources: Identifying and exploiting cost advantages throughout the value chain, such as through efficient supply chain management, negotiating lower input costs, or implementing lean manufacturing practices.

Successful Example: Aldi

Originating in Germany, Aldi expanded globally with a focus on offering high-quality groceries at significantly lower prices. Through efficient supply chain management, limited product selection, and store layout, they minimized costs while maintaining quality. Aldi's aggressive pricing and emphasis on value appealed to cost-conscious consumers, challenging German grocery chains like Tengelmann and Edeka and established grocery chains like Walmart and Kroger. Their success forced competitors to adjust pricing strategies and product offerings. Aldi's relentless pursuit of cost leadership made it a genuine threat to industry giants, showcasing the power of strategic cost management.

Failed Example: JC Penney

J.C. Penney is an American department store chain founded in 1902. In an attempt to differentiate itself from competitors while also offering lower prices, JC Penney underwent a significant rebranding and pricing strategy overhaul in 2012 under then-CEO Ron Johnson. The company aimed to revamp its stores and introduce a simplified pricing structure to attract customers. However, the strategy backfired as customers were confused by the new pricing strategy and the perceived loss of discounts. Additionally, the rebranding efforts alienated JC Penney's core customer base, leading to significant sales declines and financial losses. Despite attempting to differentiate through a combination of pricing and branding, JC Penney failed to effectively compete with big incumbents like Macy's and Kohl's, highlighting the challenges of implementing a successful Cost Leadership Strategy in a highly competitive retail market. As a result, the company struggled with a mountain of debt and declining profits for over a decade. 

Competitive Strategy 2: Differentiation Strategy

This strategy focuses on creating unique value propositions that distinguish a company's products or services from its competitors, aka product differentiation. Differentiation can be achieved through various means, including:

• Product Innovation: Developing unique features, functionalities, or technological advancements that set products apart from the competition.
• Superior Brand Image: Building a strong brand reputation for quality, reliability, or customer service to command premium pricing.
• Exceptional Customer Experience: Providing a seamless and personalized customer experience that fosters customer loyalty and positive word-of-mouth marketing.

Successful Example: Warby Parker 

Founded as a US online eyewear retailer in 2010, Warby Parker disrupted the eyewear industry dominated by established brands by offering stylish, affordable glasses with a socially conscious mission. Through direct-to-consumer sales, they bypassed traditional retail markup, while their innovative home try-on program differentiated the shopping experience. By emphasizing design, affordability, and social impact, Warby Parker attracted a loyal customer base, posing a genuine threat to industry giants like Luxottica, an Italian eyewear conglomerate and the world's largest company in the eyewear industry. Their success showcased the potency of Differentiation strategy in empowering small businesses to compete and innovate in crowded markets. Warby has since expanded to both online and through brick-and-mortar stores, offering a wide range of stylish and affordable eyewear options. Their innovative eyewear lines continue to keep them positioned as a leader in the industry. 

Failed Example: Sears Holdings Corporation

Sears attempted to differentiate itself in the retail industry by offering a wide range of products and services, including appliances, tools, clothing, and home goods, while simultaneously focusing on providing quality and convenience to customers. However, the company struggled to effectively compete with big incumbents like Walmart, Target, and Amazon. Despite their efforts to differentiate through their extensive product offerings, Sears faced challenges such as outdated store formats, declining customer service, and failure to adapt to e-commerce and digital retail trends. Additionally, Sears struggled with financial and operational issues, including high debt levels and declining sales, which further undermined their ability to execute their Differentiation Strategy successfully. Sears' eventually declined and filed for bankruptcy in 2018, highlighting the challenges of implementing a Differentiation Strategy in a highly competitive market dominated by big incumbents.

Competitive Strategy 3: Cost Focus Strategy

This strategy focuses on achieving the lowest overall costs of operation within an industry as it targets a specific niche market segment within an industry. It allows companies to achieve cost leadership within that narrow segment.

The difference between Cost Leadership and Cost Focus is that the latter strategy focuses on a smaller segment of the market rather than the entire industry. It is a more targeted approach, aligning their cost structure with the segment's value proposition, and offering tailored products or services to meet the needs of that niche market effectively. 

Key Considerations for Cost Focus:

• Market Niche Selection: Identifying a well-defined market segment with distinct needs and preferences, allowing for a tailored product or service offering.
• Value Proposition Alignment: Ensuring the cost structure aligns with the value proposition for the chosen niche, potentially offering lower prices compared to broader competitors.
• Understanding Segment Dynamics: Developing a deep understanding of the chosen segment's competitive landscape, customer needs, and growth potential.

Successful Example: Dollar Shave Club

Dollar Shave Club, a small independent business, disrupted the razor industry dominated by giants like Gillette by offering high-quality razors through a cost-focused subscription model. By targeting a niche market seeking affordable yet quality shaving solutions, they aligned their value proposition with customer needs, leveraging online channels to reduce costs. This strategic approach enabled Dollar Shave Club to challenge big incumbents, rapidly gaining market share and prompting industry-wide shifts towards subscription-based models. Their success culminated in a $1 billion acquisition by Unilever in 2016, illustrating how a well-executed Cost Focus strategy can empower underdog businesses to compete and thrive against industry giants. 

Failed Example: Blockbuster Video

Despite attempting to differentiate itself within the video rental industry by offering a wide selection of movie titles at competitive prices, Blockbuster struggled to effectively target specific niche segments while maintaining cost leadership. The company faced intense competition from big incumbents like Walmart, which also offered competitive pricing on movie rentals, as well as from neglecting emerging competitors like Netflix, which introduced disruptive subscription-based streaming services. Additionally, Blockbuster faced challenges in adapting to changing consumer preferences and technological advancements, such as the shift towards digital streaming. These factors ultimately disrupted their ability to successfully execute their Cost Focus Strategy and compete with big incumbents, leading to their bankruptcy and eventual closure of stores

Competitive Strategy 4: Differentiation Focus Strategy

This strategy combines elements of both differentiation and focus strategies. Companies pursuing this approach target a specific niche market while simultaneously differentiating themselves within that segment.

Like Cost Focus Strategy, Differentiation Focus strategy focuses on applying the broader Differentiation strategy to a specific niche in the market, allowing more focused efforts and effective resource allocation. 

Key Considerations for Differentiation Focus:

• Unique Value Proposition Within a Niche: Developing a product or service offering that caters to the specific needs of the chosen niche segment and stands out from competitors within that segment.
• Targeted Marketing & Sales: Tailoring marketing and sales strategies to effectively reach and resonate with the target niche audience.
• Building Customer Intimacy: Developing close relationships with customers within the niche segment to understand their evolving needs and maintain a competitive edge.

Successful Example: Toms Shoes

By combining elements of both differentiation and focus strategies, Toms targeted a specific niche market of socially conscious consumers while simultaneously differentiating themselves within that segment. Their unique value proposition of "One for One" - donating a pair of shoes for every pair purchased - resonated deeply with consumers, setting them apart from traditional footwear brands. Through targeted marketing, Toms built strong customer intimacy and brand loyalty, posing a genuine threat to established shoe manufacturers and showcasing the power of Differentiation Focus strategy.

Failed Example: RadioShack

RadioShack attempted to differentiate itself in the consumer electronics retail industry by offering a wide range of electronic products and components while focusing on targeting a specific niche market of tech enthusiasts and hobbyists. However, the company struggled to effectively compete with big incumbents like Best Buy and online retailers like Amazon. Despite their efforts to differentiate through their focus on electronic hobbyists and enthusiasts, RadioShack faced challenges such as outdated store formats, declining relevance in the digital age, and failure to adapt to changing consumer preferences and shopping habits. Not to mention, RadioShack's financial issues, including high debt levels and declining sales, further interfered with their ability to successfully execute their Differentiation Focus Strategy.

Implementing Competitive Strategies in Market Segments

As you'd have seen by comparing the success and failures of the examples we saw above, the way you execute your competitive strategy will greatly determine it's success.

When targeting specific market segments, i.e. using a Focus Strategy, businesses need to tailor their strategies to address the unique needs and preferences of those segments. You need to identify their needs, even if they themselves don't know that they need it, like Netflix and Dollar Shave Club did.

In doing so, you position yourselves with the foundations for success. By establishing a strong market position through strategic initiatives, companies are able to gain a competitive edge and increase their market share. 

Top tips to implement a competitive strategy and main a competitive advantage:

(1) Understand Your Market and Customers

Conduct thorough market research to understand your target market's needs, preferences, and pain points. Successful businesses like Warby Parker and Dollar Shave Club differentiated themselves by identifying niche markets and offering tailored solutions that resonated with their target customers.

(2) Focus on Value Proposition

Clearly define your unique value proposition and how it addresses customer needs better than competitors. Both successful and failed examples emphasize the importance of a compelling value proposition in differentiation. Toms Shoes succeeded by offering socially responsible footwear, while failed businesses like Circuit City and RadioShack struggled due to vague or outdated value propositions.

(3) Adapt to Changing Trends

Stay agile and adapt to changing market trends, consumer behaviors, and technological advancements. Failed businesses like Blockbuster and Sears faltered because they failed to respectively adapt to the shift towards digital streaming and e-commerce.

(4) Invest in Innovation

Foster a culture of innovation within your organization and continuously seek ways to differentiate and stay ahead of the competition. Successful businesses like Warby Parker and Dollar Shave Club innovated in their respective industries with unique business models and approaches to customer engagement.

(5) Optimize Operations and Costs

Implement efficient operational processes and cost-effective strategies to maintain competitiveness. While cost leadership is essential, failed businesses like Toys "R" Us and RadioShack struggled largely due to operational inefficiencies and high debt loads that hindered their ability to effectively compete in their chosen competitive strategy. They failed to develop a competitive advantage over competitors as a result. 

(6) Build and Maintain a Great Customer Experience

To sustain a a competitive advantage, prioritize delivering exceptional customer experiences that build loyalty and differentiate your brand. Successful businesses like Warby Parker and Toms Shoes succeeded by offering personalized experiences (Home Try-On service for eyewear) and engaging with customers beyond transactions (community building initiatives). Companies that invest in personalization technology solutions can curate more relevant, customized, and engaging experiences for their customers, leading to improved customer sentiment and decreased service complaints

(7) Be Customer-Centric

Put your customers at the center of your strategy and continually seek feedback to improve your offerings. Failed businesses like Sears and RadioShack lost sight of their customers' evolving needs and preferences, leading to declining relevance and competitiveness.

(8) Stay Financially Sound

Maintain a healthy financial position by managing debt effectively and ensuring sustainable profitability. Failed businesses like Sears and Toys "R" Us struggled due to high debt levels and financial mismanagement that hampered their ability to invest in innovation and competitiveness.

By incorporating these tactics and priorities into their business's competitive strategy, new and serial entrepreneurs increase their chances of success and effectively compete in their respective industries.

Key Concepts in Michael Porter's Competitive Strategies

Key concepts in Michael Porter's framework include understanding the differentiation focus strategy, emphasizing the importance of sustainable competitive advantage, and incorporating business strategy in competitive plans. By strategically aligning a business's strengths and weaknesses with market opportunities, organizations can develop robust plans that propel them ahead in the competitive industry.