In the 1980s Michael Porter of Harvard Business School created his generic strategy model. In it he suggests that there are three potential strategies for a business to follow when creating a marketing plan: Cost Focus, Differentiation, and Focus (Niche). He suggests that businesses who try to adopt two or more of these strategies simultaneously enter a marketing wilderness; a wasteful middle of the road position. Other academics have gone further to describe this middle ground position as a marketing death zone.
There has been some controversy over Porter’s three generic strategy model. Academics point to some businesses which are clearly not following the model. However, many of these businesses either prove Porter’s point or are clear exceptions to his rule which use tactics to mitigate the effects of a middle of the road position.
The point of Porter’s model is that a focus on one of the three generic strategies allows marketers to create clear and meaningful selling propositions. Porter’s position is that businesses should choose a generic strategy and stick to it. They need consistency when pursuing a strategy and they should choose a strategy which matches their organisational strengths.
Porter originally defined cost leadership as a strategy aimed at achieving the lowest cost of production so prices were lower than competitors. This is the strategy pursued by businesses such Lidl and RyanAir. The strategic focus is to drive down costs to reduce prices and to use that lower price position to increase market share. The aim is to become the market leader.
This position has seen some criticism. It was the strategy of Carrillion, the construction and public service contract firm which went spectacularly bust a few years ago. Carillion aimed to always be the low bidder for contracts. When costs increased due to issues such as construction delays, or if they failed to achieve a contract, Carillion were bidding at such a low margin, their earnings were wiped out and they had to increase borrowing to an unsustainable level. The company was even using subcontractors as a line of credit; often refusing to pay the agreed subcontractor price.
A second form of cost focus is the concept of Best Value i.e. not being the cheapest offer in the market but offering the best value to customers e.g. by offering better post purchase service and other product halo functionality i.e. functionality which does not cost a lot to supply but which target customers value.
A cost focus strategy can be created through:
- Building the size of the organisation and creating economies of scale
- Using tools like value chain analysis to identify the value factors important to customers
- Relocating manufacture to areas of the world with cheaper labour costs.
- Increasing operational efficiency and effectiveness e.g. Just in Time supply chains
- Increasing productivity
- Building strategic alliances and vertical integration
- Finding cheaper sources of supply.
- A focus on organisational learning
- Creating cost linkages
- Good timing i.e. time to market
- Superior management and leadership skills
- Investments in new and advanced technology
- Smart buying.
The benefits of cost leadership come from out performing your competitors (something Carillion failed to do). You must be able to resist the five forces of your businesses micro-environment – Supplier and Customer bargaining power, new market entrants, current competitors and substitute products and services.
There can be serious problems with a cost focus approach. You are highly vulnerable if cheaper alternatives come on the market and you can enter a downward spiral in margins if a price war begins. You also need to be able to maintain cost advantages over the long-term.
A cost-focus strategy is best used in price driven markets in order to gain market leadership from complacent competitors with higher cost bases.
Cost leadership requires the construction of efficient scale facilities and a vicious pursuit of cost reduction through exploitation of the experience curve, tight cost controls and avoiding marginal customer accounts (Carillion made all their customer accounts marginal). it also requires cost minimisation in areas such as after sales service, sales force, advertising, etc.
In a differentiation strategy, you focus on a particular element of your marketing mix that customers see as important. This could be being seen as a quality leader, a technology leader, speed to market and speed of supply, reliability, design, after sales service levels, unique product features and brand image. It means developing stronger and more meaningful relationships with the stakeholders and customers of your business.
So BMW are renowned for engineering excellence and consistency. Apple are leaders in the visual and tactile design of their products, etc.
Bear in mind the focus mix factor is consistent across the product range when other factors vary, this allows large firms to address the mass market and adapt products for particular market segments. However, on occasions the focus factor is inconsistent with a target market. This is why Toyota created Lexus so as to enter the executive and luxury car market. Other firms create ‘fighter brands, a defensive strategy against their primary brand being undercut and to make market entry more difficult.
Again, scale of operations is required to ensure the target mix factor can be properly maintained across a product range. Often a a differentiation strategy is best employed where products are very similar across the market e.g. cigarettes, beer.
To achieve a differentiation strategy you need:
- A strong brand identity
- the ability to identify and utilise what customers see as important
- High performance over a spectrum of attributes
- The ability to create strategic break points
- Cost parity with your competition in areas which affect differentiation
- Packaging innovation and the ability to build in additional features
- Speed of distribution
- Distribution breadth or depth
- High service levels
- Better after-sales service
- Focused relationship building
You derive benefit from a differentiation through creating distance from your competitors and through creating market competitive advantage.
It can be difficult to sustain the bases of differentiation e.g. fashion brands quickly find that high street retailers quickly adopt design features. Firms such as H & M will have similar styles in store within days of London fashion week. Differentiation needs to be meaningful to target consumers; they must value the difference.
Too often a differentiation strategy focuses on the core product and not the halo surrounding it. Differentiation factors can become less important over time. Car stereos used to be a novelty, now you would complain if your car doesn’t have an MP3 port.
Differentiation can mean a loss of cost competitivity and you can lose barriers to market entry.
A differentiation strategy is best used in mature markets where points of difference are small but important. Differentiation points must be such that it is difficult for competitors to copy them e.g. protected via intellectual property.
A focus or niche marketing strategy is often the best bet for SMEs. Here you concentrate on a single identified market segment (or a small number of closely related segments). you need to create a strong specialist reputation.
The benefits of niche marketing means you have a detailed understanding of your market through which you can create barriers to entry. You also have the ability to concentrate your resources and efforts on a clearly defined market.
A niche strategy can make it difficult to grow your market or to spread your business to new sectors. For example, Xerox were so well known as a photocopier brand, their attempt to enter the desk top computer market failed spectacularly.
A niche strategy is best used by firms with small market share or who are new to the market.