Some detail about Porter’s Generic Strategies

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
  • Flexibility
  • 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.



The differentiation trap

Marketing professionals, including this author, will advise firms to differentiate their offers to meet the needs of particular target customer groups.  This is the strategy of most household brands who will produce goods and services to meet the needs of different customers.  For instance, a supermarket chain will produce basic goods at discounted prices and they will produce premier goods such as Tesco’s finest range.  They will differentiate their offer to capture as many demographic groups as the can.

Differentiation is, after all, one of Porter’s generic marketing strategies.

Niche marketing is also one of Porter’s generic strategies and it his favoured option for small firms who may lack the resources required to undertake a differentiated strategy and who require higher margins than those available to firms offering a cost focus strategy.

If you are following a niche strategy, it is even more important to segment your market and to identify your niche customer.  A niche product, by its very nature, is different from those aimed at the mass market.  A niche product is different to those provided by potential competitors.  Differentiation is the practice of being different.

However, creating difference should not be viewed in terms of internal brand strengths.  Difference is created by finding out what the market thinks.

Too many firms believe all they need to do to be different is to put a name or logo on a product.  Their offering is otherwise undifferentiated from those of competitors.  To truly differentiate, you must create difference not only in terms of your offer but also in relation to the benefits perceived by your target customers.

The Chartered Institute of Marketing carried out research in 2003.  It found that:

  1.  97% of CEOs believed their priority was to create long-term value for their shareholders.
  2. There were two ways that value could be created; by cost advantage, and; by superior differentiation that supports a price premium.
  3. On average, differentiation was three times more influential than cost advantage in creating value.
  4. Differentiation provides three times the payback for the same (but differently directed) effort.

So what makes a good differentiated brand?

In his book Strategic Marketing, Paul Fifield describes four forms of differentiation based on the relevance of the differentiation to consumers and the level of differentiation from the market average.

You can make your offer different in two ways:

  1. Differentiated: Your products are different to those of your competitors in the minds of consumers. Those differences must be offered in terms consumers understand (not just clever technology they don’t understand). There is also the concept of substituted competition where a solution to a consumer’s problem can be found by radically different technologies. For example, I can choose to travel to London by rail, in my car or by bus. My family who live in Scotland have a further option, they can go to the airport and take a plane.
  2. Relevance: Your offer must be relevant to the needs and wants of consumers.  Technology of scientific knowledge is unlikely to be enough.

This provides four potential options:

  1.  Hygienes: These are products where differentiation is of high relevance to consumers but the product offered has low differentiation from others in the market.  The product features offered are important to customers but all suppliers in the market offer those features.
  2. Neutrals:  These products are in the market but their differentiated features are irrelevant to the consumer.
  3. Drivers: These products have differentiated features from those of competitors which are highly desirable to the targeted consumer group.
  4. Fool’s Gold: These products have highly differentiated features but those features do not drive target customers to the brand.

As you can see being different isn’t enough.  Too many brands fall into the fool’s gold category.  You must be different in ways which are valued by the target consumer.

Ideally, you want your products to be drivers.  These provide the real money!

Increasingly, the mass market is dead.  In fact many marketers no longer talk of differentiation into defined groups but of personalised goods and services targeted at individual consumers.  This is moving away from same, towards different and aspiring to be unique.  The further you move away from same, the more differentiated value you need to include.  Differentiation strategies are the practice of choosing segments where you know what consumers value and what they do not.

Differentiation is knowing where your customers see most value.  You need to differentiate to support the needs of the chosen segment and in the market position you want to own.

To differentiate you need to know where your competition sit in the market.  You need to undertake research and perceptual mapping to identify gaps in the market.  You also have to calculate the market value of those gaps.  They must be sustainable and produce sufficient earnings.

You need to understand where your offer is most and least credible.  There is no point adding features or aspects to a product if your target consumers do not see value in them.

You may need to differentiate into a market position that you can most easily maintain.  For instance, following the cataclysmic casino banking strategy introduced by Fred Goodwin, Royal bank of Scotland is retreating to the position of being a retail bank, its core competency.  Shifting to a new market position may be so costly it can destroy a firm.  Take the specialist retailer Maplin.  Its management have blamed the rising cost of raw materials but part of that firm’s failure may be its attempt to move its specialist products into prominent high street locations (at a time when most other specialist retailers have gone online).

You must defend your position where differentiation is most easily achieved.  This can be through the use of intellectual property such as trademarks, copyright and patents.  If your product is easily copied your differentiated advantage may not last very long.  Take couture fashion.  Within days of new designs appearing on the catwalk, features of those designs will begin to appear in high street fashion chains such as H&M.  The couture brands differential advantage will be eroded.

You must also protect against technological leapfrog.  This is where there are opportunities for differentiation through new technology which falls outside your expertise.  Kodak persevered in the 35mm film camera market and ignored the rise of digital camera technology.  The result, Kodak filed for bankruptcy protection.

For many years, I was responsible for the inspection of farm diversification businesses.  Amongst the most popular diversification was jam making.  Every farmer’s wife believed her jam was the best, after all it had won a prize at the Women’s Institute meeting and friends said good things about it.

The problem was that every farmer’s wife wanted to market their jams in the same way.  They were all competing in the same market segment and offering the same differentiations. The result was a market niche overflowing with homemade farmhouse jam where all products were undistinguishable and few of these businesses survived in the long-term or generated sufficient earnings.



Market Segmentation and a Multi-Brand Strategy

Michael Porter of Harvard Business School proposed that there were three basic marketing strategies for any business:

  1.  Cost Focus – a strategy of keeping costs down and offering the best-value to the market
  2. Differentiation – Offering multiple products and brands to different market segments
  3. Niche – selecting the most profitable market segments and limiting you offer to those segments

Porter argued that a company which tried to meet two or more of these strategies would be in ‘no man’s land’ and be at risk of failure.

For small firms this basically means the adoption of a niche marketing strategy as they will often lack the economies of scale for a cost focus approach or the resources to produce products which meet the needs of every market segment.  Small firms need to segment their market so that they can properly target their marketing resources.

However, as firms grow, a differentiated marketing strategy often needs to be developed and a multi-brand portfolio created.  This is particularly true if your market is mature, where product innovation and development becomes an increasingly important element of an organisation’s marketing tools.

A multi-brand approach and a differentiated marketing strategy can provide significant benefits:

  1. It can offer a route to grow and develop your market
  2. |t can increase your market coverage
  3. Differentiation is necessary in mature markets
  4. Having several brands allows the communication of different brand attributes at the same time without confusing consumers or weakening brand identity.
  5.  It can provide a defence. It can be a barrier to new entrants into your market and it can stop competitors from taking your market share..
  6. It can help to maintain a brand image.  For example, Disney owns Bueno Vista and Touchstone; two brands which allow them to distribute movies aimed at adults without harming their family friendly image
  7. It can be a route to innovation.  A product failure will have less of an impact on your primary brand.
  8. It allows market leaders to develop challenger brands in other markets.

So how do you segment a market for a multi-brand strategy?

The most obvious ways of segmenting a market are based on socio-demography.  This is breaking down a market or population on factors such as age or income.  For many years, this was the method used by the UK census with the A, B, C1, C2, D and E categories.  The census system broke the UK population down by profession and social standing.

Ferraro Kinder, Europe’s biggest confectionery manufacturer uses demography as part of its multi-brand strategy. Products such as their Roche chocolates are aimed at adults whilst Kinder products are aimed at children and young adults.

Another common method of segmentation is to use psychographic data. This breaks down the population of a market on the basis of lifestyle choice.  The ACORN segmentation system partially uses psychographic methodology.  The spirit drinks industry often uses this method to segment.  Haig whisky is aimed at ‘affluent greys’, older consumers with significant leisure time and disposable income; Haig Club is aimed at younger fashion conscious ‘aspiring’ professionals and uses David Beckham as a brand ambassador.

However, there are other methods of market segmentation:

  1.  You can segment your market by the benefit your product professes to provide.  This occurs in the mineral water market where Evian segments on the basis of health and Volvic segments in relation to ‘vitality’.  These are defined key criterion for consumers
  2. You can segment on the basis of consumer attitude.  PSA owns two parallel brands, Peugeot and Citroen (it is about to add two more with Vauxhall and Opel). These brands are designed to attract different market segments. Peugeot focuses on driving experience whilst Citroen focuses of utility.  These two brands share a production platform enabling economies of scale.
  3. You can segment by channel.  Distribution channels can be in conflict with one another.  For example you may choose to buy from a company’s web store rather than from their high street shops. L’Oréal segments their brands according to the distribution channel.  They own brands for premium and department stores but sell different brands in supermarkets.  They own specific brands for direct sale to consumers and brands only sold in pharmacies.  They own mail order only brands and brands which are only supplied through professional hairdressers. Until recently they owned brands such as The Body Shop which were only sold in brand specific stores.
  4. You can segment by occasion experience.  Guinness is segmented on the pub experience; Carlsberg segment on the ‘release’ occasion e.g. nightclubs; Budweiser concentrates its marketing on beer as part of relaxation in the home.
  5. You can segment on price through the creation of fighter and trade-up brands.  Whirlpool owns a budget fighter brand, Laden, and an aspirational trading up brand, Bauknecht, as well as mass market brands such as Indesit.  This provides a defence against others taking a market share via ‘pincer’ attacks.
  6. In business to business markets, you can segment on the basis of the purchase decision-maker and other key influencers on the buying decision.  For example, the UK firm Hydro Building Solutions (HBS) owns different brands in different European countries which sell aluminium construction products.  Wicona in Germany markets to Architects, engineers and research establishments.  Donal in Italy markets to installation firms and contract bidders.  Technal in France markets to end-users via TV advertisements and has its own installation network.

As a small or new start business, you need to segment to ensure that you are making the best use of your limited resources.  As your business grows and as your market matures, you can use segmentation tactically and to develop a multi-brand approach.