In his book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter identifies and describes three generic competitive strategies: overall cost leadership, differentiation, and focus. In this post I will summarize these three strategies and point out the role that marketing serves in supporting the strategies.
The overall cost leadership strategy requires a relentless effort to maximize efficiency and in turn minimize costs in all parts of the business while continuing to deliver the core benefits that customers expect from the business. Only one company among a group of competitors can hold the overall cost leadership position, and the leader must continuously adapt to changes in internal and external factors that can reduce efficiency and increase costs. The overall cost leadership position enables the company to earn higher profits than its competitors when the core benefits of its offerings are perceived as equal to the offerings from the competitors. Business efficiency is the central focus of this strategy, but marketing also plays a role in the success of the strategy by identifying the core benefits expected by the customers and communicating how the company’s offerings meet those expectations.
The differentiation strategy is based on creating a product or service with unique attributes that are valued by customers. These attributes differentiate the company’s offering from the core benefits of the offerings delivered by competitors. When successful, the differentiation strategy creates loyal customers who prefer the offering even when priced at a premium to offerings from competitors. This strategy relies on market research to identify unique attributes that customers value, research and development to create the unique and valuable attributes in the offerings, and marketing communications to communicate the unique benefits of the subsequent offerings to the customers. Cost control is also important because profitability depends on the costs incurred from the unique attributes being lower than the earnings from the price premium.
The focus strategy reduces the competitive scope of the business in order to serve a market segment more effectively or efficiently than competitors who are competing more broadly. The focus strategy is designed to exploit differences between the target market segment and the broader market to achieve a cost advantage, differentiation advantage, or both relative to the competitors serving the broader market. The focus strategy works well for a small company that can find a market segment that has sufficiently different needs and can serve those needs better than competitors who are serving the broader market. Marketing supports this strategy by identifying market segments that have distinctly different needs and by communicating the advantages of the company’s offerings to the selected target market.
In general, a successful company with a competitive advantage in its market will have chosen one of these strategies. Which of these three competitive strategies fits your business?
Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: The Free Press, 1980.