Porter's generic strategies: the four, with examples

Porter's generic strategies are the basic ways a business can compete, as set out by the Harvard Business School professor Michael Porter in his 1980 book Competitive Strategy: cost leadership, differentiation, or focus on a narrow segment. In Competitive Advantage (1985) he split focus into cost focus and differentiation focus, which gives the four-box version most people meet today.

The four generic competitive strategies come from two questions. Do you win on lower cost or on being different? And do you aim at the whole market or a narrow part of it?

Porter's generic strategies, one by one

Cost leadership. Be the lowest-cost operator in the industry and serve the broad market. The point is low cost, not low price: a cost leader can match rivals' prices and keep a fatter margin, or undercut them when it wants to. Ryanair is the familiar case, with one aircraft family, secondary airports, quick turnarounds and charges for almost every extra. Walmart built the same logic into retail under the banner of everyday low prices.

Differentiation. Be different, across the broad market, on something buyers value enough to pay more for: design, quality, brand, service. BMW is a standard example, selling a wide range of cars at prices above the mass-market brands on the strength of engineering and brand. It only works if the premium exceeds the cost of being different, which the differentiation strategy page covers along with the risks.

Cost focus. Be the cheapest option for one narrow segment by stripping out everything that segment does not need. Say a print shop prints only bulk orders for schools, on one type of machine, with no design service. Nobody beats it on price for that job, and it does not try to serve anyone else.

Differentiation focus. Be the best option for one narrow segment that will pay for something tailored. Rolls-Royce Motor Cars builds for a very small number of very wealthy buyers. At small-business scale, it is the bike shop that only fits and services road bikes for serious amateur racers.

Stuck in the middle

Porter's sharpest warning was about firms that never choose. A business "stuck in the middle" has no cost advantage and nothing distinctive, so it gets squeezed from both sides: price-sensitive buyers go to the cost leader, and buyers who will pay for quality go to the differentiator.

The symptoms are easy to spot. Middling prices. A headline promising "quality at affordable prices". A product range that tries to serve everyone. Picture a town-centre gym that costs twice as much as the budget chain and has none of the boutique studio's classes. It is not bad at anything, and it is nobody's first choice.

Later researchers argued that some firms do combine low cost and differentiation, usually through a process or technology rivals lack. That is fair, but it is the exception. For most businesses Porter's point holds: if you cannot say which strategy you are playing, your customers cannot either.

How to tell which generic strategy a competitor is playing

Rivals rarely announce their strategy, but they publish evidence of it every day.

Read the signals together. One cheap tier does not make a cost leader. A cheap tier, discount-led ads and job adverts for automation engineers probably does.

The most useful moment is when the signals change. A differentiator adding a stripped-down plan, or a cost leader hiring designers, is a strategy shift you can often see before it shows in your sales. Pricing pages are often where it appears first, which is why the guide to monitoring competitor pricing is worth a read. Figo flags pricing and new-page changes from the competitors you track every week, if you would rather not check by hand.

Using it on yourself

Place yourself in one box, honestly, then place your two or three closest rivals.

If your main rival is a cost leader, do not fight on price. Move towards differentiation or a narrower focus.

If they are a broad differentiator, look for a segment they serve badly and specialise in it.

If they are focused on your niche, decide whether to out-specialise them or widen your offer.

Porter's other well-known framework, the five forces, tells you how attractive the industry is in the first place. The generic strategies tell you how to compete once you are in it, and the competitive advantage page covers how to check whether the strategy you chose is actually working.