Michael Porter’s “Generic Strategies”
• Porter’s five-forces model describes strategy as taking actions that create
defendable positions in an industry.
• In general, the strategy can be offensive or defensive with respect to competitive
forces.
• Defensive strategies take the structure of the industry as given, and position the
company to match its strengths and weaknesses to it.
• In contrast, offensive strategies are designed to do more than simply cope with
each of the competitive forces; they are meant to alter the underlying cause of
such forces, thereby altering the competitive environment itself.
There are, of course, many specific strategies of each type (offensive or defensive), and
identifying which is best depends on the circumstances. But Porter suggests 3 broad or
generic strategies for creating a defendable position in the long-run and outperforming
competitors.
1) Cost Leadership
• Cost leadership means having the lowest per-unit (i.e., average) cost in the
industry – that is, lowest cost relative to your rivals.
• This could mean having the lowest per-unit cost among rivals in highly
competitive industries, in which case returns or profits will be low but
nonetheless higher than competitors
• Or, this could mean having lowest cost among a few rivals where each
firm enjoys pricing power and high profits.
• Notice that cost leadership is defined independently of market structure.
Cost leadership is a defendable strategy because:
I. It defends the firm against powerful buyers. Buyers can drive price
down only to the level of the next most efficient producer.
II. It defends against powerful suppliers. Cost leadership provides
flexibility to absorb an increase in input costs, whereas competitors
may not have this flexibility.
III. The factors that lead to cost leadership also provide entry barriers
in many instances. Economies of scale require potential rivals to
enter the industry with substantial capacity to produce, and this
means the cost of entry may be prohibitive to many potential
competitors.
Achieving a low cost position usually requires the following resources and
skills:
