A REFINEMENT OF PORTER’S STRATEGIES

PETER WRIGHT (1987)

Southeastern Louisiana University, Hammond,
Louisiana, U.S.A.

PRESENTED BY:
HAIRIN NISA BT. MEOR NORDIN
GM05005

31 MAY 2013
 Michael Porter has formulated a set of generic
strategies and addressed them to academicians in
the fields of economics and strategic
management and to top managers of businesses.

 This article suggests several refinements to his

ideas which may further enhance their value to
academicians and practitioners.
 Michael Porter has identified and defined three
generic strategies, namely:

i) Cost leadership - producing a standardized product at very

low per-unit cost for many buyers who are price-sensitive.

ii) Differentiation refers to outputs of an enterprise which

are considered unique industry-wide and are addressed to
many buyers who are relatively price- insensitive.

iii) Focus strategy adverts to products which fulfil the needs

of particular buyers who are fewer number in an industry.
 In this paper an attempt is made to refine
Porter's treatment of generic strategies in
four areas, which are:

1) Parameters of choice
2) Competing with only one strategy
3) Focus strategy
4) Generic strategies and ROI
 1. PARAMETERS OF CHOICE
 Business firms have the option to choose any of the
generic strategies.
 However, choices of generic strategies have limitation
boundaries in terms of the size of the firm and its access
to resources, as well as industry and competitive analyses.
 Refinement:
 In term of access to resources:

i) Larger firms in an industry with greater access to

resources may primarily compete with the cost leadership
or differentiation strategies.
ii) The smaller firms can only viably compete with
the focus strategy.
 In terms of industry analysis (parameter restriction):
It may delimit the differentiation or focus strategies
(various commodity industries, product-market scopes of
mature industries, an environment which has a
strong pull demand for competitors' branded outputs).

 In terms of competitor analysis:

It may delimit the availability of the cost leadership
strategy.
That is, several of the firm's competitors may have
greater cumulative volume of operation capabilities or
better access to low-cost inputs.
 2. COMPETING WITH ONLY ONE
STRATEGY
 Explicit in Porter's argument is that successful businesses
should compete on the basis of one or the other of the
generic strategies: cost leadership, differentiation or focus.

 Refinement: larger businesses would primarily compete

with cost leadership or differentiation strategies. The
larger enterprises which compete with cost leadership
would do so in isolation of other strategies. The larger
firms which compete with the differentiation strategy,
however, may do so in isolation of other strategies or in
conjunction with the focus strategy.
 The choice to be made among these options would of
course be influenced by industry and competitive
analysis, as well as the preferences of the top managers.
 The reason for stating that those firms competing on the
basis of cost leadership would do so in isolation of
other strategies is that the emphasis of this strategy is on
cutting costs throughout the value chain encompassing
all the functional supports.
 Consequently, the economics and technologies of
functional supports involved in competing with the cost
leadership strategy would normally be incompatible
with the simultaneous adoption of other strategies, since
with the cost leadership strategy all the emphasis is put
on cost reductions (Allan and Hammond, 1975).
 3. THE FOCUS STRATEGY
 Porter has presented focus as a viable generic strategy which
may be considered by various business units. He has stated:

- In cost focus a firm seeks a cost advantage in its target

segment, it exploits differences in cost behavior in some
segments
- In differentiation focus a firm seeks differentiation in its target
segment, it exploits the special needs of buyers in certain
segments.

 The benefits of optimizing the firm's strategy for a particular

target segment (focus) cannot be gained if a firm is
simultaneously serving a broad range of segments (cost leadership
or differentiation) (Porter, 1985: 15, 17).
 Porter's assessment that the focus strategy may be
a viable single strategy adoption possibility in
general is not correct.
 As a single strategy adoption the focus strategy is
only appropriate for the smaller firms.
 With regard to the mid-size and the larger firms,
focus may only be logically adopted if it is
adopted in conjunction with the differentiation
generic strategy.
 a. Cost focus
 This strategy is not a viable choice for mid-size and
larger business units if it is chosen by itself.
 Reason: First, the size of the market is crucial to the
investment decision. A small cluster of buyers cannot
justify high operation, R&D and marketing efforts,
no matter how successful the efforts are.
 Second: mid-size and larger business units will not
bother with a product-market dimension.
 Should the market, presently appropriate for the cost
focus strategy, evolve into a larger and larger size,
then the larger firms will become involved.
 But then the industry structure may shift and the
appropriate generic strategy may become cost leadership,
not cost focus
 With the cost leadership emphasis is on low per-unit cost
outputs for many buyers in the industry through attaining
cumulative volume of operation.
 And with the cost focus strategy (used primarily by the
smaller firms), the major emphasis is on low per-unit
cost outputs for a smaller number of buyers in the
industry through the establishment of a low initial
investment and low operating costs.
 For both the bottom line is the reduction of costs.
 b. Differentiation focus
 The differentiation focus strategy may by itself
be used successfully in the long run only by the
small firm, not the mid-size and the larger
businesses.
 However, the differentiation focus strategy may
be adopted by the mid-size and larger business
units in conjunction with their differentiation
generic strategy.
 With the differentiation and the differentiation focus
strategies, there are numerous factors to consider
(Wright, 1983, 1984b).
 All these factors are driven by various levels of
functional mix intensities. For select product market
scopes, a predominant intensity in any one or several of
the functional supports maybe the primary reason(s) for
the successful implementation of the differentiation
and/or the differentiation focus strategies.
 The differentiation focus strategy may be used by the
mid-size and the larger firms in conjunction with the
differentiation strategy, for competitive reasons.
 4. GENERIC STRATEGIES AND ROI
 Various theoretical and empirical
investigations have proposed differing
relationships between cumulative volume
of production/market share and return on
investment
 Porter argues that firms that compete through the cost
leadership generic strategy will have higher ROI with
larger market shares (part C of the graph in Figure 2).
 Contrarily, Porter reasons that firms which compete
through differentiation and focus strategies would
observe higher returns on investment with smaller
market shares (part A in the graph).
 Porter makes further distinctions between cost
leadership, on the one hand, and differentiation and
focus, on the other hand, by his elaboration of part B
in the graph which refers to low performance firms
that are 'stuck in the middle'.
 Porter's elaborations are correct as he treats cost
leadership and focus and relates them to market
share and profitability, while Porter is incorrect with
respect to his discussion of differentiation and its
relation to market share and profitability.
 However, with the differentiation generic strategy
Porter is mistaken to consider a lower market share
with higher ROI (part A in the graph in Figure 2). In
fact, the differentiation strategy should be related to
a positive relationship between market share and
ROI (part C of the graph in Figure 3).
 That is, the focus strategy is placed in
part A and cost leadership and/or
differentiation strategies are placed in
part C of the graph in Figure 3.
 CONCLUSIONS
 Porter’s proposals can serve as a powerful tool in
the analysis of corporate problems which have
strategic ramifications.

 In this article several refinements are made to

Porter's ideas, which may further enhance their
value to academicians and practitioners.