Porter’s Generic Strategies

Excerpted from George, J.M. & Jones, G.R. "Understanding and Managing Organizational Behavior." 3rd Edition, Prentice-Hall, 2002.

An organization pursues a strategy – a plan of action – to develop the skills, knowledge, and capabilities that will allow it to compete successfully in its environment for resources and gain a competitive advantage, outperforming its competitors.  The primary resources that any organization needs to survive and thrive is customers and the revenues that they provide.  According to Michael Porter, to attract customers, organizations can pursue one or more of the following strategies:

 

  • Cost-leadership strategy:  Organizations strive to lower their costs and then attract customers with lower prices (made possible by lower costs).
  • Differentiation strategy:  Organizations attract customers by offering them unique or distinctive goods and services.
  • Focused cost-leadership strategy:  Organizations focus on one kind of customer or group of customers and produce a low-cost product for that group.
  • Focused differentiation strategy:  Organizations focus on one kind of customer or group of customers and produce a differentiated product for that group.

 

Founder Sam Walton decided that Wal-Mart, for example, would pursue a cost-leadership strategy.  To serve the needs of large numbers of rural customers who were being ignored by urban retailers like Sears and Kmart, Walton located his first stores in rural areas where land was cheap.  He pioneered the development of low-cost materials management technology that allowed Wal-Mart to purchase, distribute and sell products at a cost lower than its competitors.  This low-cost competence allowed Wal-Mart to sell items at low prices.  Wal-Mart attracted enough customers away from stores like Sears and Kmart to become the largest and most profitable retail store in the world.  Through the development of a cost-leadership strategy, Wal-Mart triumphed.

 

In contrast to Wal-Mart, stores like Neiman Marcus, Nordstrom, and Saks Fifth Avenue serve an affluent clientele who are interested in high quality, personalized service and unique goods.  To attract and hold this type of customer, these stores pursue a differentiation strategy by offering designer clothes, high-priced and unique gadgets, and highly personalized service.

 

Finally, local clothing stores or copy shops that select a group of customers, such as students, and focus on attracting them with a low-cost product are pursuing a focused cost-leadership strategy.  An exclusive clothes designer like Calvin Klein or Christian Dior that focuses on producing clothing for customers who are very rich is pursuing a focused differentiation strategy.  Amazon.com is also pursuing a focused differentiation strategy by concentrating on the groups of customers who want to buy books over the internet.

 

How can organization design help an organization pursue cost-leadership and differentiation strategies (either the focused or the general kind)?  Organizational design can help an organization achieve increases in efficiency, quality, innovation and creativity, and responsiveness to customers – improvements in four areas crucial to gaining a competitive advantage.  Increasing efficiency is most closely associated with a cost-leadership strategy.  Increases in quality, innovation, and customer responsiveness are most closely associated with a differentiation strategy.  An organization that attempts to simultaneously pursue a low-cost and differentiation strategy has to attempt the difficult task of increasing its performance in all four areas.