Michael Porter – have you heard the name before?
I have, and just about everything I’ve learnt in regards to strategic planning comes from his teachings. j In my head I call him the King of Strategy, but he’s best described as an American academic known for his theories on economics, business strategy, and social causes.
You’re not a business nerd like me, so why would you care about Mr. Porter’s work in strategic planning?
Because you’re a business owner, and by reading this blog you’ll learn Porter’s three generic strategies: cost leadership, differentiation and focus. Michael Porter has hundreds of legendary quotes, but the one most applicable is: “The essence of strategy is choosing what not to do.”
Hence, by reading this article you’ll choose what your business is not. By the end of the blog you’ll narrow your future business strategy into two possible strategies. You’ll be that much closer to the innovative strategy that’s going to take your business to the next level.
In business strategy, cost leadership is establishing a competitive advantage by having the lowest cost of operation in the industry. Cost leadership is often driven by company efficiency, size, scale, scope and cumulative experience. A cost leadership strategy aims to exploit scale of production, well-defined scope, purchasing power, producing highly standardized products, using advanced technology.
Walmart has succeeded across the world due to its cost leadership strategy. The company has cut down on excesses at every point of production and thus are able to provide the consumers with quality products at low prices.
Cost leadership is different from price leadership. A company could be the lowest cost producer yet not offer the lowest-priced products or services. If so, that company would have a higher than average profitability.
The next business strategy lies in differentiating your product or service as a whole. If this strategy has caught your attention you’ll need to assess your current business model and understand if you’re already offering something unique. By conducting rigorous industry analysis you can conclude whether your business already holds a competitive advantage over your competition.
In the creation of a differentiation strategy your focus should be to become as unique as possible. There is no such thing as “the best” in strategy. Let’s take automakers for example, each of the top one hundred global makers have their own segment of the market.
Focus strategy ideally tries to get businesses to aim at a few target markets rather than trying to target everyone. This strategy is often used for smaller businesses since they may not have the appropriate resources or ability to target everyone.
Businesses that use this method usually focus on the needs of the customer and how their products or services could improve their daily lives. In this method, some firms may even let consumers give their inputs for their product or service.
This strategy can also be called the segmentation strategy, which includes geographic, demographic, behavioral, and physical segmentation.
By narrowing the market down to smaller segments, businesses are able to meet the needs of the consumer. Michael Porter believes that once businesses have decided what groups they will target, it is essential to decide if they will take the cost leadership approach or differentiation approach.
Avoid using more than one of these generic strategies, because there’s a high chance that your business will come out achieving no strategies instead of achieving success. This can be called “stuck in the middle”, and your business won’t be able to have a competitive advantage.
My main suggestion is in using the process of elimination. What is your company not? Even once you’ve created your business strategy you’ll need to monitor it to understand if it’s appropriate to pivot due to external factors.
President, Black Sheep Business Consulting