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What is Porter’s Generic Strategies model?

Porter’s Generic Strategies is another simple tool to outline the major strategic options that a business is able to undertake. We believe it is a great tool to use, but far from complete. Though, choosing one of these may lead your strategy there are many elements here that are overlooked. To Porter, they may have seemed like details but to everyday small businesses they should be considered. This is why we also suggest taking a look at our SWOT analysis at the end of your strategic development.

What is Porter’s Generic Strategies model used for?

Porter’s Generic Strategies model is nevertheless a great simple way to establish a strategy which can create sustainable competitive advantages for you. Using this model, though three options are available, you must consider the options within two dimensions. These are the sources of competitive advantage and the competitive scope of the industry. The former will establish whether your products are differentiated or they are the lowest cost producer in the market and the latter will determine whether your business should focus on a narrow niche of the market or the market as a whole. In other words it will either be the cost or uniqueness of the product and the scope of the target market will either be broad or narrow.

How do you use it in practice?

The three different strategies as you have probably already seen are either: cost leadership, differentiation or a focused/niche strategy.

Cost Leadership: Basically means that you have a competitive advantage being able to produce products at the lowest cost. The achievement of this is not trying to be producing at the lowest cost, but actually doing so. The different ways to achieve this are through special access to resources, outsourcing to labor intensive markets (India, China, or other specific Asian markets), or having the expertise to efficiently manufacture products. It is usually not department specific, but the company as a whole should integrate this strategy and exploit all sources of cost advantage, including selling a standardized product.

Differentiation: A differentiation strategy will focus on either R&D or design. Here you are able to provide very unique products to your customers. And your customers should value this, as the product is focused on the features which generate additional value to those customers. This can lead to charging higher prices, which will cover the additional costs to produce the unique and non-standard features. The long-term downside is that these features may end up being added by your competition, or that your customers may change their desires or requirements. Thus, putting extra pressure on you to be innovative and to improve over time.

Some of your internal strengths for this strategy should include: having access to scientific research, your workforce should not only be skilled with expertise but also creative, you should build a reputation for being innovative and having high quality, as well as having a great sales team which is able to communicate the benefits of the features added to the products.

Focus -> Niche Markets: This strategy will concentrate on specific segments. But, within these segments is where you will attempt to achieve either differentiation or cost leadership position.

The downside of this strategy is that it is narrow, and you will only reach a limited amount of customers. Therefore, you will have much lower volume turnover and less bargaining power with your suppliers. But, the upside comes from a higher degree of customer loyalty led by the premise that you mainly focus on their exact wants and needs. And these extra costs to produce specific and unique products can be passed on to your customers, because substitute products may not exist.

But be aware, these markets will not last long. In the long run these specialized markets may disappear because of changing needs, and its also quite possible that other market participants, most likely the market cost leaders, begin adapting their products in order to compete against you directly.

Tips and Tricks (What to do and don’t do)

It is very, very important not to try to achieve more than one here. In order to achieve long term success, you should focus on one of these strategies and keep or gain market share position. The companies that have tried to go after more than one of these positions are in danger of sending mixed signals to the market. Those companies won’t be “stuck in the middle with you” but more or less alone. And thus will end up without the ability to create any sort of competitive advantage in either of the strategies.

Example at a real use case

Below we have provided an example how you could use Porters Five Forces to develop potential strategic directions to focus on.

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What is Porters Five Forces?

Porter’s Five Forces is a simple tool to understand the situation a company is in, or will be going into. This is a great tool to effectively visualize the strengths and weaknesses of the company’s current competitive position, or the position you may be moving into. It was created some decades ago by Michael Porter at the Harvard Business School as a tool to analyze the potential and profitability of an industry.

What is Porters Five Forces model used for?

Business strategists use Porter’s Five Forces as a simple framework to analyze the competition in an industry prior to beginning their business strategy development. The Five Forces consist of: Threat of Substitute Products, Bargaining Power of Buyers, Threat of New Entrants, Bargaining Power of Suppliers and the Competitive Rivalry. From these five forces you could get a sense of the attractiveness of the industry, if the competitive intensity is high then it may be less profitable to enter or continue with the current business strategy and vise versa. Thus, you could say that an industry is not attractive because the combination of all the threats will in hinder profitability.

In the overall hierarchy of a business strategy, Porters Five Forces should be done after you have already looked at the macro-environment. As this model dives deeper and closer to the heart of the industry. Though Michael Porter created this too in response to the popular SWOT analysis, we greatly believe that the two can still coexist together and actually strengthen your business strategy development.

How do you use it in practice?

Lets dive straight in. The Five Forces tool can determine the competitive environment in an industry, and in this section we will analyze each one of them. Keep in mind while you go through here, that is could be an organized brainstorming exercise. But, before you move on list them depending on importance or power. This will make it much easier to re-use and think about when you move to other tools in which we will reference this Five Forces tool.

Bargaining Power of Suppliers: Suppliers come in many shapes and sizes. They may supply you with raw materials, specific components, or even expertise services. If there are a limited amount of suppliers who can supply you with the resources you need, you have a problem. They will be able to charge excessively high prices and you won’t have much of a choice but to pay it. Other things to consider:

The higher the bargaining power of suppliers, the higher your costs will be to produce your product and run your business.

Bargaining Power of Buyers: Here you need to ask yourself how easily can your customer negotiate down the prices. Its basically the same as the Bargaining power of suppliers, except from a different angle.

The higher the bargaining power of your buyers, the lower your revenue will be.

Threat of New Entrants: According to Porter there are six major sources of entry, which we will look at here.

Threat of Substitution: Here you should look closely at the products you are selling. Are they unique? Can they be replicated quite easily? In an industry where substitute products can be replicated easily, it will be hard to have high profit margins. Whether it is an existing industry or a new industry you are entering or creating.

On the other hand, in profitable markets where high returns are possible new entrants will come knocking on your doors. This will result in higher competition with a greater supply of choices to the market and will eventually lead to decreasing profitability for the whole industry through price reductions.

Competitive Rivalry: Here what is most important is the competitors themselves. What are their capabilities, are their products or services as attractive as yours or better? On the other hand if no one else in the industry is able to provide what you provide, you could consider yourself having strength in this category. Some other things to consider for this element are:

Tips and Tricks (What to do and don’t do)

As mentioned before, use this tool to have an organized brainstorming exercise with your team. This will provide you with an understanding towards which strategy you should lean towards. From Porters perspective once the Five Forces are completed you could jump into his, Porter’s Generic Strategies model in order to generate a strategic option for your business. Though, we also believe that other strategic options can be generated in a different way as well. We will discuss this in a different article.

It may seem difficult sometimes to get all the information because in some cases that information may not be available to you about certain parts of the world. In that case, its okay to make assumptions. Share those assumptions with others, with your team or with people in your network that may be able to shine a light on those areas.

Example at a real use case

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What is a Business Model Canvas?

You never know when the best ideas can confront you. It could be at a cafe while you are sipping some tea or coffee with friends, or at a bar with a friend dreaming about the day you won’t have to slave away for someone elses dreams. We definitely have! This is where the Business Model Canvas can come in. It can be done either on a whiteboard, chalkboard, smartboard, or just the back of a coffee tanned napkin.

The Business Model Canvas or BMC is a way to structure and map a basic business plan. It is a great tool to get an overview of a business you are planning. In contrast to a business plan, it is much quicker and easier to complete. The great thing about it is it can be done absolutely anywhere. The only requirement…your imagination and creativity!

What is a Business Model Canvas used for?

The BMC is gaining popularity because of its lean structure. Many entrepreneurs are using it to innovate their business models, or create new ones.

Traditional business plans are lengthy, eye sores which may take a great amount of time for someone to write up. The BMC is much leaner, it puts the spotlight on exactly what is driving the business and what isn’t necessary. Also, it is much easier to tweak the model and try new things, see how different ideas clash or complement one another, as they can all be seen on one single page or board. And lastly, its understandable. It will be much easier to point out the key details as well as present your vision to your team.

How do you use it in practice?

Brief overview of each element:

Step 1: Customer Segments

You should really take you time here. Depending on your resources close at hand, we would even recommend doing some field research to answer the following questions. This is one of the more important elements of the business canvas, because if you know your customer everything else will be smooth sailing.

Customer Dimensions: do you have just one customer or do you have a multi-sided market. Many of your products and services will have one dimension, but if you were a newspaper you would have two: the reader and the advertisers.

Customer Profiles: Next is to dive a bit deeper and look at the micro-view of your customer. You should be able to build profiles for different customers who may be interested in your products. Close your eyes, visualize your customer. What do they think? How do they look? How old are they? What kind of problems are you solving for them? If you are having a hard time with this, then narrow down your represenative group, or sample group, and discuss it with them or go observe them in action.

Step 2: Value Proposition

Here you will narrow down the problems that your customers have, or what needs are you fulfilling. Here also, really take your time and narrow down what is unique about your value proposition and why your customer profiles would buy into your vision. If you have a whole bunch of them, write them down on the back of the paper or on the side of the whiteboard and after you have a collections start to rank them with the most critical ones. Remember though, these value propositions should link to the customer profiles you have created in step 1.

Step 3: Channels

The channels should include different solutions you have to reaching your customers. Whether it is your own website to generate sales, or various advertising tools (Facebook advertising, Google AdWords) to gain attention. But, be aware it also includes third parties who you may contract out to in order to service the product once it needs repairs. Here again, you should be able to link the channels to each customer profile. How will you reach your customers. Even though your product IS the best the world has ever seen, if no one interested knows you exist then you are just like the fallen tree in the empty forest.

Step 4: Customer Relationships

How will your customer connect with you? How do you communicate with them during their customer journey. Do you have a dedicated sales person they speak with, do they have their own account manager? Will you treat all customers the same, or do you only have resources for your AAA clients. Or will you be a champion of personal support and treat all customers as if they are your only.

Step 5: Revenue Streams

Great! You are almost halfway done! Now comes the best part, the $$$! Where will your revenue streams come from? This is fairly simple, you should be able to link customer segments and their respective value proposition and generate a list of revenue streams.

Step 6: Key Activities

The key activities are basically also closely tied to the value proposition. Each proposition has certain activities that you must engage in to provide value to the customers. If you are a manufacturer of certain products, it would probably include engineering expertise, R&D, or learning new techniques in order to produce higher quality. This really depends on the value that you are proposing to the customers.

Step 7: Key Resources

Your key resources would consist of strategic assets that you require in order to support the key activities. The resources can range from key talent that you may have to the infrastructure you own. Talent can be your human resources, but it can also be the intellectual property you have accumulated from past business activities. Infrastructure on the other hand can be either physical or virtual. Amazon for example, you could say has a physical and virtual infrastructure. They have both massive amounts of warehouses, but also a vast virtual platform in order for their business to function.

Step 8: Key Partnership

We are almost there! We hope that at this point, the BMC has helped you view your business in a new light, or sharpen the focus of certain key areas in question.

Key partnerships are an important way to engage in your key activities. But, your key activities may fall outside of the scope of the business you are in. Maybe you have partners who provide those services to you, or you could find them? Here you should focus on those key activities which you may have or need to find Partners for.

Step 9: Cost Structure

At this point you should already have quite a decent understanding of your (potential) business. A few steps prior you have evaluated how your key activities drive you value proposition and then lead to revenue. Now we must do the same for cost drivers. What are the costs that you foresee in running this business? Are they directly related to providing your value propositions? Are they fixed or variable costs? Will they be fixed, grow linearly or worse throughout the business scaling process?

Congratulations, you have just finished your Business Model Canvas. In the following section we will provide some suggestions and ideas of what you can now do with it.

Next Steps

First, ask yourself and your team if it makes sense. Are there areas where you can go back and narrow the elements down or adjust them? Could it be understood by someone who isn’t part of the company?

The business model canvas is a great place to start thinking about your business. But, we strongly suggest that you also take a look at your competitive environment. Your current competitors and your future ones will definitely be looking to analyze you as well. We suggest to take a look at Michael Porter’s Five Forces model and then come back to see how your canvas can either be enhanced or changed.

If you feel you need additional guidance or consultation, drop us a mail privately or comment below. Thanks for reading!