July 31, 2014  
 
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Business Strategy

 

Michael Porter Business Strategies

Want to impress your friends at cocktail parties by talking about business strategies? Explain Michael Porter's strategy model and you'll be the star of the party. Even better, use the strategies to grow your business.

Michael Porter knows something many business owners don't: How to leverage competitive advantages as springboards to business growth.
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Although his strategies make great dinner conversation, they can also be the ingredient you need to take your company to the next level.

Porter's approach to competitive strategies hinges on whether the business' activities are broad or narrow, and the level at which the business seeks to differentiate its products. Some strategies attempt to gain advantage by emphasizing certain segments of the market, while others look for an edge based on cost. Subsequently, Porter identifies four strategies for gaining competitive advantage.

Cost Leadership

In the cost leadership model, the objective is simply to produce products at the lowest cost in the industry. By minimizing costs, the business can edge out the competition by selling the product at a slightly discounted price. Rather than specializing in a subset of the market, cost leadership sets out to meets the needs of all or most of the customers in the industry. This model is particularly attractive for businesses aiming to be a large-scale producer with economies of scale and market dominance.

Differentiation

The differentiation model attempts to meet select criteria of buyers in the market, and often provides a premium product as an alternative to standard market offerings. Although the added cost of producing a premium product results in a premium price, customers are more than willing to pay the upcharge, but only to the extent that they are able to discern the product's value-added elements when compared to competitors', non-differentiated products. Businesses that utilize a differentiation approach frequently integrate it into a larger branding and marketing strategy since the product's elite reputation is vital to its success.

Cost Focus

Like the cost leadership model, the cost focus model attempts to gain an advantage based on cost and price. However, rather than trying to compete across the industry, it narrows its focus to a much smaller market segment. This is most effectively achieved with very standard, very basic products. For example, a grocery store who offers independent label alternatives to brand name products is attempting to gain an advantage over a specific segments of the market through a cost and price basis.

Differentiation Focus

The differentiation focus model is similar to the differentiation model in that the business seeks to clearly distinguish itself from the competition in the marketplace. But while the differentiation model tries to differentiate itself based on buyers' criteria in the general marketplace, the differentiation focus model tries to carve out a niche by focusing on a specific segment of the marketplace. Ill-informed businesses run the risk of making critical decisions based on a miscalculation of buyers wants and needs, so it is important to make sure that sufficient demand exists and that competitors aren't already covering your market niche.


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