Strategic Management: Formulation and Implementation

Porter's Generic Strategies

It is becoming more and more evident that the idea of competitive advantage - the philosophy of choosing only those competitive arenas where victories are clearly achievable - offers the best general approach for achieving business success. Commonalities in the ways that business units generate competitive advantage across a variety of industries. This common patters of competition represent generic strategies. These strategic alternatives are termed generic because they can be adopted by any types business unit, or a service organization.

In this thesis the concept of generic business unit strategies is examined using Porter's framework. In recent years it has played the key role in shaping the currently dominant perspective on competitive advantage.

Business-level strategies outline how each business will compete within its respective industry. For purpose of this discussion, an industry is defined as "the group of firms producing products [or services] that are close substitutes for each other" (Michael E. Porter).

The structure of industry is determined by pressure from five competitive forces: threat of new entrants; bargaining power of suppliers; bargaining power of buyers: threat of substitutes and rivalry between existing competitors.

In Porter's approach, the analysis of these five factors should shape the development of business strategy. Porter argues that there are a limited a number of "generic strategies" available to cope with the five competitive forces:

"In coping with the five competitive forces, there are three potentially successful generic strategic approaches to outperforming other firms in an industry:

  • overall cost leadership
  • differentiation
  • focus."

Each strategy represents a different way for firms to gain a competitive advantage in their industry. The difference among the three generic strategies are illustrated in Figure B.