Today's post is an excerpt from The MFS Guide to Competitive Strategy.
Michael Porter - as we have mentioned - is, in many ways, the godfather of competitive strategy and it is his belief that there are three fundamental or generic strategies that companies can adopt to achieve competitive advantage - namely cost leadership, differentiation, and focus. In this section, we will take a closer look into each of Porter’s generic strategies and explain the situations each strategy is most suited to. We will also take a step outside the competitive strategy boundaries as laid out by Porter and look into some other competitive strategies that have produced considerable results in recent times.
1. Cost Leadership Strategy
What Is Cost Leadership Strategy?
Cost leadership is the first of Michael Porter’s generic strategies and, simply put, is based on bringing products or services to market at the lowest possible cost. The basis of Porter’s Generic Strategies is that long run profitability is achieved by maintaining a competitive advantage. It is his belief that companies must select one of the three generic strategies and pursue it relentlessly and, most importantly, exclusively. The chosen generic strategy must be the company’s raison d'etre and feed into everything the company does. According to Porter, companies that focused on more than one of Porter’s generic strategies are adopting a “middle of the road” strategy that is destructive to its brand and ultimately contradictory. Cost leadership then is as much a competitive company identity as it is a strategy. Efficiency and low costs must be present across all areas of the company including production and distribution to ensure the lowest possible cost product or service is brought to the widest possible reach of the market.
Where Did Cost Leadership Strategy Come From?
The cost leadership strategy alongside the two other generic strategies - differentiation and focus - was introduced by Michael Porter in the 1980s in his seminal book Competitive Strategy: Techniques for Analyzing Industries and Competitors. The concept of efficiency was not new in business, but Porter’s assertion that companies should only pursue a single generic strategy was a new departure in competitive thinking.
Cost Leadership Strategy Example
Among the most famous examples of cost leadership strategy are discount department store chains Walmart and Costco. Walmart has maintained a competitive advantage while bringing the lowest cost and widest range of products to the market. This idea of cost leadership can be seen throughout Walmart’s entire operation - expenses are monitored, production is highly efficient, and employees productivity is maximized while, controversially, wages are maintained at the lowest possible level.
Cost Leadership Strategy Advantages
- Competitive Moat: An established and effective cost leadership strategy throughout the organization can be difficult for competitors to replicate and can act as somewhat of a protective moat. Setting up the systems, processes, and personnel involved in low cost production, distribution, and price requires a fundamental company-wide effort and, even still, a competitor brand will face a significant marketing challenge to position itself as a cost leader within the industry.
- Economies of Scale: An effective company-wide cost leadership strategy brings with it significant economies of scale including lower costs per unit.
Cost Leadership Strategy Disadvantages
- Price Wars: If competitors also adopt a cost leadership strategy, companies can find themselves in a highly damaging price war.
- Low Quality Perception: For many customers, low costs will be associated with low quality. This perception can damage a brand. Low customer loyalty: Customers drawn to your brand for lower cost purposes will not stay loyal if a lower priced competitor emerges. Supply Chain Importance: Cost leadership is a high volume play making companies who adopt this approach vulnerable to supply chain disruption.
2. Differentiation Strategy
What Is Differentiation Strategy?
The second of Porter’s Generic Strategies, differentiation is based on bringing a unique offering to the market and, in doing so, building a brand that is distinct from all other industry participants. The way companies adopt a differentiation strategy is by focusing all their efforts on a single or small number of target attributes that customers within the target industry are looking for, rather than trying to focus on every possible attribute. Innovation is a key focus for companies who adopt a differentiation strategy as incorporating the latest technological developments into their product is often used as a way to differentiate their offering.
Where Did Differentiation Strategy Come From?
Also part of Porter’s Generic Strategies, differentiation strategy was introduced in the 1980s. The idea of differentiation was not necessarily groundbreaking, but the theory that differentiation alone and not in conjunction with any other competitive strategy was what made Porter’s generic strategies groundbreaking.
Differentiation Strategy Example
One of the most stunning examples of differentiation strategy took place at Apple upon the return of inspirational CEO and founder Steve Jobs in 1997. Apple did not necessarily have technology that was more advanced than any of their competitors, but the company’s focus on elegant design, user experience, and sleek branding set them apart from the competition.
Differentiation Strategy Advantages
- Customer Loyalty: Differentiation strategy can build high levels of customer loyalty and foster a bond with customers as witnessed by the growth of Apple zealots in the early 2000s.
- Premium Pricing: Differentiation strategy can enable a company to price their product at a higher price point than the rest of the industry and, rather than face a pushback, will actually build a customer willing to pay the premium price.
Differentiation Strategy Disadvantages
- Risk: There is an element of risk when adopting a differentiation strategy. Customers may not be as willing to purchase the differentiated product offering on which the strategy is built.
- High Costs: Companies that focus on innovation and research in order to differentiate themselves from competitors will incur high costs along the way.
3. Focus Strategy
What Is Focus Strategy?
Focus strategy is the third of Porter’s Generic Strategies and is a strategic approach based on bringing a product or service to market - targeting only a specific segment of customers or niche. Companies who adopt focus strategies can grow their market share by dominating a niche that is overlooked or unattractive to larger competitors.
Where Did Focus Strategy Come From?
Focus strategy originated in the 1980s as part of Porter’s Generic Strategies.
Focus Strategy Example
One of the most commonly cited examples of an expertly-executed focus strategy is the luxury watch brand Rolex who have successfully focused on bringing to market high-priced, high quality timepieces with an emphasis on design and precision engineering.
Focus Strategy Advantages
- High Price: One of the main advantages of focus strategy - as perfectly demonstrated by Rolex - is the potential to offer high end pricing to reinforce a brand’s exclusivity or luxury positioning.
- Customer Loyalty: By its hyper-targeted nature, focus strategy can help companies to build a high level of customer loyalty.
- Defensive Positioning: Specialization can help companies to develop a strong defensive position against competitors who would find it extremely difficult to replicate the systems, personnel, processes involved in providing a similarly specialized product or service.
Focus Strategy Disadvantages
- Market Size Limitation: By focusing on particular niches, focus strategies limit the size of the total addressable market or TAM.
- Customer Dependency: Companies who adopt a focus strategy may become highly dependent on their customer base.
4. Judo Strategy
What Is Judo Strategy?
Going beyond Porter's Generic Strategies, there are some other interesting competitive approaches that companies have used quite effectively in recent times. Judo strategy is one such approach - a competitive strategy named after the Japanese martial art of the same name that is based on the use of movement, balance, and leverage to outperform larger competitors.
- Movement - The concept of movement in Judo Strategy is based on executing quick offensive and defensive tactics, before quickly following through on competitive opportunities in areas where competitors are weakest.
- Balance - Balance in Judo Strategy refers to gripping competitors through partnerships and agreements, avoiding attritional tit for tat encounters, absorbing small losses where possible, and countering competitor moves by using their own strength against them.
- Leverage - Leverage in Judo strategy is about going on the attack against bigger competitors by using their assets, competitors, and partners against them.
Where Did Judo Strategy Come From?
David B. Yoffie, a professor at Harvard Business School, along with Mary Kwak, developed and popularized the "Judo Strategy" in their 2001 book, Judo Strategy: Turning Your Competitors' Strength to Your Advantage. They drew inspiration from the concepts of "judo economics" coined by economists Judith Gelman and Steven Salop to describe how smaller firms can defeat stronger, larger incumbents.
Judo Strategy Example
Judo strategy is most suited to smaller companies who are facing up against much larger or more established competitors. A successful example would be Sony’s use of judo strategy with the company’s foray into the home video game market which was dominated by Nintendo and Sega. Focusing on this idea of using a competitor's strength against them, Sony took the bold strategic step of opening up video game development by making Sony PlayStation development widely accessible and cutting license fees.
This move came at a time where Nintendo and Sega had kept a tight leash on games development through steep royalties and only allowed a small number of independent developers to produce video games for their consoles. This approach had left Nintendo and Sega in a hugely powerful position of being able to both control game quality and also generate high revenue from video game sales. By using what, on the surface, appeared to be strength against their competitors, Sony succeeded in dramatically disrupting the home video game market and were able to bring an offering to market that had over 10 times more games for consumers to choose from than either of their main competitors.
Judo Strategy Advantages
- Maximize Resources - Effective judo strategy can help companies get the very most out of their available resources and compete with and even outmaneuver larger, more established competitors.
- Redefines the Competitive Space - Sometimes traditional competitive strategy approaches only serve to reinforce competitor dominance. Judo strategy can provide smaller market incumbents with a way of redefining the terms of engagement.
Judo Strategy Disadvantages
- Suitability - Judo strategy is more suited to smaller companies but can however be implemented by larger companies who are entering new markets.
- Execution Challenge - Executing judo strategy comes with considerable challenges around speed, timing, and company alignment.
- Long Term Scope - Judo strategy can be extremely valuable for companies looking to disrupt the status quo, however the role of Judo Strategy in terms of long term profitability is questionable.
5. Sumo Strategy
What Is Sumo Strategy?
Staying on the martial arts theme, Sumo Strategy is a competitive strategy based on using a company’s greater size, scale, and resources to dominate the market. Sumo strategy can involve tactics like establishing barriers to market entry, price warfare, establishing supply chain control, distributor agreements, and even mergers and acquisitions.
Where Did Sumo Strategy Come From?
The concept of sumo strategy in business first emerged in a 2001 HBS article by James L. Heskett who, citing his colleague Yoffie’s book on Judo Strategy, asked the question what happens when the sumo master - in this instance, Microsoft - learns judo? Since then the idea of sumo strategy has been further refined and built on by Bernie Brenner and Denise Cicchella who have published books on the topic.
Sumo Strategy Example
One example that could be retroactively termed as Judo Strategy would be Microsoft’s bundling strategy during the mid 1990s. One of Microsoft’s competitors in the nascent web browser industry was Netscape - who, at one point - held a 90% market share. Microsoft leveraged the company’s greater scale, size, and position within the broader software market - dominated by the Windows operating system - to offer consumers their web browser, Internet Explorer free with Windows. This aggressive strategy resulted in Microsoft themselves winning 90% of the web browser market and was the beginning of the end for Netscape. One point of note however, while Netscape was not a plaintiff, some of the tactics deployed by Microsoft in the “browser wars” did catch the attention of the U.S. government and resulted in a landmark antitrust case in 1998.
Sumo Strategy Advantages
- Maintain market position - Sumo strategy can help companies to maintain and reinforce a market leadership position that may have taken many years to build up.
- Neutralize competitors - Sumo strategy can eliminate threats to market position from up and coming competitors.
Sumo Strategy Disadvantages
- Rigidity - Unlike Judo strategy which involves rapidly executed strategic plays, Sumo Strategy is based on more large-scale or traditional activities - mergers, for example. These more fundamental activities can lead to a degree of rigidity which can make it difficult for a company to change course.
- High costs - Sumo strategy may come with significant investment making it difficult to maintain as a long term strategy.
6. Blue Ocean Strategy
What Is Blue Ocean Strategy
Blue Ocean Strategy is an approach based on the idea that market boundaries are not fixed and can be restructured through the simultaneous pursuit of both low cost and differentiation - a dual pursuit previously considered by Porter and others to be contradictory. Blue Ocean Strategy uses the analogy of oceans to describe industries that companies inhabit today. Red Oceans: Red oceans are all the industries currently in existence. They are structured and competitive with each incumbent vying for position and market share. Competition, in this analogy, develops until the point of commoditization when markets become bloody or cut throat causing the analogistic ocean to turn red. Blue Oceans: Blue oceans are industries not yet in existence. They are vast, untainted, and deep like a blue ocean. Here demand is created rather than fought for. The blue ocean represents an industry that is an opportunity for rapid growth and where competition is irrelevant. Companies can create a blue ocean by redefining the boundaries of their industry or by starting a new industry.
Where Did Blue Ocean Strategy Come From?
The concept of Blue Ocean Strategy was first articulated by Professors Chan Kim and Renée Mauborgne of INSEAD business school in their 2005 book of the same name. The authors however are at pains to point out their belief that Blue Ocean Strategy has always existed, albeit in an unconscious fashion - citing Henry Ford’s 1908 creation of the Model T as a perfect example.
Blue Ocean Strategy Example
One of the most cited examples of an expertly executed Blue Ocean Strategy is Cirque du Soleil who created an uncontested market space by redefining the circus experience. Instead of competing with leading circuses like Ringling Bros. and Barnum & Bailey along conventional industry lines, Cirque achieved rapid growth by developing a production that would open up the circus experience to a whole new customer base who had traditionally attended opera, ballet, and theatre. Instead of aiming to provide a better circus than their competitors, Cirque rendered would-be competition meaningless by offering attendees an experience that blurred the lines between circus and theatre - creating a new departure that reconstructed the very industry lines within which competitive battles had traditionally been fought.
Blue Ocean Strategy Advantages
- Remove Traditional Constraints - Blue Ocean Strategy gives companies a chance to move beyond traditional or structuralist constraints. Companies adopting a conventional competitive strategy as they seek to enter a new industry can face intense competition as well as certain barriers to entry whereas companies who have identified a blue ocean can tap into an untainted marketplace with a potential for rapid growth.
- Revenue Potential - Companies who have successfully executed a Blue Ocean Strategy like Netflix, Cirque du Soleil, and Uber have experienced rapid revenue growth.
Blue Ocean Strategy Disadvantages
- Risk - Blue Ocean Strategy is a high risk play. Companies who adopt this strategy do not have years of industry activity to draw on. Instead, there is no guarantee of success.
- Market Education - Marketing and market education are an important aspect of Blue Ocean Strategy. How this new market or blue ocean is put to the customer is vital meaning marketing execution must be on-point.