Know-How Exchange : Student Questions

For those reading and not knowing to what you are referring - Porter's strategies are presented on two axes:

1. Marketing Scope (usually presented along the vertical axis) - going from narrow (high on the vertical axis) to broad (low on the vertical axis)



2. Competency of the firm (horizontal axis) - ranging from unique (left on the horizontal axis) to low cost (right on the horizontal axis

These form four quadrants - a 4x4 matrix

Porter presents three generic strategies:

1. Market Segmentation - If a firm focuses it's product and service efforts on a few narrow segments, the firm can achieve a competitive advantage in those segments and dominate them by presenting these customers with those products and services that highly meet their needs versus the products and services of the competitors. This strategy extends across the entire horizontal Compenency axis at the narrow market axis.
   
   
2. Differentiation - If the firm has some core competencies that it can leverage into highly valued unique selling points, the firm can concentrate on the broad market and use those unique selling points to dominate the market place. This is in the lower left quandrant.



3. Cost Leadership - If the firm can achieve the "least cost supplier" status, the firm can dominate the broad market. This is in the lower right quadrant.

Criticisms
The issue most critics take with these strategies is that it presents the world in rather finite terms - the market is either broad or it's narrow. The firm has competencies or it doesn't. In reality, firms have competencies that are effective in niches. A firm might develop a dominance in a niche that is an early adopter, for instance, and then leverage that dominance in another niche that is an "early majority" market adopter. Given the volume in the early majority, the firm can leverage that into a low cost position (based on the volume), and then use the cash it generates in broad market dominance to generate core competencies and then develop a differentiation strategy. Examples of such firms are Intel and Microsoft. Porter' generic models would suggest that once Intel develop a niche in memories, it should have stayed there or strived for cost leadership and stayed there. Instead, they used their niche to fuel the plunge into processors and the rest is history. Similarly, the model represents a static picture of customers - they are all the same. Whereas, if we look at customer behavior, some niches are the path to broad market dominance (early adopters to early majority to late majority to laggards).

Another area for criticism is that perhaps the firm's strategy should be to look outside the present market for its ideal strategy. Porter doesn't contemplate this. For instance, Apple is a "computer" company. So by Porter, they should have looked for their niche, or developed a cost position, or found a core competency to go after to develop competitive differentiation. Instead, they went forward to develop a personal music product. When that product became a "commodity" with several competing technologies, the went in the phone market - recognizing that this was once of their chief competitors outside their market. Porter's strategies would not have contemplated this strategic move.

These are the two chief arguments. Does that make sense?

For a little more background, see https://en.wikipedia.org/wiki/Porter_generic_strategies

I hope this helps.

Wayde