Framework library · Strategic planning
Porter's generic strategies
Porter argued that a business earns above-average returns in one of two ways: by having lower costs than its rivals, or by offering something buyers will pay more for. Either can be pursued across the whole market or in a chosen segment. A business that tries for both without being best at either risks being stuck in the middle, undercut by the low-cost player and outsold by the differentiator.
Use it when
- A business has been competing on everything at once and needs to choose what it will be better at.
- You want to map how rivals compete and see which positions are taken and which are open.
- A new entrant is arriving and you need to decide whether to meet it on price or move away from it.
- A plan needs a one-line statement of how the business intends to win.
Avoid it when
- You first need to know how attractive the market is. Run Porter's Five Forces before choosing a position in it.
- The market is changing too fast for positions to hold, such as a new technology with no settled cost base. Scenario planning or Three Horizons fits better.
- Network effects or regulation decide the market more than cost or differentiation do. Five Forces and a regulatory review will tell you more.
How to run it
Define the market and its segments
Broad means the whole market as customers see it. Narrow means a segment you could name and serve differently, such as villages or apartment buildings.
Work out relative cost
For each player, estimate cost per customer or per home passed against the lowest-cost rival. A lower price is not the same as a lower cost.
Find what customers pay more for
Speed, reliability, service, the bundle, the brand. Differentiation counts only where the premium customers pay exceeds the extra cost of providing it.
Place each player, including yourself
Choose the cell its advantage actually comes from and write the evidence. A player with neither the lowest cost nor a premium it can charge goes in the middle column.
Look for anyone stuck in the middle
A player in the middle column is exposed to the cost leader on price and to the differentiator on value. Check honestly whether that is you.
Choose your position and what it rules out
Write the choice, and two things you will stop doing because of it.
Work through it
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Mistakes to avoid
- Calling a low price cost leadership. Cost leadership means the lowest cost; a low price without it is a margin cut.
- Counting as differentiation anything the marketing says. It counts only if customers pay more for it.
- Placing yourself where you would like to be rather than where the evidence puts you.
- Treating a focus position as safe. It can disappear when a broad player decides to serve the segment.
Where it comes from
Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (Free Press, 1980), which set out overall cost leadership, differentiation and focus. In Competitive Advantage (Free Press, 1985) he divided focus into cost focus and differentiation focus, giving the four positions used here. The middle column holds the position he warned against, being stuck in the middle. Source.
Use it with
Further reading
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