Michael Porter devised and published his ground-breaking insight into the possible overarching strategies a business can select from way back in 1985.
He called these ‘generic business strategies’ and at the time he suggested there were three strategies a business must choose from, although he divided one of these into a further two strategies to create a total of four in practice.
However, despite the fact this idea has been around and discussed for well over 30 years, many business owners cannot tell you what their generic business strategy is.
This is a problem because if you are not clear about this point, you cannot be clear about your business’ identity.
Porter believed the three generic strategies all businesses had to choose between were:
· Cost Leadership – simple and cheap.
· Differentiation – a unique product or service.
· Focus – a specialised product or service for a niche market. He then divided this strategy into focus combined with cost leadership and focus combined with differentiation.
Porter maintained that unless a business picks one of these generic strategies and uses it to guide everything the business says, does, and how it does it, customers will not be able to understand if the business offers what they need and this will impact on the business’ ability to connect with and attract customers.
History has clearly shown that Porter was right. Businesses that try and be everything to everyone have a habit of not really resonating with anyone and eventually collapsing.
As an example, think of a certain large Australian department store, who rolled out a strategy to ‘focus on new high value customers’, and simultaneously ‘shifting focus back to traditional shoppers’.
While doing this they decided to pursue an online strategy to ‘compete with new online stores’ while also talking about concentrating their efforts on ‘customers who wanted to shop in a department store’.
Ultimately, they settled on a strategy build on, ‘product, price and customer’, or to put it another way, differentiation, cost leadership and focus at the same time.
They then proceeded to lose hundreds of millions of dollars year after year.
We can look at how a business might operate if they select a generic business strategy instead, and use it to guide everything they do by considering three fictional airlines:
· Airline A guarantees the lowest cost flights between major Australian cities. They charge extra for anything except hand luggage. There is no ability to cancel or alter flights after you have booked. Any inflight food or drink costs extra. The seats on the aircraft are small and uncomfortable. They only offer customer service through a call centre that is located
offshore.
· Airline B offers flights that are often among the most expensive available. They provide a generous baggage allowance that is more than any of their competitors. Customers can cancel or change their booking at no cost up to 48 hours before their scheduled departure time. All inflight food and drink is included in the ticket price. The seats are large and comfortable with plenty of leg room. They have an Australian call centre and pride themselves on answering every call in less than one minute and resolving 90 per cent of customer issues on the first phone call.
· Airline C specialises in providing charter flights to mines and other cities with large industrial plants that need to regularly fly skilled workers in and out. They are highly responsive to the needs of businesses and are known for being able to get any number of people into any area in a short period of time with limited notice.
What is clear is that each of these airlines provides the same fundamental service.
They move people from one location to another.
They also do it in more or less the same way, by air.
However, the details they concentrate on and how they appear to the public is very different. Airline A competes on Cost Leadership and is the clear choice for price conscious customers.
Airline B has selected Differentiation and everything it does is designed to make it stand out from competitors and resonate with customers who want the highest quality, most stress free and flexible option available.
Airline C is using a Focus strategy and is targeting commercial travel for companies needing to move staff to regional and remote areas for work in a responsive way.
What should be clear from this is there is no right or wrong generic business strategy, you can go through whichever door you choose.
However, you need to be very clear about what your strategy is so that you can formulate and plainly communicate what you are offering to the right customers for you.
If you have a question about starting a business or running your existing business, we’d love to hear from you because we’ll select a new question to answer here every two weeks. You can submit your question to james@qsb-consulting.com using the subject ‘CQToday’.
