Porter's generic strategies: choose how you win and stay out of the middle

Ask an owner what sets the firm apart and you often hear: good quality at a fair price, for every kind of customer. It sounds sensible. In practice it means you are too expensive for buyers who only look at price and too ordinary for buyers who want the best, so every quote becomes a fight on someone else's terms. Porter's generic strategies address exactly this problem.

Michael Porter set them out in Competitive Strategy (Free Press, 1980): three routes to above-average returns, open to a firm in any industry. A firm that fails to choose one, he argued, is stuck in the middle. Below are the three routes, what each asks of you, where the model falls short and four firms competing in one city.

What are Porter's generic strategies?

Porter combined two questions. Is your advantage lower cost, or something customers pay more for? And is your target the whole industry, or one segment?

In Competitive Advantage (Free Press, 1985) Porter split focus into cost focus and differentiation focus: a niche player wins on lower cost for its segment, or on a better fit with its needs. Each route changes your prices, your staff and the customers you turn away.

What does stuck in the middle mean?

A firm is stuck in the middle when it has tried every route and achieved none: no cost advantage, no difference customers recognise and no segment it knows better than anyone. Porter's own Institute for Strategy and Competitiveness at Harvard Business School calls trying to be all things to all customers a strategic mistake. It rarely feels like a decision; it creeps in each time the firm says yes to a job that does not fit.

Signs that you are stuck

• Price talks without a cost advantage: you win work mainly by matching the lowest quote, while your costs are not the lowest.
• No clear reason to choose you: customers and staff describe you in words any competitor could use.
• A margin below your industry: your operating margin trails comparable firms and nobody chose that as a pricing strategy. Check it against the industry figures.
• Every request is accepted: jobs, products and customers that do not fit are taken on because they bring in revenue.

From generic strategy to daily activities

A strategy on paper becomes an advantage only through daily work. Porter's value chain splits a business into activities, from purchasing to service, and shows that cost and differentiation are created activity by activity. A cost leader designs each one for low cost; a differentiator spends where customers notice it and saves where they do not.

Why getting better is not yet a strategy

In What Is Strategy? (Harvard Business Review, November 1996) Porter separated operational effectiveness, doing the same things better than rivals, from strategy, doing different things or doing them differently. Better processes are necessary, but rivals copy them quickly. Three ideas from the article sharpen the generic strategies.

Trade-offs

A position lasts when it is incompatible with others: more of one thing means less of another. A firm that promises the lowest price cannot also offer every custom option. In Porter's words, "The essence of strategy is choosing what not to do."

Fit

Activities should reinforce each other. When pricing, staffing, service and marketing all serve one position, a rival has to copy the whole system, not one feature.

Straddling

A straddler tries to copy a successful rival's advantages while keeping its own position. Porter's example is the US airline Continental, which ran a no-frills service on some routes while staying a full-service carrier elsewhere. The two positions needed opposite activities, and the attempt proved expensive.

A position can rest on three overlapping bases, Porter adds: variety (a subset of the industry's products), needs (most needs of one customer group) and access (customers reached differently, for example by location).

Can a company be cheap and distinctive at once?

Yes, with a condition. The Institute for Strategy and Competitiveness states that a firm can compete on low cost and be differentiated at the same time, like a furniture retailer pairing low prices with recognisable design. The combination must rest on clear trade-offs: drop costly features customers do not value and invest the savings in the few they do. That is also the logic of Blue Ocean Strategy. Adding a rival's strengths on top of your own does not work.

Criticism and limits of the model

• Mixed evidence: Colin Campbell-Hunt's meta-analysis in Strategic Management Journal (February 2000) found that cost and differentiation are useful for telling strategies apart, but that the model's claims about which strategies perform best had not been supported.
• A fixed industry: the model assumes clear boundaries and known rivals. Platforms and software blur those lines, and a newcomer from another industry can undercut your costs.
• Little on change: the model describes positions, not how to move from one to another. For growth paths, use the Ansoff matrix.

How do you choose a competitive strategy?

1. 01

   Map the pressure on your margin

   Use Porter's five forces to see where margin leaks away.

2. 02

   Choose your playing field

   Broad or narrow: which customers, regions and products you serve, based on a market and customer analysis.

3. 03

   Choose your source of advantage and make it measurable

   A cost leader tracks cost per unit against rivals; a differentiator tracks its price premium and how many customers stay.

4. 04

   Write down the trade-offs

   List what you will no longer offer. The TOWS matrix links the choice to your strengths and threats.

5. 05

   Align activities and test every new opportunity

   Check each new request against the chosen position, using the criteria in evaluate and choose.

Worked example: four cleaning companies in one city

Four commercial cleaning firms compete in the same metropolitan area. Three have made a choice; one has not.

Fictitious Firmfocus example. Operating margin = operating profit / revenue. The logic works in any currency.

AllServe looks busy but earns least. Split by customer group: office contracts bring in €2,000,000 with a loss of €20,000, window and one-off jobs €600,000 with a profit of €30,000, and clinics €900,000 with a profit of €60,000. On offices it meets Metro Basic Clean, whose route planning keeps costs lower; on clinics it meets Clinical Hygiene Services, whose trained teams win the larger contracts.

If AllServe stops the loss-making office contracts, revenue falls to €1,500,000 and profit on the remaining work is €90,000, a margin of 6.0%. Part of the overhead those contracts carried stays, so the gain arrives only once crews and vans are cut back. The bigger step is a real choice: become the hygiene specialist for the smaller clinics and dental practices its rival does not chase. That is differentiation focus, with a clear list of jobs to refuse.

Small business vs larger organisation

Pitfalls when you choose a generic strategy

• Calling yourself a cost leader without the lowest costs: a low price without a lower cost base is a margin problem, not a strategy.
• Differentiating on what customers do not pay for: features you value internally but customers ignore raise your costs without earning a premium.
• A niche that is too wide: "we focus on small businesses" is not focus when they are most of the market. Name a group so precisely that you can count it.

Porter's generic strategies answer how you win. The value disciplines look at the same choice from the side of your organisation, and Blue Ocean Strategy asks whether you can leave the fight altogether. All models for this decision are in strategic choices, part of the strategy overview.