The Generic Strategies

The Michael E Porter's Generic Strategies: A great business model that will never go out of corporate or academic fashion. Simply put, for your company to survive you must either (i) make the best products, (ii) make the products cheaper than your competitors, or (iii) serve a small segment of the market. You can't take on a hybrid approach because your company will lose focus on its main strategic advantage.

A Product Leadership strategy is being highly innovative and making "the best" products possible. This approach comes from the early times of currency and bartering when sole traders would specialise in their trade and the best goods would always attract the best customers and highest prices. This was great in the Middle Ages because economic trade activities were limited to your geographic microeconomy, and worked well into the 20th Century until trade barriers were lifted and sweat shops were given their time to shine.

Globalisation and the Internet during the end of the 20th Century brought many competitors into the market place, mainly competing on price. So many companies shifted from trying to create the most innovative and revolutionary product, to making just a standard product as cheaply as possible at a market-acceptable price.

Focusing your marketing strategy on cost efficient production and business processes rather than your product is adopting an Operational Excellence strategy. Utilising this strategy isn't just moving your production from Wollongong to China so you can produce colourful underpants at a cheaper rate [like Pacific Brands - the producer of Bonds - did this year] or migrate your support centre from Sydney, to India then to Africa to take advantage of the lowest English-speaking labour rates but is more focusing on creating lean systems and improving supply chain efficiencies in both response times and cost reductions. General Electric and Toyota are two stand out companies that pride themselves on having exceptionally lean manufacturing techniques. Something that you should also think about is that Operational Excellence is about "making things for cheaper", and not always about making cheap things.

But the downfall in both these two strategies is that their vision towards business success is mainly navigated internally, with little-to-some customer insight adopted. A Product Leader like Sony has always created technologically sound product concepts like the from the Walkman, to digital cameras and even to mobile phones. Their downfall however has been a lack of user adoption because their portable music players have had their market share eaten away since the Discman by the intuitive iPod, cameras are too complicated and laden with too many features, and their Sony Ericsson phones leave much to be desired in comparison to any new Nokia, iPhone or BlackBerry. The problem here was that there are many competing music players, gaming consoles, digital cameras and mobile phones.

The Perfectionist's Trap is when the creator of a new product produces something to their best capabilities. Since they are most probably an expert in their field they'll think to themselves "I have made this product to the highest standards I can perform, therefore it is the best product on the market and customers will buy it." Which thinking may work well when producing something like a $200,000 supercar, avant-garde fashion or any market that is supremely driven by innovation. But generally speaking, the most innovative and advanced product will not always have appeal to consumers. Sony's PS3 has the most GPU power for any console (apart from a computer) as well as having an integrated Blu-Ray player, Wifi, 60GB HDD, and heaps of other stuff you wouldn't think of or use, but has been overshadowed by the technologically inferior Nintendo Wii (for ease-of-use and stimulating viral videos) and the Microsoft XBox 360 (for online capabilities and high quality games) which is the oldest of the three consoles.

Cost leaders can often fall into the trap of continuously trying to make product lines more profitable at the expense of quality and user appeal. The above cartoon by Tom Fishburne is self explanatory.

The problem here really lies in the appeal of these competitive strategies. Cost and Product Leaders make product that "generally" appeals to the masses so they can extract the most revenue and profit. But what about if you narrowed your focus from the entire pie to just a slice of it? Get to know a small segment of the market that shows promise, and deliver a product that specifically suits their needs better than any other brand, product or alternative. This is Customer Intimacy.

Since customer centric companies create the best solution for this small segment of the market, these customers will [or should] take notice of your offer above any of the mass marketed alternatives and also pay the higher base price for it too. And since you specialise in this particular market, you can create economies of scale when you fit your operations to produce just these goods rather than an array of mass marketed ones.

I emailed a company the other day (for content on a later post) and asked whether their focus was on cheap prices, mix of products offered or good service. The reply was this: "we have always had the ambition of providing our customers with the widest range of ... products at the lowest prices everyday, backed with the best service." Sounds like something the CXO's say at their annual shareholders' meetings. But according to Porter, for strategic advantage you should be adopting ONE approach, not trying to do it all; even though it does sound impressive. This particular company however does adopt a customer intimacy (focus) strategy and is very successful. One of my favourite retail stores in fact.