Have you ever tried to say this to your boss this before?  For those brave enough, you must be looking for a job now.

We have all learnt this from Michael Porter’s theory in our management course – from Diploma to MBA – that we should not pursue more than one generic strategy or risk being “Stuck In the Middle”. But this theory seems to be inconsistent with the real world observations.

Is Porter wrong or is the world right?  In this article, we will explore the theory of “Competitive Strategy”.

Porter’s Generic Competitive Strategies – Affordable, Unique, and Special

Explanation and illustration of Porter’s generic strategies have been well covered in many books and websites, therefore I will not dwell on the explanation. You can also read about it in a previous article on OTR.

Porter explains that any company should set themselves to pursue only one of the above strategies as “Each generic strategy is a fundamentally different approach to creating and sustaining a competitive advantage, combining the type of competitive advantage a firm seeks and the scope of its strategic target”.

If a firm fails to achieve any of the above advantage than it is “stuck in the middle” – and this often happens because of the company’s unwillingness to make a choice about which generic strategy to adopt.

From my experience, a good example may be the Rover cars in Singapore.  The Rover marque was more successful when Honda owned the company (in the mid 90s) because it was positioned as an elegant British car with a reliable Japanese quality.  The local distributor was able to sell the car at a premium then.  Rover has changed owners and designs over the last few years.  The distributor in Singapore has also changed twice.  For a few years, both the Rover 45 and 75 were positioned to be affordable “high end cars” (cheap and good) but this strategy was not well accepted by local car buyers.  The current distributor has cut the choices of Rover models to only the 75 1.8Turbo.

Be Really Cheap or Really Good!!!…???

To prove the point wrong, practicing managers will often bring the theory to the extreme to break it.  More often than not, practitioners will argue that firms who want to become cost leaders will make the cheapest goods with almost no frills and sell it at super small margins while differentiators will make the best goods with all the state of the art features and sell it at sky high prices.  They would then argue that both firms will not be realistic and therefore will not survive.

This argument has its flaws.  Porter did stress that a company pursuing a selected strategy should also take the other strategies as constraints.  In other words, “if you choose to become a cost leader, than concentrate on this strategy but do not ignore the differentiating factors (and vice versa for differentiation strategy) relative to your competitors”.  He calls this “proximity (or parity) of cost (or differentiation) to the competitors”.

This does not mean that a company should pursue both strategies.  It just means that companies must set a certain constraint when pursuing the selected strategy.  For example, differentiator must ensure that while its product charges a premium because it is unique, the utility gained by buyers from such uniqueness must be more than the premium paid for.  Both absolute and relative cost and benefits must also be considered.

So differentiators should watch their cost while building their uniqueness.  As long as cost reduction does not compromise such uniqueness, the company is still pursuing a differentiation strategy.  But when cost reduction decision affects differentiation, the company will have to be clear if it wishes to continue its current strategy or deviate from it.

Why Adopt Competitive Strategies

The reason why companies should use these competitive strategies is that Porter has shown that companies that successfully achieve these competitive strategies have higher levels of profitability that those who have not succeeded. These competitive strategies become competitive advantages and the benefit of having these competitive advantages is higher profitability than those without them.

Porter referred to companies that were not pursuing a distinct competitive strategy as “stuck-in-the-middle.” According to Porter, these uncommitted firms should have lower performance than committed firms because they lack a consistent basis for creating superior value. He argued that companies that exclusively pursue one of the generic strategies center all of their resources on becoming good at that strategy.

People have argued that a hybrid model exists whereby a company tries to achieve both cost leadership and differentiation at the same time. However as pointed out earlier, it is intuitive that a company pursing diffentiation still manages costs and a company pursing cost leadership will still differentiate itself. So really a hybrid model must be when cost leadership and differentiation are equally important priorities.

From a Management Theory point of view, this equal priority creates a lack of focus,  causes confusion and hinders proper decision-making. This thus leads to a lower performance and fall into Porter’s description of uncommitted firms.

Still Porter did point out a few exceptions, which we discuss later, he recognized this as a short term phenomenon. The hybrid model thus does not last long and companies will eventually have to choose one competitive strategy.

Clarifying Real Life Examples

In truth, successful companies are rarely confused over whether they want to adopt cost leadership or differentiation. So while they appear to be adopting a hybrid model, they really know their priority while being mindful of the other constraint. Nike in splashing out their cash on advertising and promotion as well as brand building, still seek to produce their shoes and clothing in low-cost countries. Are they thus adopting a hybrid model? Of course not. From their business model of selling above average priced clothing and shoes and efforts at branding, you would be hard pressed to consider this cost leadership.

Another common confusion is when international companies adopt different competitive strategies in different markets. The usual model is to be a cost leader in Western Countries and differentiators in the rest of the world. This decision is to tap the brand premium from being a Western Country brand/product. Examples of such companies include Ikea in furniture, Guess in clothing and Audi in cars.

Exceptions

For those who still feel that they want to get stuck in the middle, here are some exceptions as promised.  There are companies who pursue more than one generic strategy.  There are three conditions under which a firm can simultaneously achieve both cost leadership and differentiation:

1. Competitors are stuck in the middle.  Though a firm may be successful when they are stuck in the middle under this condition, it is only temporary.  Eventually, competitors will establish their generic strategy and force others to do the same.

2. Cost is strongly affected by market share or interrelationship.  If cost is determined by market share, then the successful firm may be able to pursue both strategies when they reach that critical point.  The success of this strategy will be lost when new competitors enter the market and reduce market share of the firm.

3. A firm pioneers major innovations.  This strategy is sustainable only when they are the only firm with such an innovation.  If competitors achieve the same innovation level, the firm will have to choose one generic strategy.

Thought it is possible to pursue 2 strategies under these conditions, competition from competitors will eventually cause the original firm to pick one strategy in the long run.

Separating the Business Unit

I can sense an excitement.  Can’t a firm just create two or more separate business units in the same industry – each with different objectives and strategies – to capture the bulk of the market?

The answer lies in autonomy at the business unit level.  If each business unit’s management is given full autonomy to run the firm and they are compensated accordingly, than the corporation may be able to achieve both strategies.

But that will make the corporate function more like an investor than a business operator.  The corporation will also need more capital to undertake this function.  If that means that the firm becomes a fund manager for their investors than its generic strategy will either be high risk-returns (differentiation) or low risk-returns (cost leadership). 

Of course, if the corporate decides to practice autocracy, then the business unit separation is nothing more than changing the business formation to fool themselves.

Cheap and Good Strategy really to Blame

Businessmen in Asia can be pretty obsessed with cheap and good. A classic example is how the Creative Zen Touch mp3 Player, which has better features than the Apple iPod is still priced cheaper. This is a classic case of being “stuck in the middle” and in the long run, their performance will suffer.

Often when this happens, many businessmen blame their company’s failure on cost.  They blame workers for being too expensive and not working hard enough.  But really, is it just business conditions or is it a problem with the chosen strategy – Be Cheap and Good.

So really the next time you have to choose, either be Cheap or be Good. Do not be both Cheap and Good, else you get “stuck in the middle” at your own peril….