Eddielogic

– Thoughts on Strategy and Management

Porters Generic Strategies During the Current Financial Crisis

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Last week I was asked about my opinion about Porters Generic Strategies during the current financial crisis. My first spontaneous thought was: Why ask that question? Is it less important to have a distinctive strategy during a crisis than it is during a boom? I think the contrary is true.
However, my discussion partner expected a more detailed answer.

As a reminder – Porters model of Generic Strategies basically says that you should follow one of these generic strategies:

  • Price leader / cost leader – Sell your product for the lowest price in the market. Don’t add bells and whistles; your customers are price sensitive. Examples are the cloths you can buy at Wal Mart.
  • Differentiation – Have a unique product and sell it for a premium price. This is often equivalent to quality leadership (but not necessarily so). Examples are Gucci stores.
  • Focus – I prefer the term niche strategy since it is more self-explaining. Have a product with a fair price that fulfils the needs of a customer segment that is not larger than a market niche. Examples are the cloths specially designed for carrying babies in a wrap or a sling, e.g. extra-wide coats or fleece covers for the baby

If you don’t follow one of these strategies you are ‘stuck in the middle’. There you will have a problem since there always is somebody with a product that has either a lower price or more attractive features than yours.

Of course, this is a model. Like all models it is a simplified description of reality. Doubtless, there are other strategies that can lead a business to success. You may, for instance, stick in Porters ‘middle’ but have a brilliant customer lock-in. Thus your customers stay with you despite lower prices or higher quality products around. On the other hand, I think it is not a bad strategic position to

  • be well known for very competitive prices or
  • to have the ‘must-have’ product everybody wants to get for whatever reason or
  • to have a reputation as an excellent supplier in a particular market niche.

Coming back to where I started – why should these strategies be less viable during the current financial crisis?

At first glance we may think that when the economy is down, Wal Mart’s cloth sales may be less affected than those of Gucci. Nevertheless, there are also good arguments why a strong brand is very important even during a crisis.

I already wrote that a good strategy may be even more important in a crisis as it is in a boom phase. A good strategy is always one that fits your company’s capabilities and competences. To use a bit of textbook terminology – these core competences should be the basis for your competitive advantage. On this basis you can develop a strategy that takes into account your current business environment and the expected future change of it. I think this is much easier than the other way around – determine a strategy to prosper in the current business environment and than develop the competences needed to implement that strategy (Although, of course, this may work too).

So if you have the capabilities to produce something at very low costs – fine! Go for it! Adjust your marketing efforts or anything else and offer your crisis-shaken customers an opportunity for savings.
If you have a long reputation for the excellent quality of your products – also fine! Make sure your customers understand that the lowest price does not necessarily mean the best value for money in the long run.
If you serve a niche – you may even be one of the lucky few whose market is not even affected by the crisis.

OK, those last examples are oversimplified. But I am sure you get my point. During a crisis it is more important than ever to have a good strategy. This may or may not be one of Porters Generic Strategies. But these strategies may or may not be good for a particular business in boom times too. So I don’t think that the phase of a business cycle has great impact on the viability of a general strategic approach.

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