Porter has identified three generic strategies: (a) overall cost leadership (i.e., making units of a fairly standardized product and underpricing everybody else); (b) differentiation (i.e., turning out something customers perceive as unique an item whose quality, design, brand name, or reputation for service commands higher-than-average prices); and (c) focus (i.e., concentrating on a particular group of customers, geographic market, channel of distribution, or distinct segment of the product line). Porter’s choice of strategy is based on two factors: the strategic target at which the business aims and the strategic advantage that the business has in aiming at that target.

According to Porter, forging successful strategy begins with understanding of what is happening in one’s industry and deciding which of the available competitive niches one should attempt to dominate. For example, a firm may discover that the largest competitor in an industry is aggressively pursuing cost leadership, that others are trying the differentiation route, and that no one is attempting to focus on some small specialty market. On the basis of this information, the firm might sharpen its efforts to distinguish its product from others or switch to a focus game plan. As Porter says, the idea is to position the firm “so it won’t be slugging it out with everybody else in the industry; if it does it right, it won’t be directly toe-to-toe with anyone.” The objective is to mark out a defensible competitive position defensible not just against rival companies but also against the forces driving industry competition (discussed in Article 4). What it means is that the give-and-take between firms already in the business represents only one such force. Others are the bargaining power of suppliers, the bargaining power of buyers, the threat of substitute products or services, and the threat of new entrants. In conclusion, Porter’s framework emphasizes not only that certain characteristics of the industry must be considered in choosing a generic strategy, but that they in fact dictate the proper choice.

PORTFOLIO ANALYSIS CONCLUSION

Portfolio approaches provide a useful tool for strategists. Granted, these approaches have limitations, but all these limitations can be overcome with a little imagination and foresight. The real concern about the portfolio approach is that its elegant simplicity often tempts managers to believe that it can solve all problems of corporate choices and resource allocation. The truth is that it addresses only half of the problem: the back half. The portfolio approach is a powerful tool for helping the strategist select from a menu of available opportunities, but it does not put the menu into his or her hands. That is the front half of the problem. The other critical dimension in making strategic choices is the need to generate a rich array of business options from which to choose. No simple tool is available that can provide this option-generating capability. Here only creative thinking about one’s environment, one’s business, one’s customers, and one’s competitors can help. For a successful introduction of the portfolio framework, the strategist should heed the following advice:

1. Once introduced, move quickly to establish the legitimacy of portfolio analysis.

2. Educate line managers in its relevance and use.

3. Redefine SBUs explicitly because their definition is the “genesis and nemesis” of adequately using the portfolio framework.

4. Use the portfolio framework to seek the strategic direction for different businesses without haggling over the fancy labels by which to call them.

5. Make top management acknowledge SBUs as portfolios to be managed.

6. Seek top management time for reviewing different businesses using the portfolio framework.

7. Rely on a flexible, informal management process to differentiate influence patterns at the SBU level.

8. Tie resource allocation to the business plan.

9. Consider strategic expenses and human resources as explicitly as capital investment.

10. Plan explicitly for new business development.

11. Make a clear strategic commitment to a few selected technologies or markets early.

A diversified organization needs to examine its widely different businesses at the corporate level to see how each business fits within the overall corporate purpose and to come to grips with the resource allocation problem. The portfolio approaches described in this article help management determine the role that each business plays in the corporation and allocate resources accordingly.

Three portfolio approaches were introduced: product life cycle, growth raterelative market share matrix, and multifactor portfolio matrix. The product lifecycle approach determines the life status of different products and whether the company has enough viable products to provide desired growth in the future. If the company lacks new products with which to generate growth in coming years, investments may be made in new products. If growth is hurt by the early maturity of promising products, the strategic effort may be directed toward extension of their life cycles. The second approach, the growth rate-relative market share matrix, suggests locating products or businesses on a matrix with relative market share and growth rate as its dimensions. The four cells in the matrix, whose positions are based on whether growth is high or low and whether relative market share is high or low, are labeled stars, cash cows, question marks, and dogs. The strategy for a product or business in each cell, which is primarily based on the business’s cash flow implications, was outlined. The third approach, the multifactor portfolio matrix, again uses two variables (industry attractiveness and business strengths), but these two variables are based on a variety of factors. Here, again, a desired strategy for a product/business in each cell was recommended.

The focus of the multifactor matrix approach is on the return-on-investment implications of strategy alternatives rather than on cash flow, as in the growth rate-relative market share matrix approach. Various portfolio approaches were critically examined. The criticisms relate mainly to operational definitions of dimensions used, weighting of variables, and product/market boundary determination. The article concluded with a discussion of Porter’s generic strategies framework.