A Critique of Porter's Cost Leadership and Differentiation Strategies: An Update

Abstract

This is an update of a critique of Porter’s cost leadership and differentiation strategies (Datta, 2010a). In this critique of Porter, the author proposed an alternative competitive framework. He then followed it up by conducting studies of twelve U. S. consumer markets to test his hypothesis. This update incorporates the result of that empirical research and brings it up to date. Porter identifies high market share with cost leadership, citing General Motors (GM) as a successful practitioner of this strategy. However, GM became a market share leader in the American automobile industry due to a strategy of market segmentation, differentiation and a broad scope shaped during the 1920s. Porter argues that cost leadership and differentiation offer an equally viable path to competitive success. Nevertheless, a differentiation strategy based on superior quality compared to competition is more profitable than cost leadership strategy. It can lead a business to become a market share leader, and consequently, even a low-cost leader. Research indicates that differentiation and cost leadership can co-exist. However, Porter insists that each generic strategy requires a different culture and a totally different philosophy. Yet, the problem is that Porter’s generic strategies are too broad. It is not his logic that is flawed, but his basic premise that prescribes cost leadership strategy as the only route to market share leadership, and presents a narrow view of differentiation with a unique product—sold at a premium price—on the one hand, and a “standard, or no-frills” product on the other. Mintzburg says Porter’s cost leadership strategy should be called “price differentiation:” a strategy that is based on a price lower than that of the competition. He suggests that business strategy has two dimensions: differentiation and scope. Thus, setting scope aside, competitive strategy has only one component: differentiation. So, the key question is not whether to differentiate, but how? First, make customer-perceived quality as the foundation of competitive strategy because it is far more critical to long-term success than any other factor. Second, serve the middle class by competing in the mid-price segment, offering better quality than the competition at a somewhat higher price. It is this path that can lead to market share leadership—a strategy that can be both profitable—and sustainable.