How the internet affects Porter’s generic strategy models

In the emerging global economy, e-commerce and e-business have increasingly become a necessary component of business strategy and a strong catalyst for economic development. Michael Porter (1980) has argued that a firm’s strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent.

Research has indicated how Porter’s generic strategies would work in the light of ICT enablement of businesses. By applying cluster analysis, researchers were able to differentiate 5 strategy types, which would be significant in e-businesses.

1. The first strategy, which they call the “Hybrid Strategy”, was pursued by firms which were engaged in diverse market domains with diverse products, take advantage of online specific differentiation factors, and at the same time, pursue cost advantage.
2. The second strategy that firms focused on had a positive and distinctive value only on the cost leadership dimension.
3. The third strategy type occupies a less than even mediocre position on every strategic dimension and these firms have only a poor focus on internet specific differentiation. This may reflect lack of clear strategic direction and resource commitment.
4. The fourth strategy type resembles Porter’s differentiation strategy. This type scores high on market leadership and product proliferation dimensions, indicating an emphasis on staying sensitive to customer needs through diverse products with short life cycle.
5. The last strategy type is high on both the focus and Internet-specific differentiation dimensions, while also ranking very low on the other dimensions.

These firms do not appear to be concerned with price competition or overall market leadership. Instead, they appear to aim at a small segment of online customers, emphasizing Internet-specific factors such as transaction security and payment convenience. This strategy type is labeled “Online Focus.”  Based on their study, they concluded that, among e-business firms, a hybrid, integrated strategy is a must, and that a traditional cost leadership strategy is unlikely to be associated with success. They also suggest that focused strategies – those that are either narrowly defined differentiation strategies or those that focus on Internet-specific characteristics such as security and convenience of transaction – may have a better chance of success than cost leadership strategies.

However before MBA students start using these frameworks a pinch of caution needs to be exercised. Often one is not conversant on the context in which these frameworks may be used. It is important to note that this framework is predominantly one which requires a static industry structure. Fluctuation in the ecosystem may require organizations to pursue a combination of strategies which may emulate from among these generic strategies.