Porter's Strategic Matrix: generic strategies

The matrix

Porter's generic strategies. The two focus strategies are sometimes grouped together as 'focus'.

The strategies

• Cost leadership: be the lowest-cost producer in the industry, through economies of scale, efficient processes, standardised products and tight control of overheads. The business can then charge lower prices, or match rivals' prices and earn a higher margin.
• Differentiation: offer products that customers see as different and better (quality, design, brand, service, innovation), so the business can charge a premium price and build loyalty, which makes demand more price inelastic.
• Focus: target a narrow segment or niche, either with the lowest cost in that niche (cost focus) or with a product designed for that niche (differentiation focus).

Stuck in the middle

Porter argued that a business which tries to do everything, without being clearly cheapest or clearly different, risks being stuck in the middle: rivals undercut it on price and others beat it on quality. Critics point out that some businesses do combine reasonably low cost with differentiation, for example by using technology, so the risk is a tendency rather than a rule.

Judging the strategies

• Cost leadership needs large scale and only one firm can be the cost leader; a price war can hurt profits.
• Differentiation needs continual spending on research, design and branding, and rivals may copy.
• Focus strategies may limit growth, and a niche can shrink or be entered by large firms.

The right choice depends on the firm's resources, the market and what rivals do.

Worked example

A small furniture maker produces handmade oak tables for wealthy customers, sold at prices well above mass-market rivals. Which Porter strategy is it using? Explain one risk.

1. The target is a narrow, wealthy segment: narrow target.
2. It competes on craftsmanship and materials, not price: differentiation.
3. So it follows a differentiation focus strategy.
4. Risk: the niche is small, and if incomes fall during a recession, demand for luxury furniture may fall sharply.

Answer: Differentiation focus; the niche is small and sensitive to customers' incomes.

Check yourself

1. A supermarket chain uses huge buying power and standard store designs to have the lowest costs in its market, and sells to everyone. Which strategy is this?
   • Differentiation
   • Cost leadership
   • Differentiation focus
   • Market development
   Show answer

   Cost leadership. Broad target, lowest cost.

2. What is the main benefit to a business of a successful differentiation strategy?
   • It always has the lowest costs in the industry
   • It needs no spending on marketing
   • It removes all competitors
   • It can charge a premium price because customers value its products more
   Show answer

   It can charge a premium price because customers value its products more. Perceived difference supports higher prices and loyalty.

3. A business sells specialist running shoes only to serious marathon runners, designed for their needs. This is
   • cost leadership
   • differentiation focus
   • cost focus
   • diversification
   Show answer

   differentiation focus. Narrow segment, distinctive product.

4. According to Porter, a business that is neither the cheapest nor clearly different risks
   • becoming a cost leader by default
   • achieving economies of scale
   • being stuck in the middle
   • overtrading
   Show answer

   being stuck in the middle. It loses price-sensitive customers to the cost leader and quality-seekers to differentiators.

5. Why is cost leadership not possible for every firm in an industry?
   • By definition only one firm can have the lowest costs
   • Cost leadership is illegal in most countries
   • It only works in service industries
   • It requires a narrow target market
   Show answer

   By definition only one firm can have the lowest costs. There can be only one lowest-cost producer.

6. Which is a key risk of a differentiation strategy?
   • Prices must be the lowest in the market
   • The business must sell only to a niche
   • Rivals may copy the features that make the product different
   • It needs the largest factory in the industry
   Show answer

   Rivals may copy the features that make the product different. If features are copied, the premium cannot be maintained.

7. Explain how differentiation can make demand for a product more price inelastic.
   Show answer

   Customers see the product as different or better with fewer close substitutes and become brand loyal, so a rise in price leads to a proportionately smaller fall in quantity demanded.. Link differentiation to fewer substitutes or loyalty, then to the size of the fall in demand when price rises.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (XBS11/YBS11, 2018), Unit 3 Business decisions and strategy and Appendices 6, 7 and 9

Last updated 8 November 2026. Spotted a mistake? Tell us.