Strategic Management: Formulation and Implementation

The Porter Curve

Michael Porter has suggested three generic competitive strategies: cost leadership, differentiation and focus strategy (see Part 1). Each strategy is designed to secure a long-term sustainable advantage in a competitive market, and each attempts to pursue that goal in quite distinctive ways.

The justification for this positioning can be understood after recognizing the U-shape effect that is observed in the behaviour of profitability of firms competing in some industrial sectors.

This concept suggests a number of possible relationships between market share and profitability. According to the U-shaped curve depicted, a company can attain a relatively high return on investment (ROI) by going after the leading market share in its industry.

If the firm cannot achieve a high a level of sales, two alternatives are open: (1) one is to choose unique differentiation, so the firm can enjoy a price-premium because of the special characters of its products, (2) the other is to focusing on a specialized but profitable niche within the industry.

The worst situation is the lower end of the U-curve with no cost advantage and no distinctive value of offer.