An Empirical Examination of Porter's (1980) Generic Strategies

Gregory G. Dess, University of South Carolina

Peter S. Davis, University of South Carolina

ABSTRACT are used in developing normative propositions

regarding the appropriate strategy for an organi-
zation operating within its chosen environment
The existence of the three generic strategies— (i.e., industry).
differentiation, overall low cost, focus—proposed
by Porter (1980) is empirically examined through Particular attention has been focused on business
an exploratory field study consisting of 22 firms portfolio matricies such as the four-cell grid
in a fragmented industry. Further support relating developed by the Boston Consulting Group (BCG)
to the existence of these generic strategies is and the "business screen" advanced by General
provided through the analysis of panel data. Electric (see Hofer and Schendel, 1978). The
product life cycle has also been proposed as a
useful construct in the development of organiza-
INTRODUCTION tional strategies (Hofer, 1975). All of these
constructs infer a relationship between the de-
sirability—seen in terms of market growth or size
of the market—of the specific product-market with
The field of strategic management is often based
which the firm is identified and the firm's share
upon theoretical and largely untested constructs
(either relative or absolute) of that market as
to aid in the description and/or prescription of
directly related to the firm's economic performance.
a firm's strategy. Recently the normative propo-
A number of empirical studies have tended to rein-
sitions advanced by Porter (1980) have had a
force these propositions, particularly the BCG's
profound impact on the study and practice of
work on learning curves and the PIMS (Profit Impact
strategic management as well as generating intense
of Market Strategy) investigations (e.g., Buzzell,
interest in the popular press (New York Times,
Gale, and Sultan, 1975; Schoeffler, Buzzell, and
January 2, 1981; Fortune, October 5, October 19,
Heany, 1974). The conclusions implied by such
November 2, 1981.)
models and supporting empirical research was a
distinct lack of effective strategies available to
The purpose of this paper is to report the results low market share firms. The majority of the liter-
of an exploratory field study consisting of twenty- ature in the area of low market share firms and
two small, non-diversified firms competing within small businesses has been "discursive, prescrip-
a single highly fragmented industry. This field tive, and wisdom based" (Cooper, 1980: 5 ) . In
study examines the relationship between firms' developing prescriptions based on these paradigms,
"intended or espoused" (Schendel and Hofer, 1979) some authors have gone so far as to posit that
strategy—represented by the competitive means for businesses whose sales are less than 5 percent
considered most important by the firms' dominant of the industry leader there are only four stra-
coalition—and the presence of strategic groups tegically viable options: (1) concentrating on a
within the industry. These strategic groups are small defensible niche in the market while reducing
classified on the basis of which of the three the firm's asset base to the minimum level needed
alternative generic strategies—overall cost to serve that niche, (2) growth through acquisition,
leadership, differentiation, focus—(Porter, 1980) (3) selling out to larger firms, or (4) liquidation
they are most closely aligned. A factor analytic (Hofer and Schendel, 1978: 170-171).
approach is used to analyze the field data in order
to search for constructs or dimensions assumed
to underlie manifest variables (Green and Tull, Recently, doubt has begun to emerge concerning the
1978). underlying assumptions of previous conceptual
frameworks and the usefulness of prescriptions based
Additionally, a panel of experts is surveyed to on them, particularly as they relate to low market
indicate which competitive means are most closely share firms (Christensen, Cooper, and de Kluyvor,
associated with each of Porter's three generic 1981). Yet, as noted by several authors, there
strategies. This panel consists of seven acade- remains an absence of systematic, formal, empirical
micians selected on the basis of their background, research on the strategic management of low market
expertise, and interest in the area of strategic share firms (Hamermesh, Anderson, and Harris, 1978;
management. Woo and Cooper, 1980; Robinson, 1981). This lack
of research emphasis has served to limit under-
standing of the relationship between strategy and
THEORETICAL BACKGROUND AND EMPIRICAL RESEARCH performance for firms which do not comprise the
rather select group of industry leaders. However,
beginning with Hamermesh et al. (1978), a small
Over the past several years numerous "frame but growing body of literature and empirical re-
models" (Rumelt, 1979) for visualizing strategies search has begun to emerge on strategies for low
have been proposed. Typcially, these frame models market share businesses. Research by Woo and
Cooper (1980), Hall (1980), and Rumelt and Wensley Finally, it must be recognized that strategy is the
(1981) have produced results that run counter to outcome of choices made by the chief executive of-
most previous research and accepted wisdom on the ficer (CEO) in concert with members of the firm's
relationship between market share and economic dominant coalition (Thompson, 1967). Typically,
performance. Authors have begun to note the dan- this dominant coalition is composed of the most
ger in "affording excessive attention to one fac- influential members of the top management team—
tor as 'the' performance imperative." (Lenz, 1980: TMT—(Hambrick and Snow, 1977). Thus, the member-
221). ship of the TMT is the appropriate unit of analysis
when attempting to assess the mix of strategic
With the recognition of limitations and defects in means for consistent patterns which represent a
previous constructs representative of generic generic strategy.
strategies, others have proposed alternative guides
for strategy formulation. Porter's book.
Competitive Strategy (1980), has received parti- RESEARCH METHODOLOGY
cular notice among academicians and practitioners.
Porter begins by noting that "the essence of for-
mulating competitive strategy is relating a company Porter (1980) has important implications for both
to its environment," and that, "the key aspect of top level managers of manufacturing organizations
a firm's environment is the industry or industries as well as academicians interested in the opera-
in which it competes" (1980: 3 ) . The underlying tional measurement of competitive strategy. The
determinates of the appropriate classification for major purpose of this paper is to subject Porter's
an industry revolve around five competitive forces generic strategies to empirical examination. To
which drive industry competition: (1) threat of this end, the three generic strategies proposed by
new entrants, (2) bargaining power of buyers, (3) Porter (1980) and conceptualized as common to all
bargaining power of suppliers, (4) threat of sub- organizational environments were selected as the
stitute products or services, and (5) rivalry among broad theoretical framework. In order to provide
existing firms. Based on an analysis of these five a comparative study of the strategies of competing
forces an industry may be classified as represent- organizations within a single industry, the writers
ing one of five generic industry environments: (1) developed a research methodology providing the
fragmented, (2) emerging, (3) mature, (4) declining, "realism" obtained from field research in conjunc-
or (5) global. tion with a panel of academicians representing the
academic community. The research methodology will
Porter develops three potentially successful generic be discussed for each of the two components: (1)
strategic approaches for creating a defensible posi- the exploratory field study and (2) the panel
tion and outperforming competitors in a given in- technique.
dustry. The first, overall cost leadership, which
although not neglecting quality, service, and other Field Study
areas, emphasizes low cost relative to competitors.
The second strategy, differentiation, requires that Firm strategies were seen by the writers as repre-
the firm create either a product or a service senting the views of the dominant coalition or top
recognized industrywide as being unique, thus per- management team (TMT) concerning the firm's means
mitting the firm to command higher than average for competing within a given industry. In con-
prices. The third is a focus strategy, in which structing the research instrument it was assumed
the firm concentrates on a particular group of that each member of the TMT had knowledge of the
customers, geographic markets, or product line content of the firm's strategy which could be
segments. assessed on the basis of the emphasis (or impor-
tance) given various competitive means available
These three generic strategies represent three to the firm.
broad types of strategic groups and thus the choice
of strategy "can be viewed as the choice of which An initial concern of the researchers was the se-
strategic group to compete in" (Porter, 1980: 149). lection of criteria for identifying firms for the
The notion of strategic groups promoted by Pat ton study. The four-digit Standard Industrial Classi-
(1976) and Hatten and Schendel (1977) recognizes fication (SIC) code was chosen as an appropriate
that within an industry firms differ along more measure of the industrial environment within which
dimensions than size and market share. Hatten a given firm competes. This unit of analysis has
(1979: 457) identified that among these subgroups been used frequently in industry analysis and is
"firms employ different mixes of what are substan- supported by Porter (1980: 370). The four-digit
tially the same strategic variables." industry used in this research—paints and allied
products (SIC 2851)—has a four-firm concentration
When investigating the content of a firm's strategy, ratio of less than 40% (i.e., 22%). The absence of
it is important to avoid confusion between the in- market leaders and the presence of a large number
tended and implemented strategies. The appropriate of small and medium-sized companies, many of them
focus is on the means the organization employs to privately-held, conforms to Porter's (1980: 191)
compete within its industry rather than the goals definition of a fragmented industry. An additional
it purports to pursue. This view is supported by criterion followed from Rumelt's (1974) "single
Hofer and Schendel (1978) who view the "organiza- business" or "dominant business" categorization,
tion's strategy to be a statement of the fundamen- i.e., at least 70% of the firm's total sales must
tal means it will use... to achieve its objectives" be within a given four-digit SIC industry. Since
(1978: 23-24) and that it is the content of strate- all the sample firms conformed to this criterion,
gy that "has the greatest impact on performance the researchers were able to regard Hofer's (1975)
results" (1978: 191). corporate-level and business-level strategies as
synonymous for these firms. data was examined to determine whether experts would
organize the variables into clusters or dimensions
It is generally recognized that size and technology unique to each strategy. Furthermore, since "expert
are important influences on strategic decisions. judges will not show such well-known biases as
Size was operationalized as "average total sales leniency, halo, etc." (Einhorn, 1974: 562) expecta-
for the most recent five-year period." All firms tions should increase that the variables being
comprising the sample have total sales of less measured actually represent explanatory concepts
than or equal to $50 million, which is consistent when combined into global constructs.
with the Small Business Economic Program Announce-
ment, 1980. During the research it was found that
all of the sample firms utilized a similar core RESULTS
technology, identified as conforming to Woodward's
"batch" technology (1965).
The principal factor solution obtained after the
Following a review of Porter (1980), the writers varimax rotation for the 21 competitive means is
inductively derived an instrument to evaluate the shown in Exhibit 1. Although five significant
various competitive means which might be used in factors (i.e., eigenvalues - 1) emerged from the
implementing a particular generic strategy. In factor analysis, only the three factors explaining
order to evaluate the instrument in a field setting, the greatest amount of total variance are shown in
individual interviews were conducted, utilizing a Exhibit 1. The other two factors were dropped in
sample of CEO's representing small to medium-sized the interest of parsimony; additionally, a scree
manufacturing firms to develop and "pretest" the test (Catcell, 1965) dictated that they should be
research instrument. Upon completion of the "pre- excluded.
test" the researchers constructed a questionnaire
to assess the content of a firm's competitive stra- The factors displayed in Exhibit 1 are rank ordered
tegy. In the field study, 28 organizations were from left to right according to the proportion of
initially contacted—all non-diversified manufac- total variance they explained. The three factors
turing firms in the paints and allied products in- are named according to the three generic strategies
dustry, SIC 2851. Of these, 22 fully participated proposed by Porter they were interpreted by the
in the study. The writers conducted on-site inter- writers as representing.
views with the Chief Executive Officer (CEO) of
each of the participating firms. Discussion fo- Overall, 15 of the 21 competitive means exhibited
cused upon strategies for competing within their factor loadings greater than or equal to i.5O on at
industry and the identification of the TMT. The least one factor—which is generally considered to
TMT consisted of those individuals identified by represent a high degree of significance (Hair et al.
the CEO as most influential in the making of stra- 1979). Two of the variables (i.e., V13 and V20)
tegic decisions for the firm. This interaction loaded highly on more than one factor. In these
enabled the researchers to further refine the re- instances, the higher loading was selected for sub-
search instrument into its final industry-specific sequent analysis Co represent the factor for inter-
form. The resulting questionnaire was mailed to pretative purposes as suggested by Hair et al.
the CEO of each sample firm for distribution to the (1979: 236-237).
previously identified TMT members. These indivi-
duals were asked to indicate the importance of each The writers recommend caution in interpreting these
of 21 competitive means (e.g., customer service, results because the sample size (i.e., respondents)
brand identification) to their firm's overall relative to the number of variables (i.e., strate-
strategy. A five-point interval scale was used gic means) represents a ratio of 3.7 to 1. This
with values ranging from "l=Not At All Important" approaches, but does not exceed, the desirable but
to "5=Extremely Important." A total of 78 of 99 conservative ratio of four to five to one advocated
possible respondents (79%) from the 22 sample firms by some authors (Hair et al. 1979). This may, to
completed the questionnaire. The data was factor some extent, inhibit the stability of the factor
analyzed to enable the researchers to determine the loadings obtained. However, given the exploratory
presence of meaningful patterns of variables. nature of the research question as well as practi-
cal constraints—time, resources, availability of
Panel Technique firms—inherent in field research, we do not con-
sider this to be a major limitation in the inter-
A panel of experts was used to evaluate Porter's pretation of our results.
(1980) concepts regarding generic strategies be-
cause of the common core of knowledge they possessed Panel Technique
relevant to the area of inquiry. The panel con-
sisted of seven academicians, selected on the basis The descriptive statistics developed from the panel
of their background and expertise in the field of of experts is shown in Exhibit 2. This descriptive
strategic management. Each member of the panel was analysis was used to evaluate which strategic means
first asked to review Porter's chapter on "generic used in the field research the experts associated
competitive strategies" (1980: 34-46) and then com- with each of Porter's generic strategies. As
plete three questionniares—corresponding to each Exhibit 2 indicates, the panel of experts identi-
of Porter's three generic strategies. Each ques- fied certain competitive means with each of the
tionnaire consisted of the the same 21 competitive generic strategies. This analysis clarified the
means and associated five-point interval scales relationships between the variables and the generic
used in the field research. The panel was asked strategies and aided in the interpretation of the
to indicate the importance of each competitive factor analysis developed from the field study.
mean with regard to each generic strategy. This
 EXHIBIT 1
COMPETITIVE MEANS: FACTOR STRUCTURE AND COMHUNALITIES

Factor One Factor Two Factor Three Comnmnallcics

Ditferentiation Low Cost Focus
Squared Squared
Factor Factor
CompeCltlvQ Means Loadings Loadings Loadings Loadings Loadings Loadings
(aj/) - ; >
"*J3>

1. New Product Development .19858 .03943 .15352 .02357 .62736 .39358 .45658
2. Customer Service -.26645 .07100 .48492 .23515 .41641 .17340 .47955
3. Operating Efficiency .29412 .08650 .51166 .263 80 -.14168 .02007 .36837
4. Product Quality Control .16526 .02731 .80309 .64495 .02370 .00056 .67281
5. Experienced/Trained Personnel .05293 .00280 .58847 .34630 -.02899 .00084 .34994
.24855 .06118 .07925 .00628 -.05166 .00270 .07016
7. CompotiLlve Pricing .04730 .00223 -.01997 .00040 -.26566
8. Broad Range of Products .07058 .07321
.02949 .00087 .11203 .0125') .26821 .07194 .08536
9. Developlns/Refining Existing Products .19764 .03906 .61536 .37867
10. Brand Identification .34666 .12017 .53790
.82943 .68795 .12707 .01615 .03331 .00111 .70521
11. Innovation in Marketing Techniques .85953 .73879
and Methods .20290 .04117 .15055 .02267 .80263
12. Control of Channels of Distribution
13. Procurement of Raw Materials .70853 .50201 .29166 .08507 .07323 .00536 .59244
14. Minimizing Use of Outside Financing .50326 .25327 .61069 .37294 -.15426 .02380 .65001
15. Serving Special Ceugraphic Markets .23042 .05309 .30128 .09077 -.11744 .01379 .15765
L6. Capability to Manufacture Specialty .17321 .03000 .10626 .01129 .25196 .06348 .10477
Products -.08241 .00679 .16097 .02591 .76621 .58708 .61978
17. Products in High Price Market
Segments .22651 .05131 .00842 .00070 .69132 .47792 .52993
J8. Advertidlng
L9. Reputation within Industry .831)2 .69076 .01627 .00026 .06969 .00486 .69588
20, Forecaating Market Growth .04930 .00243 .78639 .61841 .25484 .06494 .73265
21. Innovation in Manufacturing .55085 .34034 .51302 .26319 .17149 .02940 .63293
Processes .44429 .19739 .61579 .37920 .11464 .01314 .58973

Eigenvalue 6.7871 2.2416 1.8101 10.8388

Percent of Common Variance 62.60 20.74 16.66 100.00
32.3 10.7 8.6 51.6

EXHIBIT 2
PANEL TECHNIQUE: DESCRIPTIVE STATISTICS
summarized in Exhibit 3. The exhibit is organized
on the basis of Porter's three generic strategies.
Under each generic strategy, the items identified
Competiclve Differentiation OV€i r a l l Focus by the field study and the panel of experts as most
Means Strategy Low Cost Strategy and least important are arrayed. (The most impor-
Strategy
tant and least important items were those whose
Mean S.D. Mean S.D. Mean S.D. mean value was greater or less than, respectively,
one standard deviation from the aggregate mean
V 1 4.71 0.49 2.29 1.25 3.71 0.49
V 2 4.29 0.49 1.71 0.49 4.29 0.76 value.)
V 3 2.57 0.53 5.00 0.00 3.(JO 1.00
V4 4.29 0.49 3.00 1.00 3.57 0.79
V5 4.57 0.53 3.57 0.98 3.57 0.53
V 6 2.57 0.53 3.14 1.21 2.57 1.27
V 7 1.71 0.49 4.86 0.38 3.57 0.79
V8 1.14 0.69 2.14 1.07 2.43 0.53 EXHIBIT 3
V9 4.00 1.00 3.86 0.69 3.29 1.11
V 10 5.00 0.00 1.86 0.69 4.57 0.53 CONTENT OF CENERIC STRATEGIES: SUMMARY OF FINDIMCS
V 11 4.86 0.38 1.71 0.76 4.14 0.90
V 12 4.14 0.69 3.00 1.41 3.29 0.49
Differentiation Overall Low Cost Focua
V 13 2.43 0.53 4.86 0.38 2.71 0.76
V 14 2.29 0.49 3.29 0.95 2.43 0.79
V 15 2.71 1.25 1.57 0.79 4.86 0.38 experts ManaRera Experts ManaRers Experts Managers
V 16 3.86 1.07 1.14 0.38 5.00 0.00 (moat important) (moat important) (most important)
V 17 4.57 0.53 1.29 0.49 3.71 0.76
V 18 4.71 0.49 2.43 1.72 3.86 1.07 VI VIO V3 V3 V2 VI
V 19 VIO Vll V7 V4 VIO V16
4.29 0.49 2.57 0.98 3.50 1.04
Vll V12 V13 V5 V15 V17
V 20 3.29 0.49 4.00 0.82 2.86 0.69 V18 V18 V21 V9 V16
V 21 2.57 1.13 4.14 1.07 3.71 1.38 V20 V13
V19
Mean Item Value 3.60 2.93 3.55 V21
( l e a a t important)
Mean S t a n d a r d (least important)
Deviation 1.07 1.21 0.74 V6 V3
V8 V2 ( l a a s t important) V8 V6
V13 V13 V7
V14 V2 V8 V14 V12
The final step in our analysis of the empirical Vll V15 V13
data involved: (1) a comparison between the opin- V15 V18 V14
V16 V21
ions of the experts as to the appropriate content VI7
of each of the generic strategies and (2) the
principal factor solution with varimax rotation
for the 21 strategic means used in the field study.
For the reader's convenience, these findings are

10
It appears evident from a review of these results strategies—focus—the evidence was less conclusive.
that factor one—developed from the field study— Also noteworthy was the extent to which those pat-
displays a content consisting of variables identi- terns of strategic means which emerged from the
fied by the experts as characteristic of a differen- field study resembled those of the experts. In
tiation strategy. Three of the four variables addition to identifying strategic means of high
identified by the panel are contained in factor one. importance, the managers and experts also identi-
This close association led the researchers to inter- fied items of lesser importance for each generic
pret factor one as representative of a differentia- strategy.
tion strategy. Supportive of this interpretation
is the fact that none of the variables identified For purposes of evaluation, the researchers endea-
by the experts as least Important to such a strate- vored to separate the content of a strategy from
gy appeared with high loadings on factor one. Many the process by which it is determined—a conceptual
of the variables loading highly on factor one appear separation viewed by some as very important
to be indicative of a marketing orientation (e.g., (Kirchhoff, 1979). Yet, when analyzing small or
brand identification). Porter (1980: 199) notes closely-held firms, the researchers were frequently
that one of the principal economic causes for the forced to rely upon perceptual or self-reported
existence of highly fragmented industries is high measures due to a lack of publicly available objec-
product differentiation, particularly if it is tive measures. Thus, in the present research some
based on image. merger may have occurred between elements compris-
ing the firm's espoused strategies which are in-
Similarly, factor two contains three of the four tended to guide the organization's actions, and
variables identified by the experts as primary com- those which it is actively implementing. Also, the
ponents of an overall low cost strategy. Factor choice of industry and the structure of the sample
two exhibits a predominately production orientation may somewhat limit the generalizability of the pre-
(e.g., operating efficiency). Such an organization sent findings. Perhaps, with a broader sample which
lends support to the researchers' identification of included high market share as well as low market'
factor two as representative of Porter's overall share, and diversified as well as nondiversified
low cost strategy. Porter (1980: 36) contends that firms, a clearer delineation and diversity of stra-
"achieving a low overall cost position often re- tegies would emerge. Finally, it should also be
quires a high relative market share or other advan- recognized that the sample was representative of
tages, such as favorable access to raw materials." only one of Porter's (1980) five generic industrial
While there has been some empirical research to environments (i.e., fragmented industries).
refute the requirement for a high relative market
share in order to obtain a low cost position (Hall, The present study also provides a basis for larger
1980), it should be noted that one of the strategic scale research which could encompass more complex
means with a high loading on this factor was V13 research questions and require more sophisticated
(i.e., procurement of raw materials). As with fac- analytical techniques. First, comparisons within
tor one, some interpretative support is indicated and across industries could be made to determine
since none of the variables regarded by the experts the relative strength of the association between
as least important to this strategy appeared with implementation of a single generic strategy and
high loadings on factor two. firm performance. One may posit that successful
firms competing in an industry experiencing rapid
Much more similarity appeared between the experts growth would be more likely to successfully imple-
and managers on what does not rather than what does ment more than a single generic strategy. In this
constitute a focus strategy. Three of the four case, additional organizational slack would permit
variables seen by the experts as least Important in more experimentation with new strategies as well as
a focus strategy appeared in factor three with their increase the number of alternatives considered and
lowest loadings (i.e., factor loadings less than or evaluated. Second, studies with a larger number of
equal to .30). Those strategic means (e.g., V 1 6 — firms would permit the application of more powerful
specialty products and V17—high priced market seg- analytical procedures. For example, multiple re-
ments) exhibiting high loadings on factor three gression would be a technique for determining the
suggest an emphasis on particular market segments. relative importance and explanatory power of many
Although this may imply concentration on a small strategy variables in a linear model and path ana-
defensible niche, the writers do not infer this to lysis would enhance the viability of causal infer-
be a definitive identification. This caution seems ences (Rosenberg, 1968). Third, more complex models
warranted in light of the lack of consensus between could incorporate several strategy variables which
the managers and the experts as to the items com- play a key role in the determination of a given
prising such a strategy. firm's strategy (e.g., company objectives, distri-
bution of power, environmental assessment). The
impact of such process variables in the determina-
DISCUSSION tion of (1) the content (espoused or implemented)
of a firm's strategy, and (2) firm performance out-
comes hold great promise for further developing
The writers view their exploratory research as pro- empirically-based normative theory.
viding empirical support for the presence of dis-
tinct strategic orientations on the part of the
managers. Two of these orientations contain ele- REFERENCES
ments which appear to the writers to be indicative
of the two generic strategies which Porter (1980) Available upon request.
identifies as differentiation and overall low cost.
However, for the third of Porter's generic

11