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CHAPTER 5 • STRATEGIES IN ACTION 151

These three guidelines indicate when liquidation may be an especially effective
strategy to pursue: 20
• When an organization has pursued both a retrenchment strategy and a divestitute
strategy, and neither has been successful.
• When an organization’s only alternative is bankruptcy. Liquidation represents an
orderly and planned means of obtaining the greatest possible cash for an
organization’s assets. A company can legally declare bankruptcy first and then
liquidate various divisions to raise needed capital.
• When the stockholders of a firm can minimize their losses by selling the
organization’s assets.

Michael Porter’s Five Generic Strategies

Probably the three most widely read books on competitive analysis in the 1980s were
Michael Porter’s Competitive Strategy (Free Press, 1980), Competitive Advantage (Free
Press, 1985), and Competitive Advantage of Nations (Free Press, 1989). According to
Porter, strategies allow organizations to gain competitive advantage from three different
bases: cost leadership, differentiation, and focus. Porter calls these bases generic strategies.
Cost leadership emphasizes producing standardized products at a very low per-unit cost for
consumers who are price-sensitive. Two alternative types of cost leadership strategies can
be defined. Type 1 is a low-cost strategy that offers products or services to a wide range of
customers at the lowest price available on the market. Type 2 is a best-value strategy that
offers products or services to a wide range of customers at the best price-value available on
the market; the best-value strategy aims to offer customers a range of products or services
at the lowest price available compared to a rival’s products with similar attributes. Both
Type 1 and Type 2 strategies target a large market.
Porter’s Type 3 generic strategy is differentiation, a strategy aimed at producing
products and services considered unique industrywide and directed at consumers who are
relatively price-insensitive.
Focus means producing products and services that fulfill the needs of small groups
of consumers. Two alternative types of focus strategies are Type 4 and Type 5. Type 4 is a
low-cost focus strategy that offers products or services to a small range (niche group) of
customers at the lowest price available on the market. Examples of firms that use the Type 4
strategy include Jiffy Lube International and Pizza Hut, as well as local used car dealers and
hot dog restaurants. Type 5 is a best-value focus strategy that offers products or services to
a small range of customers at the best price-value available on the market. Sometimes called
“focused differentiation,” the best-value focus strategy aims to offer a niche group of
customers products or services that meet their tastes and requirements better than rivals’
products do. Both Type 4 and Type 5 focus strategies target a small market. However, the
difference is that Type 4 strategies offer products services to a niche group at the lowest
price, whereas Type 5 offers products/services to a niche group at higher prices but loaded
with features so the offerings are perceived as the best value. Examples of firms that use the
Type 5 strategy include Cannondale (top-of-the-line mountain bikes), Maytag (washing
machines), and Lone Star Restaurants (steak house), as well as bed-and-breakfast inns and
local retail boutiques.
Porter’s five strategies imply different organizational arrangements, control proce-
dures, and incentive systems. Larger firms with greater access to resources typically com-
pete on a cost leadership and/or differentiation basis, whereas smaller firms often compete
on a focus basis. Porter’s five generic strategies are illustrated in Figure 5-3. Note that a
differentiation strategy (Type 3) can be pursued with either a small target market or a large
target market. However, it is not effective to pursue a cost leadership strategy in a small
market because profits margins are generally too small. Likewise, it is not effective to
pursue a focus strategy in a large market because economies of scale would generally favor
a low-cost or best-value cost leaderships strategy to gain and/or sustain competitive
advantage.