8.2 Choosing how to compete Flashcards
What two aspects will a business decide to compete on when choosing how to compete with other businesses
- Price
- Customer benefits
Price competition example : choosing how to compete
Price : Discount retailers often try to price-match or undercut one another to remain competitive
Customer benefits example : choosing how to compete
Google’s Google Docs and Microsoft Office 365 compete in terms of benefits they can offer customers: both products offer customer email access, digital storage and document editing capabilities
What are Porter’s strategies
- Cost leadership
- Cost Focus
- Differentiation leadership
- Differentiation focus
What do Porter’s strategies measure
- Competitive advantage
- Scope
Cost leadership approach
An approach taken which competes on price, and which seek to be the cheapest retailer or producer within the market
How can businesses increase their competitiveness
- Reducing costs
e.g negotiating better deals with suppliers and producing their own products if this can be done at a lower cost than the cost of buying such products from suppliers - Investing in research, development and innovation so that they continue to increase in terms of the benefit offered to customers
Differentiation approach
Approach taken which competes in terms of the benefits offered to customers from the purchase of its products or services
e.g apple - iOS product and the benefits this can offer to consumers when compared to other operating systems
Stuck in the middle
If a business fails to target customers based on cost or differentiation, Porter’s strategy classifies the business as a concern, known as ‘stuck in the middle’
What factors influence positioning strategy
1) Business competence
2) Presence of competitors
What does Bowman’s strategic clock provide
An alternative approach to positioning, and suggests a range of methods a business can use to remain competitive
The difficulty on competing on both price and customer benefits
Offering products with perceived high value but at a low price, or offering products with low perceived value but at a high price will not offer a realistic or viable position for a business to take; they are destined for failure
Advantage of competitive advantage
- Increase market share and sales revenue as customers are attracted to the business
Disadvantage of competitive advantage
If it cannot be protected, can be copied by competitors who want to share a business’s success, resulting in the competitive advantage no longer existing
What is a competitive advantage
Advantage over competitors gained by offering consumers GREATER VALUE, either by means of lower prices or by providing greater benefits and service that justifies higher prices
Position 1 on Bowman’s clock
Low price and low added value
Position 2 on Bowman’s clock
Low price
Position 3 on Bowman’s clock
Hybrid
Position 4 on Bowman’s clock
Differentiation
Position 5 on Bowman’s clock
Focused differentiation
Position 6 on Bowman’s clock
Risky, High Margins
Position 7 on Bowman’s clock
Monopoly pricing
Position 8 on Bowman’s clock
Loss of market share
The strategy of position 1
Bargain Basement - a business would typically wish to avoid. It represents a situation in which the business is perceived to be selling goods of low value at low prices
Examples of businesses that use position 1
- Home Bargains
- Charity Shops
Arguments for position 1
- very little marketing effort, which keep costs low
- increased sale volume due to attractive prices
- wider audience - all can afford
Arguments against position 1
- Does not require particular qualities - easy to copy
- encourages competitors
- competitors able to reduce costs to match the firs levels then it has lost advantage
- niche market
What is the successful point of strategy 1 that may depend on
The use of marketing means that the business is able to save on these additional costs meaning overall these production costs are lower and therefore retail prices are able to be low. This acts as a pull factor to customers as they become more lenient on purchasing these ‘bargain’ products
The strategy of position 2
Becoming the lowest cost option for buyers in the market. Cost reduction is key for it to be successful
Examples of businesses that use position 2
- McDonald’s
- Jack’s (Tesco)
- Poundland
Arguments for position 2
- low prices = high sales volume
Arguments against position 2
Risky if customers don’t buy products/services or demand doesn’t increase after price increase
What is the successful point of strategy 2 that may depend on
- Process efficiency and cost reduction is key for this strategy success
- Aiming for high quantity levels, otherwise it will end up with low sales / low price
The strategy of position 3
Product differentiation
Ensuring the price is competitive, ideally with a low perceived price from buyers, while promoting the added value aspects of the product
Examples of businesses that use position 3
- McDonald’s
- Ikea (great brand loyalty by offering higher perceived value at a reasonable price)
- Lush (differentiates through ethically made products at reasonable price)
Arguments for position 3
- HIgher valued products
- Lower prices than competitors at higher quality
- Low-cost to offer consumers with a competitive edge
Arguments against position 3
- Reduction at productivity
- Culture will suffer
- Innovation won’t flourish
What is the successful point of strategy 3 that may depend on
The business may not be able to continue with lower prices especially if they need to be a good quality
Strategy of position 4
- Highest level of perceived added value
- Mid range / standard price
Examples of businesses that use position 4
- Apple (successful) :
- constantly innovating product design - elevated + sleek
- unique operating systems
- wide range of products
- LG (unsuccessful)
- tried to break into smartphone market
- products either too innovative or useless
- Starbucks
Arguments for position 4
- Creates additional added value (willing to pay price)
- brand loyalty
Arguments against position 4
- Revenue increases are not guaranteed
- Offerings perceived value can decline, trends change
What is the successful point of strategy 4 that may depend on
- money for R&D
- demand / gap in market
- a creative / innovative design team
Strategy of position 5
Highest price levels, high perceived value - luxury brands (Louis Vuitton)
Strategy of position 6
High risk strategy where businesses set high prices without offering more value in return
Examples of businesses that use position 6
Gym memberships: don’t offer much more than their competitors
Arguments against position 6
- Higher risk for security
- Risky for long-term proposition as competitive markets will quickly adjust + erode the competitive advantage
What is the successful point of strategy 6 that may depend on
If a business has achieved focused differentiation with a product / service but persists with that product after competitors have introduced short term
What is the strategy of position 7
A very dominant firm who can set high prices without a high perceived value, because of the absence of competitors
Examples of businesses that use position 7
National rail - charge higher prices for the service i.e peak and off peak
Royal Mail
Arguments for position 7
Significant profit margin in each product due to customers not buying any other products
Economies of scale
Arguments against position 7
- Less incentive to be efficient
- Misallocation of resources
- Price charged is likely to outweigh the value that they provide the customer
What is the successful point of strategy 7 that may depend on
The elasticity of the product
The strategy of position 8
Mid price range
Low perceived value to consumer
Examples of a business that uses position 8
Tesco:
- market share 32% - 27.4%
- started to increase since clubcard
- however attempt of discounter Jacks failed
Arguments for position 8
- Customer base
- Low costs
Arguments against position 8
- Not sustainable in long term
- Price higher than value
What is the successful point of strategy 8 that may depend on
- Existing customer base
- High profit margin for product
