8.2 Strategic positioning (Choosing how to compete)

Question 1

Porters generic strategies

Answer 1

1- cost leadership
2- differentiation
3- focus strategy

Question 2

competitive advantage

Answer 2

Ability to add more value for customers than rivals, therefore attain advantageous position.
Arises from selection of generic strategy best fitting for organisations competitive environment.

Question 3

Competitive strategy

Answer 3

The means by which organisations seek to achieve and sustain competitive advantage.
Porter argues competitive strategy means “taking offensive or defensive actions to create a defendable position in an industry to cope with competitive forces, thereby yield a superior return for the firm”

Question 4

Basis of the generic strategies

Answer 4

Porter argues firm’s strengths fall into either cost advantage or differentiation.
By applying these strengths in broad or narrow focus 3 generic strategies result: cost leadership, differentiation and focus.
-‘generic’ as they aren’t specific to a firm/industry.

Question 5

Low producer cost in a mainstream market

Answer 5

Cost leadership is advised

Question 6

High customer value in a mainstream market

Answer 6

Differentiation is advised

Question 7

Low producer cost in a niche market

Answer 7

Focus cost leadership advised

Question 8

High customer value in a niche market

Answer 8

Focused differentiation is advised

Question 9

Low cost

Answer 9

-low cost culture
-economies of scale(cost advantages, production more efficient)
-eliminate unnecessary costs
-cost advantage means enjoy high profits

Question 10

Differentiation

Answer 10

-adding value through; product features, quality, distinctive offering
-offer something new or different
-high costs but charge premium price

Question 11

Focus

Answer 11

-niche markets
-targeting
-limited territory
-focus on specific group of customers
-either cost leader or differentiation within segment

Question 12

Cost leadership

Answer 12

NOT about being cheapest.
Concentrates on aiming to become lowest cost producer in industry through economies of scale.
Firm can compete on price with other producers in industry, earn higher unit profits.
Cost reduction provides focus of organisations strategy.
Competitive advantage by driving down costs.
There can only be ONE cost leader- requires unchallenged position.

Question 13

Cost leadership is based on

Answer 13

-efficiency to drive down costs
-effectiveness-knowing what is/isn’t important to consumers.

Question 14

Cost leadership is beneficial in which markets?

Answer 14

Where customers are price sensitive (elastic)

Question 15

How to become a cost leader

Answer 15

-reduce staff-capital intensive-technology-production costs reduced
-economies of scale
-negotiate with suppliers
-0 hour contracts-less expertise
-greater labour efficiency & effectiveness
-control of overhead costs
-superior management-low paid staff, high paid managers
-relocation-low cost site e.g enterprise zones
-reduction in waste-lean production

Question 16

Low cost

Answer 16

Porter assumes price is a key element in marketing mix.
And that operational and financial objectives must focus on cost minimisation.
-Business operating with lowest cost can charge lowest prices

Question 17

Firms that succeed in cost leadership have these strengths

Answer 17

Access to capital required to make significant investment in fixed assets.
Design skills for efficient manufacture.
High level of expertise in manufacturing skills.

Question 18

Low cost-cost leadership how to achieve?

Answer 18

Be streamlined - few layers.
Encourage responsibility and accountability- cost/profit centres.
Implement tight cost control- budgets, close supervision.
Use incentives based on cost targets.

Question 19

Differentiation

Answer 19

Differentiation strategy calls for development of product or service that offers attributes unique and valued by customers.
Customers perceive product as different and better than rivals.
Value added by uniqueness may allow premium prices to be charged.
Differentiation can be based on product image or durability after sales, quality, additional features, after sales.
-Requires emphasis, research capability and strong marketing.

Question 20

Success in a differentiation strategy means

Answer 20

Gain of competitive advantage- products differ to competitors.
Competing on basis of value added to customers.
Persuading customers their product is superior to rivals.
Customers willing to pay premium price, covers higher costs.

Question 21

Extra costs & premium prices

Answer 21

Differentiation adds costs in order to add value.
Extra costs can be recouped (recovered, got back)if market pays premium price.
Problems occur if these extra costs outweigh additional revenue generated by higher prices.
Extra costs should be added only in areas customers see as important.

Question 22

Sources of differentiation

Answer 22

-creation of strong brand
-superior performance
-high quality
-additional features offered
-innovation in packaging
-speed of distribution
-higher service levels
-greater flexibility
-delivery
-quality of the materials

Question 23

Firms that succeed in differentiation strategy have…

Answer 23

-access to leading scientific research
-a strong creative product development team
-strong sales team with ability to successfully communicate strengths of product
-reputation for quality and innovation

Question 24

Five forces

Answer 24

1- Entry barriers
2- Buyer power
3- Supplier power
4- Threat of substitution
5- Rivalry

Question 25

Entry barriers and cost leadership

Answer 25

Cost leader is able to discourage potential entrants to the market.

Question 26

Buyer power and cost leadership

Answer 26

Cost leader is able to offer competitive price to buyers with power.

Question 27

Supplier power and cost leadership

Answer 27

Cost leader is insulated from a powerful buyer by low costs.

Question 28

Threat of substitution and cost leadership

Answer 28

Cost leader is able to make use of low price as defence against substitutes.

Question 29

Rivalry and cost leadership

Answer 29

Cost leader is better able to compete on price.

Question 30

Entry barriers and differentiation

Answer 30

A firm benefits from customer loyalty which discourages potential entrants.

Question 31

Buyer power and differentiation

Answer 31

A firm enjoys some protection, large buyers have less power to negotiate because of absence of close alternatives.

Question 32

Supplier power and differentiation

Answer 32

A firm is better able to pass on supplier price increases to customers.

Question 33

Threat of substitution and differentiation

Answer 33

A firm is protected from threat of substitutes by customer loyalty.

Question 34

Rivalry and differentiation

Answer 34

A firm benefits from brand loyalty to keep customers from rivals.

Question 35

How can differentiation be acheived?

Answer 35

Requires:
Through awareness, appreciation of target market, what they value.
In depth knowledge on competitors.
Innovation, flexible organisation.
Investment in R&D, new technologies, training.

Question 36

When is differentiation appropriate?

Answer 36

When there is significant competition.
Do not sell standard homogenous products.
Customers are not price sensitive (inelastic demand)

Question 37

Benefits of differentiation

Answer 37

-offers prospect of charging premium price
-demand for differentiated product will be less elastic than demand for competitors products.
-can result in above average profits, reinvest or increase returns for shareholders.
-create additional barriers to entry for newcomers.
-build customer loyalty

Question 38

Risks of differentiation

Answer 38

-difficulty sustaining
-involves higher costs
-customers may not value the differences
-customers may become price sensitive, choose price not uniqueness
-may involve differentiation on dimensions that become less important to consumers overtime
-customers may no longer need differentiation factor
-imitators may narrow the differentiation
-rivals pursuing focus strategy (aims on niches) may be able to achieve greater differentiation in their market segments.

Question 39

Focus strategy

Answer 39

Segmentation is key.
Firm concentrates on one or limited number of segments of the market.
Needs of group can be bettered served by focusing entirely on it.
Firm may feel more secure in niche with greater insulation from competition.
Firms efforts are not spread too thinly.

Question 40

Focus strategies are

Answer 40

Cost focus: cost leader in particular segment.
Focus differentiation: differentiation in chosen segment.

Question 41

Requirements of focus strategy

Answer 41

-identify suitable target customer group
-identify needs of group
-confirmation the market is sufficiently large to sustain the business
-estimation of extent of competition in market
-produce products meet needs of group
-decide whether to opt for cost leadership or differentiation within segment.

Question 42

benefits of focus strategy

Answer 42

-lower investment in resources
-firm benefits from specialisation
-provides scope for greater knowledge of segment of the market
-entry to new markets easier, less costly
-high degree of customer loyalty

Question 43

Focussed cost leadership

Answer 43

Strategy aiming to attract one type of customers with low cost, differentiated product
Aims to be lowest cost operator in one particular niche segment of market.
Aims to exploit unique position in niche segment of market
-not cheapest but best or most distinctive in that segment

Question 44

Entry barriers and focus strategy

Answer 44

A firm develops core competences that can act as an entry barrier.

Question 45

Buyer power and focus strategy

Answer 45

A firm enjoys some insulation since large buyers have less power to negotiate because few alternatives available.

Question 46

Supplier power and focus strategy

Answer 46

A firm is better able to pass on supplier price rises thereby reducing impact of supplier power.

Question 47

Threat of substitution and focus strategy

Answer 47

Firm enjoys some protection against substitutes by specialised products and core competences.

Question 48

Rivalry and focus strategy

Answer 48

Firm enjoys some protection as rivals cannot meet differentiation focused consumer needs.

Question 49

‘Stuck in the middle’ strategy (failing strategy)

Answer 49

Porter argued a firm must make choice about competitive advantage it seeks to develop.
If its fails to choose a strategy= ‘stuck in the middle’ trying to be all things for all people, ends up with no competitive strategy at all.
Leads to low profitability.
Competitors with clear strategy outperform those with unclear strategy or attempt of combination.

Question 50

What is wrong with being ‘stuck in the middle’?

Answer 50

-difficult to become low cost and differentiated.
-firm loses out to others able to undercut it and those able to offer superior product.
-very high quality products to differentiate risk undermining that quality if it seeks to become cost leader.
-blurred corporate culture and projection of confusing image

Question 51

multiple strategies

Answer 51

Firms that are able to succeed at multiple strategies create separate business units for each strategy.
Separate strategies into:
-different units
-each with own culture
-each with own brands

Question 52

How to protect sustainable competitive advantage

Answer 52

-legal protection e.g patents (legal right to an invention given to a person without interference from others who want to replicate/use/ sell it)
-control over resources e.g ownership of parts or all of supply chain
-culture (hard for competitors to replicate)
-innovation
-architecture ( relationship between suppliers and customers which provides useful info to businesses )
-reputation (takes time to develop, not easily copied)