Porter's generic forces

Question 1

What are porter’s generic forces

Answer 1

which outlines the ways that any business - of any size and operating in any industry - can gain a competitive advantage.

It looks at competitive advantage in terms of cost and uniqueness, and for scope it looks at mass and niche

Question 2

What is the strategy when there is cost and mass

Answer 2

cost leadership

Question 3

What is the strategy when there is cost and niche

Answer 3

“focus” (cost focus)

Cost focus means a business emphasizes cost-minimization within a focused (narrow or niche) market.

Question 4

What is the strategy when there is uniqueness and mass scope

Answer 4

differentiation

Question 5

What is the strategy when there is uniqueness and niche scope

Answer 5

“focus” differentiation focus

Question 6

Cost leadership characteristics

Answer 6

Cost leadership is a generic strategy that aims to establish a competitive advantage by achieving the lowest operational costs in the market for a particular good or service. It means to become the lowest cost supplier of a product within the market. Examples include providers of low-cost accommodation (such as youth hostels) and budget airlines

Adopting a cost leadership strategy means the business can price its products the same as its competitors but earn a higher profit (because the firm’s costs are lower). Alternatively, the cost leader can lower its prices below those charged by its rivals in order to attract more customers and therefore gain higher market share.

Although these firms might charge low prices, they are highly profitable and market leaders in their respective industries. They do not compete with firms that offer higher-quality products since this would require price hikes. The only way to directly compete with these firms is by using penetration or predatory pricing strategies. Alternatively, firms might choose to use technology to cut wastage and to improve productivity, thereby reducing unit costs of production. Hence, cost leaders can enjoy greater profit margins.

However, to become and remain a cost leader can mean the business has to continually innovate and create new ways to reduce costs. Furthermore, the strategy can be risky as rivals with similar market power can simply try to match the price cuts, which could lead to a price war. Also, cost leaders might develop a reputation for low quality, due to the low prices. This is not necessarily a perception that the business wants to earn. Finally, cost leaders are dependent on a high volume of sales to generate profit, due to the relatively low profit margins.

Other examples of companies that use a cost leadership strategy include:

AirAsia - Malaysia’s low-cost airline carrier, which is also the largest in Southeast Asia.

Aldi - Germany’s largest chain of discount supermarkets

Costco - American multinational wholesaler and retailer

IKEA - the world’s largest furniture retailer

McDonald’s - the world’s largest fast food restaurant