Porter's Generic Strategies 12

Question 1

Outline Porter’s generic strategies

Answer 1

Aims to achieve a competitive edge over competitors
Two approaches: cost leadership (no frills), differentiation (unique, desirable products, and focus (specialised service in a niche market)

Question 2

Process to determine which generic approach

Answer 2

SWOT- to gauge its current position in the market and the impact of the changes it is considering
Five force analysis- tool that focuses on five determinants of competitive power, used to understand the nature of the industry
○ Supplier power- can suppliers control supplies and have power over supplies
○ Buyer power- can consumers drive down prices (readily available products
○ Competitive rivalry- number and capability of competitors, if many then business has less power
○ Threat of substitution- can customers find a product of higher quality/lower price from another business (fakes, intellectual property regulations)
○ Threat of new entry- other businesses entering the same market may take customers

Compare these results
Choose the option that will be most advantageous

Question 3

What is cost leadership? 3 ways to achieve it?
Advantages and disadvantages
Examples

Answer 3

Business aims to be the low-cost producer in the market by reducing operating costs or/and charging lower prices

* Asset utilisation- using resources efficiently (mass-producing, IKEA cutting down on costs by obtaining supplies from overseas, offering basic service, customers pick up purchased items from warehouse and assemble it themselves)
* Low direct and indirect operation costs- a small variety of standardised products made (less personalisation/customisation), productions costs kept to a minimum, creating a culture where everyone looks at keeping costs low, technology 
* Control over all departments or groups of the business- reviewing all areas of the business on where costs can be reduced (bulk buy, JIT, further negotiations)

Adv: attracts customers, increases sales and market share, increases profits through lower cost
Disadv: may be inferior quality, reduction in customer loyalty, outsource tasks (reduce ethical commitments)

Example: Costco, ALDI

Question 4

What is differentiation?
Advantages and disadvantages?
Examples

Answer 4

Business aims to differentiate between their product and those that are similar, by developing the attributes that customers find appealing
Marketing/advertising differentiate between products
Customers may find these products more appealing, unique and attractive enabling businesses to charge premium prices. Quality reflects price and vice versa, may develop reputation and quality being associated with their brand

Adv: Increased customer loyalty, superior quality, attracts customers, higher demand
Disadv: Limit client base, ongoing R&D and innovation, susceptible to copycats

Examples: Nike, BMW

Question 5

Why not both?

Answer 5

Porter argues that only one main strategy should be implemented because business will find themselves ‘stuck in the middle’ with no focus as to which strategy to follow. It is also difficult to compete on price and at the same time differentiating (developing quality and attributes of product) as this may be costly

Question 6

Considerations to be made when choosing between cost leadership and differentiation

Answer 6

Cost leadership: take advantage of economies of scale, new technology (that can mass-produce), outsource, source supplies overseas
Must exploit all sources of cost advantage

Differentiation: where consumers have specific needs, and if the business has resources (finance for research, intellectual property, expertise)