Porter's Generic strategy Flashcards
Define PGS to have a competitive advantage
Porter’s generic theory attempted to explain how a business can manage change in their attempt to gain a competitive advantage. A competitive advantage is the conditions or attributes that places a business in a superior position, or enables it to achieve a point of difference relative to its competitors. This advantage can either be attained by cost leadership of differentiation.
Define Porter’s differentiation strategy
The differentiation strategy offers customers unique services or product features that are of perceived value to customers which can then be sold at higher prices than competitors. Perceived value is a customer’s opinion on the benefits they receive when they purchase the product and could relate to quality, status, brand or reputation of the business. Point of difference are the unique features that distinguish a business’s product from an immediate competitor.
Define Porter’s lower cost strategy
Lower cost strategy is when a business aims to achieve the lowest cost of operations (reduce production costs) among competitors, allowing them to pass on these savings to customers by offering lower-priced products compared to the industry average.
How can cost leadership reduce expenses…
- Use resources efficiently to reduce operation costs. Basic, no-frills products/services.
- Reducing the cost of suppliers. Buying in bulk or sourcing cheaper suppliers.
=Cost savings made by a business can then be passed onto customers by offering lower prices relative to its competitors within the same industry
Benefits of low-cost strategy
- strong competitive advantage in markets with price conscious consumers
- aiming for lower costs of production may lead to effective and efficient use of operations
- creates a barrier entry for new competitors as they would need to match the low prices
Limitations of low-cost strategy
- lowered customer loyalty as price conscious customers are attracted to the lowest price available
- customers may associate lower price with lower cost
Limitations of low-cost strategy
- lowered customer loyalty as customers are only attracted to the lowest prices available
- lower prices may be associated with lower quality
How can the differentiation strategy create a unique product…
- high-quality products
- multiple branding
- innovation and research
- advertising (a brand that portrays status)
Differentiation strengths
- increased expenses can be passed on to customers through the price that they are willing to pay
- customers are inclined to stay loyal
Differentiation limitations
- unique features may be copied by competitors which reduces competitive advantage
- premium prices are unattractive to price sensitive customers
- may require more investment and time to constantly develop to have a product that has a competitive edge
Similarities between low-cots and differentiatiin
- both aim to increase profitability by providing a competitive advantage to a specific target market
- both strategies may alter the price of the product as a result of changing production costs
Differences between low-cost and differentiation
- the competitive advantage is either lowered prices OR a premium product charged for a high price
- low-cost customers are not loyal, whereas differentiation customers are likely to be loyal
- low-cost focuses on reducing operating costs (internal focus) whereas differentiation focuses to meet customer needs (external focus)
Porter’s theory to change
- Once mangers have identified that change is necessary ( after analysis of KPIs), they need to decide which strategy is right for them in order to remain competitive
- The strategy must align with the business’s objectives and mission / vision statements.
- Managers must decide to pursue an advantage through cost leadership ( internal focus) or product differentiation ( external focus).
- Managers must make a considered decision about which strategy to use.
- A manager could use a SWOT analysis to determine which strategy is most suitable
