Porters generic strategy

Question 1

Porters generic strategy

Answer 1

• sets out key generic strategies to help business gain a competitive edge.
• focus on one strategy, rather than attempt to implement both.
• businesses that implement both strategies risk being ‘stuck in the middle’
• before deciding with a strategy to implement, businesses should look at the 5 competitive forces in their industry and asses their own strength + see what they can take advantage of

Question 1

lower costs

Answer 1

The lower cost strategy is where a business looks to gain a competitive advantage by reducing its costs in both the primary and support activities.
- Businesses will look at all their activities and determine where costs can be reduced.
- Businesses that are able to become a cost leader and sell their good/service at a price that is low to gain a substantial competitive advantage.
- price sensitive consumer are attracted to the low costs.
- It is important that prices are not reduced so far that profit margins are not diminished.

Question 2

differentiation

Answer 2

This is where the business can make their good or service seem to have a unique point of difference from its competitors.
- If point of difference is valued, customers may be willing to pay higher prices for product, rather than competitors at a lower cost.
- can set itself apart from competitors by developing unique qualities that make it unique and result in customer loyalty.
- A product that stands out to buyers can often demand a premium price, so long as it can keep costs competitive.

Question 3

advantages of lower costs

Answer 3

• A business may become more profitable
• prevent competitors from increasing their market share if they can’t match costs or prices.
• save money on some costs
• Savings can be put towards differentiation at a later date

Question 4

disadvantage of lower costs

Answer 4

• perceived product as being poor quality.
• lose its market share if other businesses copy the low-cost approach.

Question 5

advantage of differentiation

Answer 5

• can develop customer loyalty.
• If able to charge a premium price, the business can make revenue gains.
• market share can be increased.

Question 6

disadvantage of differentation

Answer 6

• Rival businesses can copy the differentiated approach
• initial cost that must not outweigh the benefits.
• time-consuming process
• consumer tastes or preferences may change

Question 7

choosing the right generic strategy

Answer 7

1. Conduct a SWOT analysis – (strengths, weaknesses, opportunities and threats) to be conducted at regular intervals to gauge the current situation/position and the impact of any future changes.
2. Use five force analysis - to understand the nature of the industry in which they operate. Porter found that there were five forces that determine the competitive power of those within the industry (supplier power, buyer power, competitive rivalry, threat of substitution and threat of new entry)

Question 8

differentiation example

Answer 8

Apple
Private label brands in supermarkets such as Coles now account for over one-third of products on the shelves. This differentiation strategy focuses on multiple branding and perceptions of quality.

Question 9

lower cost example

Answer 9

Aldi is rapidly gaining market share in Australia due to competitive pricing and quality. Aldi’s mission is to provide customers with high-quality products at very low prices.
Aldi keeps its costs lower than competitors while selling products with features that are acceptable to customers (it maintains differentiation to a competitive level).