Porters generic strategy Flashcards
What is porters generic strategy
An understanding of Porter’s generic strategies can help determine the strategic direction required for business change. In this lesson, you will be learning Porter’s lower cost and differentiation strategy.
Lower cost strategy
The lower cost strategy is where a business is able to give a competitive advantage by becoming the low cost produces in its industry by offering customers similar or low priced products
• Businesses can achieve this in a number of ways, including:
o Achieving economics of sales
o Implementing technology
o Preferential access to raw materials
By becoming the low cost leader, businesses can gain a competitive advantage in two main ways:
- Sell the goods/services at or near industry advantage, increasing the profit margin of the business
- Prices can be reduced to become more attractive to the price sensitive consumer.
It is important that reducing cost cant have a significant impact on the value to the customer
It is common that businesses look to the value chain as a way to remove costs. Value chain is a set of activities a business performs to add value to a good or service
Possible drawbacks of lower cost strategy
o Lower costs in operations may impact the quality of the product.
o If the business lowers the price, they need to increase staff volume significantly to make substantial profit.
o Consumers may perceive the lowered prices as lower quality
Strengths and weaknesses of lower cost strategy
Strengths
• Company with the lowest cost is the highest profit in the event when the competing products Are a sensually undifferentiated, and selling at a standard market price.
• Increase in profits due to reducing costs
• Increase in market share due to lowering prices
Weaknesses
• The weakness of following the cost leadership strategy is that the companies focus on reducing cost, even sometimes at the expense of other vital factors, may become so dominant other company leases vision of why embarked on one such strategy in the first place.
• It is fairly easy for different competitors to follow suit as the ways outlined above to achieve cost reduction are not unique and are readily available given the same level of investment in driving down
The differentiation strategy
- The differentiation strategy is where the business aims to be unique in its industry in some way that is valued by its customers
- This allows the business to charge a premium price for the product
- Customers are attracted to the unique offering
• Differentiation can be achieved in a number of ways including:
o Introducing new technology such as electric cars or wireless charging
o Implementing innovations such as new flavours of foods
o Improving durability where the product will last longer because of higher quality materials or design
o Advertising a brand image that portrays a status or image aligned with the customers personal values
Possible drawbacks of the differentiation strategy
- The differentiation strategy is where the business aims to be unique in its industry in some way that is valued by its customers
- This allows the business to charge a premium price for the product
- Customers are attracted to the unique offering
• Differentiation can be achieved in a number of ways including:
o Introducing new technology such as electric cars or wireless charging
o Implementing innovations such as new flavours of foods
o Improving durability where the product will last longer because of higher quality materials or design
o Advertising a brand image that portrays a status or image aligned with the customers personal values
Strengths and weakness of the differentiation strategy
Strengths
• A business is often able to change a premium price for its products or services in the market
• The key success factor in a differentiation strategy is to make it either very difficult or very expensive for arrivals to replicate your product or service. If you do this, your differentiation will work
weaknesses
• There would be extra costs that the business would have to incur. Such extra costs may include higher advertising spending to promote a differentiated brand image for the product, which in fact can be considered as a cost and an investment.
• Successful differentiation strategy of affirm may attract competitors to enter the companies market segment and copy the differentiated product.
Which strategy?
• Businesses should select one strategy rather than risk being mediocre at both. This is called being “stuck in the middle”
• However, each strategy can’t completely ignore each other
• Businesses should understand the competitive forces that make their industry when deciding which strategy
• There are five competitive forces:
o Supplier power: how easily it is for suppliers to drive costs up
o Buyer power: how powerful buyers are in driving prices down
o Competitive rivalry: looks at the number and compatibility of competitors
o Threat of substitution: how easily it is for customers to find a similar goal/service
o Threat of new entry: how easy it is for competition to enter the market
When deciding which generic strategy to implement, managers can follow a simple process:
- Analyse the competitive forces
- Determine what the business strengths are
- Compare the strengths to the competitive forces
- Decide the most appropriate strategy
Similarities and differences between the two strategies
Similarities
- Increases a business’s profitability by providing a competitive advantage
Differences
Lower cost:
• Sells at similar or lower prices
• Targets cost conscious customers
• Internal focus on operating processes
Differentiation
• Sells at premium prices
• Targets customers that are not price sensitive
• External focus on meeting customer needs
