Strategic Choice Flashcards
Porter’s Strategy Model
Organisation’s must make two key decisions: -Should the strategy be one of differentiation or cost leadership? -Should the scope of the strategy be broad or narrow? -Differentiation: Perception that a product is different/superior than rival ones -Cost Leadership: Lowest priced product offered while still earning a good margin -Focus: Using differentiation or cost leadership in either narrow or broad market segments
Cost Leadership
-Becoming the lowest cost provider in an industry -Offers basic, no frills, essential products -Continually strive to lower costs -Economies of scale = important for increased market share = lower production costs -Porter (1980): Above average performance/more profits = charge industry average prices while having below average industry costs -Sales and market share can grow -Able to enter a new market and compete -Valuable in a price-sensitive market -Creates a barrier to entry for new companies
Differentiation
Market research used to create a differentiation strategy. -Porter (1980): Above average industry performer = price exceeds the extra costs of providing differentiation Benefits: -Products command a premium price -More profit can be earned -Less price elastic than rival products -Barrier to entry for new companies Achieved by: -Creating a better/more valuable product -Superior service -Strong brand -Distinctive promotions
Focus
Narrow or broad focus Aimed at a particular segment of the market Benefits: -Specialisation -Lower investments if narrow -Entry to market is less costly Based on: -ID a target group -ID needs of the group -Whether the group is large enough -Check for rival products -Production -Using either a cost leadership or a differentiation strategy
Criticisms of Porter (Mintzberg, Olsen, Johnson & Scholes, 2002)
-Hybrid strategies can be used -Rivals can easily lower their costs -Only when economies of scale are obtained can costs be reduced without compromising quality -Customers may not be willing to pay the industry average price
Hybrid strategies
Providing quality products and services at low prices -Combines cost leadership and differentiation strategies -Trying to achieve high load factors - airlines
Principles for competitive success (Poon, 1993)
-Customers first -A leader in quality -Develop radical innovations -Strengthen strategic position
Cost Leadership
-Becoming the lowest cost provider in an industry -Offers basic, no frills, essential products -Continually strive to lower costs -Economies of scale = important for increased market share = lower production costs -Porter (1980): Above average performance/more profits = charge industry average prices while having below average industry costs -Sales and market share can grow -Able to enter a new market and compete -Valuable in a price-sensitive market -Creates a barrier to entry for new companies
Differentiation
Market research used to create a differentiation strategy. -Porter (1980): Above average industry performer = price exceeds the extra costs of providing differentiation Benefits: -Products command a premium price -More profit can be earned -Less price elastic than rival products -Barrier to entry for new companies Achieved by: -Creating a better/more valuable product -Superior service -Strong brand -Distinctive promotions
Focus
Narrow or broad focus Aimed at a particular segment of the market Benefits: -Specialisation -Lower investments if narrow -Entry to market is less costly Based on: -ID a target group -ID needs of the group -Whether the group is large enough -Check for rival products -Production -Using either a cost leadership or a differentiation strategy
Criticisms of Porter (Mintzberg, Olsen, Johnson & Scholes, 2002)
-Hybrid strategies can be used -Rivals can easily lower their costs -Only when economies of scale are obtained can costs be reduced without compromising quality -Customers may not be willing to pay the industry average price
Hybrid strategies
Providing quality products and services at low prices -Combines cost leadership and differentiation strategies -Trying to achieve high load factors - airlines
Principles for competitive success (Poon, 1993)
-Customers first -A leader in quality -Develop radical innovations -Strengthen strategic position
