AQA GCE Business Studies A2 UNIT 3 STRATEGIES FOR SUCCESS SELECTING MARKETING STRATEGIES Porter’s Generic Strategies: Low Cost versus Differentiation © APT Initiatives Limited, 2009

Introduction All successful firms have a competitive advantage (CA)… something which makes them stand out from their rivals Porter identified 3 generic strategies through which CA can be achieved: Cost leadership Differentiation Focus

Low Cost – Cost Leadership What is It? How can it be Achieved? Being the lowest cost producer either to: Offer lowest-priced product/ service - objectives re: sales, market share; or Enjoy higher than average profit - objectives re: profit, ROCE, s/holders

Low Cost – Cost Leadership What is It? How can it be Achieved? Often involves producing / selling large volumes of standard ‘no frills’ product service - benefit from economies of scale Emphasis on minimising costs eg through: New technology, production methods Re-locating some or all of business Outsourcing non-core / critical activities Fw / bw vertical integration Raising productivity, capital utilisation

Low Cost – Cost Leadership What is It? How can it be Achieved? Businesses tend to: Be streamlined - few layers Encourage responsibility and accountability - cost/profit centres Implement tight cost control - budgets, close supervision Use incentives based on cost targets

Low Cost – Cost Leadership When is it Appropriate? Significant price competition Sell standard, homogenous product readily available from rivals Customers price sensitive or have significant purchasing power

Low Cost – Cost Leadership Advantages Price advantage - sales, market share; or above average profit Other advantages: Deter new entrants Force out new entrant Defend against substitutes Cope with pressure to reduce prices Cope with increase in costs

Low Cost – Cost Leadership Disadvantages Customers may perceive product / service to be lower quality than others in the marketplace

What is It? How can it be Achieved? Differentiation What is It? How can it be Achieved? Making the product / service look distinctively different to competitors in eyes of customer and in ways valued by customer In order to: Increase profits - charge higher price or Increase market share - offering better product than rivals at same price

What is It? How can it be Achieved? Differentiation What is It? How can it be Achieved? Actual (physical) advantages eg: Design - better performance, look Additional features Better quality materials Better packaging Easier access Faster, more reliable delivery After sales services Perceived (psychological) advantages eg: Through branding, advertising

What is It? How can it be Achieved? Differentiation What is It? How can it be Achieved? Requires: Thorough awareness, appreciation of target market, what they value In-depth knowledge on competitors Innovation, flexible organisation Thus, requires investment in: R&D, new technologies, training

Differentiation When is it Appropriate? significant competition do not sell standard, homogenous product ie scope for differentiation customers not price sensitive

Differentiation Advantages Allows higher price, thus greater profits; or attract more custom - sales, market share Can help build customer loyalty: Keep customers from rivals Reduce threat of substitutes Deter new entrants Few, if any, close substitutes: Reduce power of big customers re price Pass on cost increases – maintain profitability

Differentiation Disadvantages Finding ways that are difficult for competitors to imitate – difficult, costly Customers increasingly sophisticated, tastes can easily, frequently change - necessitates ongoing investment

Focus What is it? Focusing on small part of overall market, and succeeding either through: Cost leadership or Differentiation within that small sector of overall market

Better understanding of: Focus Advantages Better understanding of: customers and needs Thus more: efficient allocation of resources rapid response to change

Focus Advantages Focus differentiation - helps secure customer loyalty, gain leadership in a particular segment, maximise profits NB high customer loyalty: discourages new entrants protects against substitutes FD also: reduces power of large firms as generally few alternatives

Focus Disadvantages In general: Lower volumes thus…lower sales, profits plus…less power with suppliers However…focus-differentiation - more able to pass on cost rise (supplier, other) as customer less price-sensitive As with any strategy - risk of imitation Plus… market + evt can change – affect make-up of segments – requires change in strategy

Closing Comments Porter stresses danger of not using single strategy – risk being “stuck in middle” failing to develop CA However… recent research suggests firm can use hybrid strategy and outperform those adopting single One thing that is certain… given dynamic challenging environment flexibility in strategy (& tactics) is required to respond to changing market conditions