Porter’s Generic Strategies

Defending Competitive Advantage If a firm’s successful formula is easy to copy, its superior returns will be short-lived Dyson ‘bagless’ vacuum copied by other manufacturers e.g. Hoover

Defending Competitive Advantage Rivals can learn from the first mover and develop: Products offered at a better price Better products This will drive profitability of the first firm downwards A winning formula needs to be special in some way and difficult to imitate for superior profits to be sustainable

Porter’s Five Forces Every marketing strategy needs to be defendable against the forces of competition Companies therefore need to analyse their strategies against PORTER’S FIVE FORCES

Porter’s Five Forces The threat of new entrants The threat from substitute products The power of buyers (i.e. consumers) The power of sellers (i.e. suppliers) The level of competition between firms

Successful companies Successful companies build highly distinctive products and services for which there is no ready substitute. Ignoring the competition can be fatal – just ask Marks and Spencer Tesco WHSmiths

Porter’s Generic Strategies STRATEGIC ADVANTAGE Low Producer Cost High Customer Value STRATEGIC TARGET Mainstream Market Cost Leadership Differentiation Niche Market Focused cost leadership Focused differentiation

Cost Leadership Aim: To be the lowest cost producer in the industry Prices close to industry average Risk 1 – Customers perceive that products are of lower quality which may force you to reduce price (& therefore profit margin) Risk 2 – Competitors reduce their costs to match firm’s levels

Cost Leadership Ways to reduce costs: Introduce new production method New cheaper source of supply New technology allowing business to cut costs New distribution strategy Productivity improvements

Cost Leadership It is likely that competitors will be able to copy many of the ways set out above For PERMANENT cost leadership may need: A patent to protect process enabling lower costs Economies of scale due to size Creating barriers to entry that prevent competition from eroding market

Cost Leadership

Differentiation Definition: Product differentiation is the degree to which consumers see a particular brand as being different from other brands If consumers value the difference then the company can benefit in two ways: 1. Increased sales volume 2. greater scope for charging a higher price (more price inelastic)

Differentiation (a.k.a. Value Leadership) Differentiation can be based on a number of characteristics: Superior performance Product durability After-sales service Design, branding & packaging to improve the attractiveness of the product Promotional campaigns to boost brand image and sales Different distribution methods

Differentiation & Added Value Pursuing a policy of differentiation can add value by creating a USP This may be real: E.g. different design / components Or perceived: Based on image and branding Key to success is to reduce costs in areas that do not affect the USP, and identify features that add value without significantly increasing costs

Differentiation

Differentiation How do the following companies differentiate their products / service? Avon cosmetics Amazon Hotel Chocolate BMW

Focus Porter identified comparable approaches to firms operating in niche markets i.e. a firm picks a segment of the market that is poorly served by the main players in the industry and then adopts either a cost leadership or differentiation strategy to target the segment or niche Porter says that firms which fail to adopt one of these strategies risks failure

Focus Differentiation Costs High Success ‘Stuck in the middle’ - failure ? Success Low Low Costs High

Stuck in the Middle? “Good food costs less at Sainsburys”

Stuck in the Middle?