AQA GCE Business Studies A2 UNIT 3 STRATEGIES FOR SUCCESS SELECTING MARKETS & MARKETING 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

© APT Initiatives Limited, 2009 Low Cost – Cost Leadership 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 What is It? How can it be Achieved?

© APT Initiatives Limited, 2009 Low Cost – Cost Leadership 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 What is It? How can it be Achieved?

© APT Initiatives Limited, 2009 Low Cost – Cost Leadership 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 What is It? How can it be Achieved?

© APT Initiatives Limited, 2009 Low Cost – Cost Leadership  Significant price competition  Sell standard, homogenous product readily available from rivals  Customers price sensitive or have significant purchasing power Wh en is it Appropriate?

© APT Initiatives Limited, 2009 Low Cost – Cost Leadership 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 Advantages

© APT Initiatives Limited, 2009 Low Cost – Cost Leadership  Customers may perceive product / service to be lower quality than others in the marketplace Disadvantages

© APT Initiatives Limited, 2009 Differentiation 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?

© APT Initiatives Limited, 2009 Differentiation a)Actual (physical) advantages eg:  Design - better performance, look  Additional features  Better quality materials  Better packaging  Easier access  Faster, more reliable delivery  After sales services b)Perceived (psychological) advantages eg:  Through branding, advertising What is It? How can it be Achieved?

© APT Initiatives Limited, 2009 Differentiation 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 What is It? How can it be Achieved?

© APT Initiatives Limited, 2009 Differentiation  significant competition  do not sell standard, homogenous product ie scope for differentiation  customers not price sensitive When is it Appropriate?

© APT Initiatives Limited, 2009 Differentiation 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 Advantages

© APT Initiatives Limited, 2009 Differentiation  Finding ways that are difficult for competitors to imitate – difficult, costly  Customers increasingly sophisticated, tastes can easily, frequently change - necessitates ongoing investment Disadvantages

© APT Initiatives Limited, 2009 Focus Focusing on small part of overall market, and succeeding either through:  Cost leadership or  Differentiation within that small sector of overall market What is it?

© APT Initiatives Limited, 2009 Focus Better understanding of:  customers and needs Thus more:  efficient allocation of resources  rapid response to change Advantages

© APT Initiatives Limited, 2009 Focus 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 Advantages

© APT Initiatives Limited, 2009 Focus 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 Disadvantages

© APT Initiatives Limited, 2009 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