1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

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

9. 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

10. 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

11. 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

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

13. 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

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

15. 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

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

17. 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

18. 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

19. 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