AQA GCE Business StudiesAQA GCE Business Studies
A2 UNIT 3
STRATEGIES FOR SUCCESS
SELECTING MARKETS & MARKETING
Porter’s Generic Strategies: Low Cost versus Differentiation
© APT Initiatives Limited, 2009
© APT Initiatives Limited, 2009
Introduction
All successful firms have a competitiveadvantage (CA)… something which makesthem stand out from their rivals
Porter identified 3 generic strategies through whichCA 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 largevolumes of standard ‘no frills’ productservice - 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
When is it Appropriate?
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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
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Low Cost – Cost Leadership
Customers may perceive product / service to be lower quality than others in the marketplace
Disadvantages
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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?
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Differentiation
significant competition
do not sell standard, homogenous product ie scope for differentiation
customers not price sensitive
When is it Appropriate?
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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
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Differentiation
Finding ways that are difficult for competitors to imitate – difficult, costly
Customers increasingly sophisticated, tastes can easily, frequently change - necessitates ongoing investment
Disadvantages
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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?
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Focus
Better understanding of: customers and needs
Thus more: efficient allocation of resources rapid response to change
Advantages
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Focus
Focus differentiation - helps securecustomer loyalty, gain leadership in aparticular segment, maximise profits
NB high customer loyalty:discourages new entrantsprotects against substitutes
FD also: reduces power of large firms asgenerally few alternatives
Advantages
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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 usehybrid 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