Q4) Porter's generic strategies

Cost-focus: example

Budget environmental cars such as Nissan Leaf

What is a competitive advantage?

Competitive advantage is about how an SBU creates value for its users, both greater than the costs of supplying them and superior to that of rival SBUS

What is a competitive strategy?

Competitive strategy is concerned with how a strategic business unit achieves competitive advantage in its domain of activity

Cost leadership: disadvantage (1)

Cost leadership involves being the leader in terms of cost in your industry. However, its risky because other low-cost producers may undercut your prices and therefore block your attempts to increase market share.

Differentiation-focus: one benefit of this strategy?

Firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist.

Differentiation-focus: what is it?

Focus strategy concentrates on a narrow segment of the market. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly. Firms also will have lower volumes and therefore less bargaining power with their suppliers. The key is to add value to customers that broad market scopes can't.

Cost leadership: Example

IKEA • offer cheap but stylish furniture • Kept prices low by sourcing its products in low-wage countries and offering very basic level of service • IKEA does not assemble or deliver the furniture, customers must do it themselves - Allowing it to cut costs even further • Critical argument: may not work in some cultures

What did Porter say about being stuck in the middle?

Porter argues • It is best to choose which generic strategy to adopt and then stick rigorously to it • Failure to do this leads to a danger of being 'stuck in the middle' - doing no strategy well • The argument for pure generic strategies is controversial

Differentiation: What is it?

The firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs.

Cost leadership: What is it?

The firm sets out to become the low cost producer in its industry. Cost leadership is about minimizing the cost to the organization of delivering products and services. The price paid by the customer is a separate issue.

Y and x-axis of table?

Y-axis competitive scope (bottom: narrow, top: broad) X-axis competitive advantage (left: low cost, right: differentiation)

Ways of combining generic strategies (3)?

• A company can create separate strategic business units each pursuing different generic strategies and with different cost structures • Technological or managerial innovations might occur where both cost efficiency and quality are improved • Competitive failures - if rivals are similarly 'stuck in the middle' or if there is no significant competition then 'middle strategies may be ok.

Cost leadership: What do firms need? (4)

• Access to the capital needed to invest in technology that will bring costs down • Very efficient logistics • A low cost factors of production that's sustainable • Economies of scale

Differentiation: What a firm needs for this strategy? (3)

• Good research, development and innovation • The ability to deliver high-quality products or services • Effective sales and marketing, so that the market understands the benefits offered by the differentiated offerings

Other analyses to use alongside Porter's generic strategies? (2)

• It is important to conduct other analyses like PESTEL analysis to analyse how the generic strategy being employed by a company should change in accordance with external factors. • Other useful analyses would include SWOT analysis, analysis of the key success factors etc.

Differentiation-focus: disadvantages (4)

• Lower volumes, therefore less bargaining power with their suppliers (both focus strategies) • Niche markets may disappear over the long term (both focus strategies) • May be easy for a broad-market cost leader to adapt its product in order to compete directly • Market segment may not be large enough to generate profits

Differentiation-focus: requirements for this strategy? (2)

• Make its products or services increasingly specialized • Increase differentiation through innovation and your specialized knowledge of your target customer's needs

Limitations of Porter's Strategies (3)

• Most companies will not admit that their product is essentially the same as that of others (Macmillan et al, 2000). • The generic strategies only provide a good starting point for exploring the concepts of cost leadership and differentiation. • they may not provide relevant strategic routes in the case of fast growing markets (Lynch, 2003).

Cost-focus: potential actions for this strategy? (5)

• Reduce cost across the value-chain by engaging with specialist suppliers • Make smart investments in specialized technology to increase production efficiency • Eliminate activities in the value-chain that are superfluous in you target segment • Adopt Just-in-time production • Limit production to specialized products for your target segment

Differentiation: disadvantages (3)

• Unique features will eventually be copied by the competition • Customers may change their tastes and opinions • Constant pressure to innovate and improve

Differentiation-focus: Example

- Luxury cars like Rolls-Royce - Niche smartphones made of diamonds for the super rich

Cost leadership: 2 ways of achieving it?

1) Increasing profits by reducing costs, while charging industry-average prices 2) Increasing market share through charging lower prices, while still making a reasonable profit on each sale

Differentiation: Example

Apple • They focused on customers willing to pay more • Focused heavily on the design, making them look more attractive than competitors • Limited products - IOS only available on Apple devices whereas android is available on pretty much any phone