aqa gce business studies a2 unit 3 strategies for success selecting markets & marketing...

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


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


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?



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




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




Significant price competition

Sell standard, homogenous product readily available from rivals

Customers price sensitive or have significant purchasing power

When is it Appropriate?



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



Customers may perceive product / service to be lower quality than others in the marketplace

Disadvantages


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



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



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



Differentiation

significant competition

do not sell standard, homogenous product ie scope for differentiation

customers not price sensitive

When is it Appropriate?


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


Differentiation

Finding ways that are difficult for competitors to imitate – difficult, costly

Customers increasingly sophisticated, tastes can easily, frequently change - necessitates ongoing investment

Disadvantages


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?


Focus

Better understanding of: customers and needs

Thus more: efficient allocation of resources rapid response to change

Advantages


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


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


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

aqa gce business studies a2 unit 3 strategies for success selecting markets & marketing...

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