Porter's Generic Stratergy

Porter's Generic Stratergy

1. Porter identified 3 generic strategies which competitive strategies can be achieved.

   • Cost leadership- Drive costs as low as possible.
   • Differentiation- Unique products, a brand that stands out.
   • Focus- Specialisation- pick a specific customer to target.

2. Cost leadership

   • Through offering the lowest-priced product/ service.
   • Higher than average profit.
   • Involves producing/ selling large volumes of standard 'no frills' products which benefit from economies of scale.
   • Emphasis on minimum costs through New technology, Outsourcing non-critical activities, Raising productivity.
   • They tend to have few layers so STREAMLINED, encourage responsibility so profit centres, implement tight cost controls (budgets),
   • They use price competition, sell standard products to customers who are price sensitive.
   • Advantages: Price advantage or above average profit, deter new entrants, force out new entrants, cope with pressure to reduce prices.
   • Disadvantages: Customers may perceive product/ service to be of lower quality than others in the marketplace.

3. Differentiation

   • Making the product/ service look distinctively different to competitors in eyes of customer and in ways valued by customers.
   • In order to increase profits through charging higher prices or Increase market share through offering better product than rivals at same price.
   • Can be achieved physically though design, better packaging, better quality materials, additional features and psychologically though branding and advertising.
   • It requires thorough awareness, appreciation of target market, in-depth knowledge on competitors, innovation. It requires investment in R&D, training.
   • It is appropriate when there is significant competition, when they do not sell standard products so there's scope for differentiation, customers not price sensitive.
   • Advantages: Allows higher prices so greater profits or attract more custom- sales, market share. Can build customer LOYALTY and there are less close substitutes.
   • Disadvantages: Finding ways that are difficult for competitors to copy is difficult and costly, customers tastes can change easily and frequently so ongoing investment is necessary.

4. Focus

   • Focusing on small part of overall market and succeeding through cost leadership or differentiation within the small sector of an overall market.
   • Advantages: Better understanding of customers and needs so can response to rapid response,
   • Advantages of focus differentiation is it helps secure customer loyalty, gain leadership in a particular segment, maximise profits. Discourages new entrants and protects against substitutes.
   • Disadvantages: Lower volume so lower sales and less power with suppliers and risk of imitation plus market changes means changes in market segment so can mean a need for change in strategy.