| What is Michael Porters generic competitive strategies? | Michael Porter’s generic strategies are strategy “archetypes” i.e. hold across many kinds of industry and business situations. To gain competitive advantage, the firm must be able to create greater value for customers than competitors do. Two fundamental means of achieving this:
1. lower costs
2. products or services that are differentiated in ways that are so valued by customers that company can charge higher prices |
| What is the Cost leadership strategy about? | Cost-leadership strategy involves becoming the lowest-cost organisation in a domain of activity. This can be achieved through:
• Lower input costs. (Goods and labour)
• Economies of scale (The cost advantage of the more you produce, the lower average cost per good, especially producing at MES)
• Economies of experience (Gains in labour productivity as staff learn to do things more cheaply over time (learning effect)
• Economies of product/process design (Costs are saved through more efficient designs or equipment as experience shows what works best.)
It is a broad target / lower cost strategy, (See pic) |
| What are the implications and risk/dangers of the cost leadership strategy? | Two implications for this business strategy:
1. Entry timing matters: early entrants into a market will have experience that late entrants do not yet have and so will gain a cost advantage.
2. It is important to gain and hold market share. Firms with higher market share have more ‘cumulative experience’ simply because of their greater volumes.
There are however some risks and dangers from being competitive only by having the lowest costs:
1. Must be lowest! Having the second-lowest cost structure implies a competitive disadvantage against somebody You are always at risk of being undercut on price
2. Low cost strategy cannot be pursued in total disregard for quality. Cost-leader has to meet market or regulatory standards |
| Why can quality be difficult to manage at low costs? How does it relate to the cost leadership strategy? | Further, it can be difficult to manage quality at low cost:
1. Quality-parity option: provide equivalent quality in terms of product or service features. The cost leader can then charge the same price as rivals and make higher profits (from lower costs)
2. Quality-proximity option: provide slightly lower quality in terms of of product or service features. The cost leader can then offer a slightly lower-than-market price and still make higher profits. |
| What is the differentiation strategy? | Differentiation strategy involves providing uniqueness that is sufficiently valued by customers to allow a price premium Key drivers of differentiation are:
• Product and service attributes: providing better or unique features or options or locations etc.
• Customer relationships: providing better or unique customer service and responsiveness; or customisation
• Reputation: providing better or unique image and prestige
• Complements: building on unique linkages with other products/services (Apple and iTunes).
It is a broad target / differentiation strategy (See pic) |
| What are the risks and dangers of the differentiation strategy? | There are some risks and dangers of this strategy:
1. Differentiation requires additional investment (per unit of sale) = Higher costs. This must be recouped in an actual higher-price sale
2. Beware of competitor who can replicate your differentiation at lower cost |
| What is the focus strategies? | A focus strategy targets a narrow scope / specific segment using either cost leadership or differentiation as the way of targeting.
The focus player achieves competitive advantage by serving specific segments or areas better than those covering that segment as part of a broad portfolio. Focus builds specialist knowledge; can improve brand recognition and customer loyalty
Per Porter, you don’t get Focus on its own: goes along with Cost or Differentiation So there are two types of focus strategy:
1. Cost + focus strategy (e.g. Ryanair).
2. Differentiation + focus strategy (e.g. Nutrogena; Ecover eco cleaning) |
| What is the cost + focus strategy? | Cost+focus players identify areas where broader cost-based strategies fail because of the added cost of trying to satisfy a wide range of needs.
A cost+focus player attacks a particular segment by way of cost leadership. e.g. Tesco aims for cost leadership in all areas. Iceland Foods focuses on frozen goods; outcompetes supermarkets due to specialized cost-focus strategy |
| What is the differentiation + Focus Strategy? | General differentiation strategy: uniqueness sufficiently valued by customers to allow a price premium (e.g. BMW). Differentiation+focus provides uniqueness in a particular narrow segment. (ARM Holdings in the market for mobile phone chips; Auna microphones, etc). |
| What are the threats and dangers of a focus strategy? | 1. Main threat to a focus strategy is the size (or very existence) of the focus segment: Will the the segment continute to exist, and can its needs be served economically (either on a cost+focus basis, or on a differentiation+focus basis)?
2. Also, same threats as specified for Cost or Differentiation |
| Can you be in the middle of the TWOS matrix? | As argued by Porter, there is a fundamental trade-off between cost-leadership and differentiation (with or without focus). Firms cannot do both. Doing both creates the danger of stuck in the middle, and then you are not good at any (Hence, you lose competitiveness).
But… some companies manage both e.g. Southwest Airlines, is low-cost, but is (was) also differentiated in terms of frequency and customerrelations.“Hybridstrategy”seems possible in some instances.
Example of how low cost and differentiation can work:
1. Differentiation increases cost
2. But, differentiation increases demand (Broader appeal, price inelasticity, brand loyalty) Sales volume increase
3. Unit costs fall with increasing sales volume (Economies of scale, economies of scope: Learning effects)
4. Differentiation leads to lower unit costs because sales volume rise
5. Diagram: Profit goes from abcd to aegf
6. BOOM! Differentiation and low cost goes hand in hand here. |
| How can a "hybrid" TOWS strategy work? | Example of how low cost and differentiation can work:
1. Differentiation increases cost
2. But, differentiation increases demand (Broader appeal, price inelasticity, brand loyalty) Sales volume increase
3. Unit costs fall with increasing sales volume (Economies of scale, economies of scope: Learning effects)
4. Differentiation leads to lower unit costs because sales volume rise
5. Diagram: Profit goes from abcd to aegf
6. BOOM! Differentiation and low cost goes hand in hand here. |
