8.2 Porters Low-cost, differentiation and focus strategies

• According to Porter, a competitive business strategy is about being different
• It involves deliberately choosing a different set of activities to be able to deliver a unique mix of value relative to competitors
• The value a business offers depends on the combination of benefits relative to the price paid
• Also known as Porters Generic Strategies
• Porter argued that the position of a business relative to competitors within its industry determines whether its profitability is high or low
• The ability of a business to earn above-average profits depends on whether it has a sustainable competitive advantage
• A business that is not a cost leader or differentiated is likely to be caught in the middle and not be profitable
• Cost leadership

  • a business aims to become the low-cost producer in its industry
  • it may try to achieve this position through economies of scale, patented technology that makes its processes more efficient or by finding supplies cheaper than competitors can get
  • if a firm can achieve and sustain overall cost leadership, then it will achieve above-average profits if it can charge similar prices to rivals
• Differentiation

  • if a business adopts a differentiation strategy it seeks to be unique in its industry
  • it chooses one or more benefits that buyers value and seeks to meet these better than competitors
  • it charges a premium price
• Focus

  • if a business adopts a focus strategy, it concentrates on one segment within the market
  • the target segment may be different from the rest of the market because buyers have unusual needs
  • by pursuing a focus as a strategy, a firm picks a segment of the market that is poorly served by main businesses and then adopts either cost-leadership or a differentiated strategy
• Criticism

  • porters generic strategies have been criticised for producing a range of strategic positions that is too limited
• Influences on the choice of strategic position position

  • the strengths and competencies of the business
  • the external environment
  • where competitors are positioned