AQA GCE Business Studies
A2 UNIT 3
STRATEGIES FOR SUCCESS
SELECTING MARKETING STRATEGIES
Porter’s Generic Strategies: Low
Cost versus Differentiation
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Introduction
All successful firms have a competitive
advantage (CA)… something which makes
them stand out from their rivals
Porter identified 3 generic strategies through which
CA can be achieved:
 Cost leadership
 Differentiation
 Focus
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Low Cost – Cost Leadership
What is It? How can it be Achieved?
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
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Low Cost – Cost Leadership
What is It? How can it be Achieved?
Often involves producing / selling large
volumes of standard ‘no frills’ product
service - benefit from economies of scale
Emphasis on minimising costs eg through:
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New technology, production methods
Re-locating some or all of business
Outsourcing non-core / critical activities
Fw / bw vertical integration
Raising productivity, capital utilisation
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Low Cost – Cost Leadership
What is It? How can it be Achieved?
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
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Low Cost – Cost Leadership
When is it Appropriate?
 Significant price competition
 Sell standard, homogenous product
readily available from rivals
 Customers price sensitive or have
significant purchasing power
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Low Cost – Cost Leadership
Advantages
Price advantage - sales, market share;
or above average profit
Other advantages:
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Deter new entrants
Force out new entrant
Defend against substitutes
Cope with pressure to reduce prices
Cope with increase in costs
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Low Cost – Cost Leadership
Disadvantages
Customers may perceive product /
service to be lower quality than
others in the marketplace
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Differentiation
What is It? How can it be Achieved?
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
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Differentiation
What is It? How can it be Achieved?
a) Actual (physical) advantages eg:
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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:
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Through branding, advertising
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Differentiation
What is It? How can it be Achieved?
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
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Differentiation
When is it Appropriate?
 significant competition
 do not sell standard, homogenous
product ie scope for differentiation
 customers not price sensitive
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Differentiation
Advantages
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
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Differentiation
Disadvantages
 Finding ways that are difficult for
competitors to imitate – difficult, costly
 Customers increasingly sophisticated,
tastes can easily, frequently change necessitates ongoing investment
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Focus
What is it?
Focusing on small part of overall market,
and succeeding either through:
 Cost leadership
or
 Differentiation
within that small sector of overall market
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Focus
Advantages
Better understanding of:
 customers and needs
Thus more:
 efficient allocation of resources
 rapid response to change
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Focus
Advantages
Focus differentiation - helps secure
customer loyalty, gain leadership in a
particular segment, maximise profits
NB high customer loyalty:
discourages new entrants
protects against substitutes
FD also: reduces power of large firms as
generally few alternatives
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Focus
Disadvantages
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
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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 use
hybrid 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
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