4.5 - Porter's generic stratergies

Question 1

what is competitive advantage

Answer 1

is where one business is in a more favourable position, relative to its rivals and becomes more popular with customers due to lower cost or differentiation. Businesses can compete on cost/quality or speed of delivery.

Question 2

what is sustainable competitive advantage

Answer 2

is where one business is in a more favourable position and is able to stay in that position long term with its potential customers due to lower cost or differentiation

Question 3

what is generic strategy

Answer 3

Porter’s is a generic strategy because it can be applied to all industries and businesses of all sizes and therefore has a general application

Question 4

what is price sensitivity

Answer 4

The impact that a change in price will have in changing buyer choice to purchase. A price sensitive product will lose a lot of market share if they increase the price of their product whereas a product that is not price sensitive can introduce price increases without a dramatic reduction in customer base.

Question 5

what is economies of scale

Answer 5

Where a business is able to benefit from buying raw materials in bulk and lowering their unit cost by mass producing a good or service.

Question 6

describe porters theory

Answer 6

Porter’s Generic Strategies can be applied businesses of all sizes and helps a business to decide whether to achieve competitive advantage by reducing production costs to increase profit margins-Lower Cost Strategy or making its products or services more unique, and higher quality, therefore appealing to customers more than competitor products- Differentiation Strategy.

Porter says that a business must complete a five-force analysis which looks at supplier power, buying power, competitive rivalry, threat of substitution and threat of new entry in order to decide which strategy to apply (Lower Cost or Product Differentiation)

Question 7

how to use SWOT Analysis to plan for change

Answer 7

A SWOT analysis is a planning tool that helps senior management to develop a strategic (long term, 3-5 years) objective. A business gauges its current position by analysing its strengths and weaknesses and consider the impact of any future changes by identifying opportunities and threats. A SWOT analysis can be used to support a five-force analysis to determine which of Porter’s Strategies (either Lower Cost or Differentiation) will be more suitable for a business.

Question 8

how to analyse a business using a five-force analysis

Answer 8

Porter’s 5 force analysis helps a business understand its competitive power and make decisions about which strategy is best suited to the business (lower cost or differentiation)
Supplier power (how many suppliers, how much power they have to drive prices up (or not), how easy a business can change supplier)
Buyer power (the size of the customer base, how easy it is for buyers to drive down prices (or not), how flexible customers are to price change
Competitive rivalry (the number and flexibility of rival businesses, how similar the competitors product/services are)
Threat of substitution (how easy customers can find a similar or improved product to replace the good or service)
Threat of new entry (how quickly can a competitor enter the market and gain market share)
Porter suggests that businesses compare the SWOT analysis with the results of the 5 force analysis in order to decide which strategy to use (lower cost or differentiation)

Question 9

what is porters lower cost strategy

Answer 9

Porter’s Lower Cost Strategy involves gaining a competitive advantage by increasing the gap between the selling and cost price (increasing the margin) by reducing the costs associated with producing a good or service. The Lower cost strategy helps to increase profits relative to competitors by reducing costs while charging industry-average prices.

The strategy involves more than just being the lowest cost seller or producer in a particular market, as doing so can leave a business open to threats from competitors that might undercut the business’s prices, which will prevent it from increasing its market share.
This strategy also emphasises efficiency. By producing or selling high volumes of standardised products, businesses hope to take advantage of economies of scale. Such products are often basic, no-frills goods that are produced at a relatively low cost and made available to a large customer base.

Question 10

advantages of lower cost strategy

Answer 10

Cost reductions should increase profitability due to the business identifying strategies to remove cost or waste in the whole production system.

Increase in market share(increased sales) due to customers viewing the business as low cost resulting in higher volume of sales.

Question 11

disadvantages of lower cost strategy

Answer 11

Business reputation may be labelled as ‘cheap’ (hard to change this perception) resulting in less sales.

Lowering cost could reduce quality and increase customer complaints resulting in less sales and lower productivity as the business must spend time dealing with complaints.

Question 12

Strategies to implement Lower Cost Strategy

Answer 12

• Choosing a cheaper supplier with access to low-cost raw materials or components (an efficient supply chain
• Asset utilisation: using technology to replace labour costs and speed up production/services.
• Low direct and indirect operating costs: using fewer parts or reducing the size or variety of products, mass production, buying in bulk and benefitting from economies of scale, reduction of customer services or streamlining.
• Whole organisation focus on cost reduction, lean management, waste minimisation, just in time
• Preferential access to the best or limited supplies of raw materials or components
• Process engineering skills (the ability to design, test and upgrade systems and processes)
• Products designed for ease of manufacture
• Close supervision of labour
• Tight cost control
• Incentives based on quantitative targets.

Question 13

What is Porter’s Differentiation Strategy

Answer 13

Porter’s Differentiation Strategy involves a business making its products or services more unique, and higher quality, with successful branding making the goods or services highly valued by buyers and difficult for competitors to replicate. Premium pricing will increase the margin between selling price and costs of production creating a competitive advantage with the business outperforming rivals within the industry.

In using the differentiation strategy a business seeks to be unique within its industry or market segment. This usually means the product has characteristics or attributes that are highly valued by buyers and perceived as important. The uniqueness of the product or attribute is rewarded by a premium price.
Using the strategy, product uniqueness and attractiveness is developed to engage customers, for example promoting a product’s durability, focusing on the support system for a service or good or emphasising particular features or functions of the product. Another way of differentiating a product is through brand image, which involves creating meaningful connections with customers to ensure long-term loyalty. Businesses that differentiate their products from their competitors’ products want to meet customers’ unique needs, and are rewarded with premium prices.

Question 14

advantages of porters differentiation strategy

Answer 14

• Increase in market share (increased sales)due to meeting/exceeding the customer’s needs (quality, innovation etc.)
• Differentiation strategies should increase profitability as premium pricing can be used, increasing the sales price of goods/services once brand success and loyalty is achieved

Question 15

disadvantages of porters differentiation strategy

Answer 15

• Business reputation may be labelled as ‘expensive’ or out of reach of many customers (hard to change this perception) limiting the potential customer base
• Increasing quality or investment in branding and marketing can be costly and reduce profitability (especially if unsuccessful)
• If the product or service is copied, the business may lose its competitive advantage.

Question 16

what are strategies to achieve porter’s differentiation strategies

Answer 16

• Marketing: establishing a brand or reputation that is highly desireable (strong marketing skills ) with communication channels to communicate the importance of the differentiating product’s characteristics
• Focus on high quality products or services to customers (highly skilled, creative employees)
• Research, development and innovation. Be a leader of products that are unique and cannot be copied.
• Strong research and development skills, advanced technology
• Advanced product engineering skills
• Sound distribution channels
• A culture of continuous improvement and innovation

Question 17

similarities in porters strategies

Answer 17

• Both lower cost and differentiation aim to improve the ability of a business to achieve a competitive advantage and capture more of the industry sales relative to its rivals within the industry.
• Both lower cost and differentiation will enable a business to improve its profitability as lower costs allow a higher return per good/service sold and differentiation allows for higher prices and increased sales due to customer loyalty also increasing profitability.

Question 18

differences in porters strategies

Answer 18

• Lower cost is successful when high volumes of products/services are sold due to supplying a cheaper price to a businesses competitor whereas differentiation is successful when a business charges a premium (higher) price for its goods/services without the need, necessarily for high volume sales.
• Lower cost customers tend to be price sensitive and therefore not brand loyal if product/service prices increase whereas differentiation approach creates brand loyalty and customers tend not to be price sensitive if product/service prices increase.

Question 19

what is equilibrium

Answer 19

According to Lewin’s Force Field Analysis, all businesses facing change need to move out of equilibrium where driving and restraining forces are equal and by supporting the driving and overcoming the restraining, a business will move out of equilibrium and be able to successfully introduce change.

Question 20

what is asset utilisation

Answer 20

Using business resources such as equipment, buildings/facilities or technology in the most efficient way

Question 21

what is margin

Answer 21

is the difference between the selling price and the cost price. A lower cost strategy requires a business to sell volume product at a lower ‘margin’ whereas a differentiation strategy involves a business having a higher selling price (premium pricing) with lower volume of sales but a higher margin (greater profit)

Question 22

what is competitive edge

Answer 22

is where one business is in a more favourable position with its potential customers due to lower cost or differentiation

Question 23

what is competitive scope

Answer 23

is when a business determines whether to choose a narrow target market (niche market) or a broader target market.