7 Low Cost vs Differentiation

AQA GCE Business Studies:

AQA GCE Business Studies A2 UNIT 3 STRATEGIES FOR SUCCESS SELECTING MARKETING STRATEGIES Porter’s Generic Strategies: Low Cost versus Differentiation © APT Initiatives Limited, 2009

Introduction:

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

Low Cost – Cost Leadership :

Low Cost – Cost Leadership 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 What is It? How can it be Achieved?

Low Cost – Cost Leadership :

Low Cost – Cost Leadership Often involves producing / selling large volumes of standard ‘no frills’ product service - benefit from economies of scale Emphasis on minimising costs eg through: New technology, production methods Re-locating some or all of business Outsourcing n on-core / critical activities Fw / bw vertical integration Raising productivity, capital utilisation What is It? How can it be Achieved?

Low Cost – Cost Leadership :

Low Cost – Cost Leadership 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 What is It? How can it be Achieved?

Low Cost – Cost Leadership :

Low Cost – Cost Leadership Significant price competition Sell standard, homogenous product readily available from rivals Customers price sensitive or have significant purchasing power Wh en is it Appropriate?

Low Cost – Cost Leadership :

Low Cost – Cost Leadership Price advantage - sales, market share; or above average profit Other advantages: Deter new entrants Force out new entrant Defend against substitutes Cope with pressure to reduce prices Cope with increase in costs Advantages

Low Cost – Cost Leadership :

Low Cost – Cost Leadership Customers may perceive product / service to be lower quality than others in the marketplace Disadvantages

Differentiation:

Differentiation 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 What is It? How can it be Achieved?

Differentiation:

Differentiation Actual (physical) advantages eg: Design - better performance, look Additional features Better quality materials Better packaging Easier access Faster, more reliable delivery After sales services Perceived (psychological) advantages eg: Through branding, advertising What is It? How can it be Achieved?

Differentiation:

Differentiation 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 What is It? How can it be Achieved?

Differentiation:

Differentiation significant competition do not sell standard, homogenous product ie scope for differentiation customers not price sensitive When is it Appropriate?

Differentiation :

Differentiation 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 Advantages

Differentiation :

Differentiation Finding ways that are difficult for competitors to imitate – difficult, costly Customers increasingly sophisticated, tastes can easily, frequently change - necessitates ongoing investment Disadvantages

Focus :

Focus Focusing on small part of overall market, and succeeding either through: Cost leadership or Differentiation within that small sector of overall market What is it?

Focus :

Focus Better understanding of: customers and needs Thus more: efficient allocation of resources rapid response to change Advantages

Focus :

Focus 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 Advantages

Focus :

Focus 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 Disadvantages

Closing Comments:

Closing Comments Porter stresses danger of not using single strategy – risk being “stuck in middle” failing to develop CA However… r ecent 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