Porter's Generic Strategies (HL IB Business Management)

• Porter’s Generic Matrix identifies a range of strategies a business can utilise to increase their success
• The matrix considers two factors 
  • Its source of competitive advantage (cost or differentiation)
  • The scope of the market in which it operates (mass or niche)
     
• Porter's generic strategies provide a clear framework for businesses to determine the most appropriate strategy to succeed in the mass market or within a smaller niche market
  
  
• It emphasises the importance of developing distinctive capabilities and avoid being 'stuck in the middle'
     

A Diagram to show Porters Generic Matrix

Porter's generic matrix identifies suitable strategies for mass and niche markets

• The model encourages businesses to make strategic choices that are difficult for competitors to copy
• Pursuing one strategy forces the business to make explicit choices about its direction and concentrate on it
• The model does not offer guidance to businesses on specific tactics or implementation
• The model often overlooks external factors such as technological change, economic conditions and changes in laws which could  impact competitive position
  

Stuck in the Middle

• Porter argued that failing to adopt one of the strategies risks a business being ‘stuck in the middle'
  • This means it is unable to compete successfully with rivals in the market because each strategy is different
  • A business should select its strategy and concentrate its resources on pursuing it rather than simply responding to its competitors actions
    
    
• Pursuing a mixture of strategies is also not feasible in the long term
  • For example, cost leadership and differentiation are unlikely to be financially compatible
    • Low prices combined with high quality can negatively affect consumer perceptions of the product

Cost Leadership

• Most suitable for businesses that have a significant cost advantage over rivals 
  
  • Cost leadership with parity is where a business has lower costs than rivals but charges the same price
    • Examples include hotel chains such as Premier Inn and Ibis Styles
  • Cost leadership with proximity is where a business has lower costs and charges a lower price than rivals
    • Examples include budget airlines such as Southwestern and Ryanair
       

Evaluating the Cost Leadership Strategy

Advantages	Disadvantages
Economies of Scale Cost leadership involves large-scale production and lower unit cost Competitive Pricing Cost leaders can offer lower prices than their competitors which attracts more customers  Barriers to Entry New rivals struggle to fund required capital investment	Risky May result in a  price war if more than one business in a market pursues this strategy Quality Concerns Low costs/prices are often linked to poor quality

 
Differentiation

• Businesses that cannot be the most competitive on cost should make its products distinct from those of rivals
• Successful differentiation allows a business to charge a premium price and achieve a high profit margin
• Examples of businesses that adopt a mass market differentiation strategy include Coca Cola, Samsung and Volvo
  • Coca Cola's trusted and well-known branding includes its logo, brand colours and characters such as the Coca Cola truck
  • Samsung's cutting-edge mobile phones have the most advanced package of technical features in the mass market
  • Volvo's focus on safety and build quality allows it to charge premium prices in the mass market
     

A Diagram to show ways to Achieve Differentiation

Businesses can achieve differentiation through branding, customer service, design features and quality

 
Evaluating a Differentiation Strategy

Advantages	Disadvantages
Premium Pricing Customers are willing to pay more for unique features, quality or brand image Brand Loyalty A strong brand image can lead to less price-sensitive loyal customers Fewer Competitive Pressures A differentiated product is difficult for rivals to imitate	High Costs Researching, developing and maintaining unique features requires significant budgets Customer Preferences Fashions, trends and customer preferences change over time

 

• Business that operates in a niche markets should adopt one of two focus strategies that closely meet the needs of its specific group of customers

Cost focus strategy 

• A cost focus involves being the lowest cost competitor within the market niche
  • Examples of businesses that adopt a cost focus strategy include Carnival Cruise Line and Glasses Direct
    
    • Carnival Cruises sells cruises to locations including the Caribbean and Europe and is well-known for it's eye-catching low fares that can be offered due to its fleet of smaller vessels that operate at full capacity
    • Glasses Direct is an online retailer of spectacles that sells popular styles of lesser-known brands at very low prices as a result of its low overhead costs
      

Differentiation focus strategy

• A differentiation focus involves offering specialised products within the niche market
  • Examples of businesses that adopt a differentiation focus strategy include Hotel Chocolat and Brompton Bicycle Retail Ltd
    • Hotel Chocolat sells a range of premium, fair-trade celebration confectionary in its chain of beautifully-designed retail outlets
    • Brompton Bicycle Retail sells innovative products such as the folding bicycle that closely meet the needs of its wealthy commuter target market
       

An Evaluation of Niche Market Strategies

Strengths	Weaknesses
Focusing on a specific niche allows a business to tailor its products or services to a particular audience Can be highly profitable as low competition allows high prices to be charged Serving a niche market well can lead to strong customer loyalty	Focusing on a small segment limits sales potential If the niche market shrinks or changes the business may struggle to break even Larger competitors might enter the niche market and outcompete the focused business.