Porter's Generic Strategies (DP IB Business Management)

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Lisa Eades

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Porter's Generic Strategies

  • 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'
       

Diagram: porters generic matrix

A diagram to show Porter's Generic Matrix which identifies growth strategies for mass and niche markets
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

Mass Market Strategies

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
       

Diagram: ways to achieve differentiation

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

 

Niche Market Strategies

  • 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.

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