Porter Generic Stratey Essay

The key drivers of competitive advantage are cost leadership and differentiation product †¢COMPETITIVE STRATEGY- the means by which an organisation seeks to achieve and sustain a competitive advantage†¦Ã¢â‚¬ ¦ Porter suggests that competitive strategy means taking an offensive or defensive action to create a defendable position to cope with the competitive forces- this would lead to greater returns †¢Porter suggests that a firm’s strengths fall into two headngs; cost advantage and differentiation. By applying these strengths in a broad or narrow focus, three generic strategies result: COST LEADERSHIP, DIFFERENTIATION AND FOCUS†¦Ã¢â‚¬ ¦they are generic because they are not specific to a firm or industry. †¢4 strategies to gain a competitive advantage: COST LEADERSHIP-(superior profits through lower costs), DIFFERENTIATION-(higher profits by adding value the products areas that are of real significance for customers who are willing to pay a premium price), FOCUS STRATEGY-(concentrate on a specific area on the market) †¢COST LEADERSHIP- concentrates on becoming the lowest cost producer through economies of scale. With this, the organisation can compete on price with the potential to earn higher unit profits. Cost reduction provides the focus for the orgaisations strategy. Competitive advantage is achieved by driving costs down. There is room for only one cost leader †¢Firms that succeed in cost leadership have the following strengths: access to capital to make big investment, design skills, high level of expertise in manufacturing process, efficient distribution channels †¦. EXAMPLES- RYANAIR, TOYOTA, TESCO, AND WALMART †¢Cost leadership is often seen as a strategy that aims to attract customers with low prices made by low costs†¦.. ut this doesn’t necessarily mean the lowest selling price, but due to low costs, the profit margins are higher †¢DIFFERENTIATION- this strategy calls for a development of a product or service that offers unique and valued attribute by customers. The customers believe that the product is different than rivals. – the uniqueness gives a product added value which enables companies to charge a higher price premium. Successful differentiation- differentiating products from competitiors, charging a higher price†¦. an base differentiation on omage, durability, after-sales customer service/ needs strong R&D †¢HOWEVER, adding value increases a firms cost base for a product which reduces the unit profit margin- these costs can only be recouped if the consumer is willing to pay the premium price. Also, customers must recognise these differences†¦. EXAMPLES: BMW, MIELE (HIGHER QUALITY DOMESTIC APPLIANCES), BANG AND OLUFSEN, MERC, ETC †¢Benefit – a chance of charging a premium price, demand for differentiated less elastic, above average profits, additional barriers to entry? Risks – difficult to sustain, higher costs, risk of creating differences, comsumers may become too price sensitive, compititors who attain a focus strategy may achieve greater differentiation. †¢FOCUS STRATEGY- Like differentiation, but organisation concentrates on one or more segments of the market, this may offer the firm more security for achieving its competitive advantage†¦. However there are specific requirements for the focus strategy†¦. Firms benefit form specialisation, differentiation on a lower scale, so the costs are lower than full scale differentiation