Porter's Strategic Mix - 3.1.2
Porter's Strategic mix - describes how a company pursues competitive advantage across its chosen market segment by using four generic strategies: mass vs niche and lowest cost vs highest differentiation strategies.
Competitive advantage - An advantage over the competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher price.
Lost-cost positioning - Where a business is able to operate at the lowest unit cost in the market, enabling it to charge lower prices than the competition or earn a higher profit margin
Differentiation positioning - Where a business is able to distinguish its product or service in the minds of consumers as offering better value - perhaps through quality, branding or other attributes that consumers value
Porter suggested two overall business strategies that could be followed in order to gain a competitive advantage:
If a business used one of these strategies to gain competitive advantage than they would be effective in being dominant in the market.
Why is cost leadership potential such an effective strategic positioning?
Problems with Porter's Strategic Matrix include that businesses tend to opearte in a number of ways and grouping them into four is too simplistic to provide a strategy that is useful. It also presumes a market is static, whereas in fact most markets are evolving, particularly dynamic markets such as those based around technology. The approach therefore needs to be one of a number of methods to help create corporate strategy.
Competitive advantage - An advantage over the competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher price.
Lost-cost positioning - Where a business is able to operate at the lowest unit cost in the market, enabling it to charge lower prices than the competition or earn a higher profit margin
Differentiation positioning - Where a business is able to distinguish its product or service in the minds of consumers as offering better value - perhaps through quality, branding or other attributes that consumers value
Porter suggested two overall business strategies that could be followed in order to gain a competitive advantage:
- Low cost
- Differentiation
If a business used one of these strategies to gain competitive advantage than they would be effective in being dominant in the market.
Strategics Positioning with a Low-Cost Strategy
With this strategy, the objective is to become the lowest-cost operator in a market or industry.
This typically involves production of operations of a large scale which enables the business to exploit economies of scale (which therefore reduces unit costs).
- Typically low-cost works at either niche or mass market level.
- Price is a key element of the marketing mix
- A business with the lowest costs can charge the lowest prices but doesn't necessarily have to.
- Operational and financial objectives must focus on cost minimisation
- Typically a lost-cost strategy`` tends to be most suitable for markets offering standard products, products with little differentiation or where branding is relatively unimportant
Mass market - Cost Leadership
Niche market - Focused Cost Leadership
- If selling prices are broadly similar, the lowest-cost operator will enjoy the highest profits
- Lowest-cost operator can also offer the lowest prices (gain market share)
- High levels of productivity and efficiency
- High capacity utilisation
- Large scale = economies of scale
- Use bargaining power to negotiate (or demand) lowest prices from suppliers
- Lean production methods to reduce waste and costs
- Access to the widest and most important distribution channels
- Effective management of technology
Strategic Positioning through Differentiation
With a differentiation strategy, businesses aim to offer a product that is distinctively different from the competition, and where the customer values that differentiation rather than the amount it has cost the business to produce the product.
Mass market - Differentiation
Niche market - Focused Differentiation
There are various ways in which a business can attempt to differentiate its product or service:
- Superior product quality (features, benefits, durability, reliability)
- Branding (strong customer recognition & desire; brand loyalty)
- Wide distribution across all major channels (i.e. the product or brand is an essential item to be stocked by retailers)
- Sustained promotion - often dominated by advertising, sponsorship etc.
- Operational objectives have to focus on R&D and innovation
Some examples of businesses who position themselves through differentiation are:
Problems with Porter's Strategic Matrix include that businesses tend to opearte in a number of ways and grouping them into four is too simplistic to provide a strategy that is useful. It also presumes a market is static, whereas in fact most markets are evolving, particularly dynamic markets such as those based around technology. The approach therefore needs to be one of a number of methods to help create corporate strategy.
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