U4 AOS 1: Porter’s Generic Strategies

Question 1

What are Porter’s generic strategies?

Answer 1

Porter found that in response to competition, a business may wish to gain its own competitive advantage. Cost advantage and differentiation advantage.

Question 2

What is lower cost strategies?

Answer 2

A strategy where a business aims to become the LOW cost producer in its industry.
- Reducing direct and indirect costs
- Improving efficiency
- Controlling areas of management responsibility

Question 3

How is reducing direct and indirect costs a lower cost strategy?

Answer 3

• Reducing wages (minimising wage costs)
• Reducing the cost of interest (perhaps by refinancing)
• Reducing the cost of suppliers/stock (sourcing from cheaper suppliers, or offering minimal packaging)

Question 4

How is improving efficiency a lower cost strategy?

Answer 4

• By minimising idle stock on shelves (not stocking products that do not sell)
• Using assets more efficiently (quick turn over of restaurant tables)
• Operating at economies of scale

Question 5

How is controlling areas of management responsibility a lower cost strategy?

Answer 5

• A business might check areas of business such as finance, operations, human resources, sales, and marketing and information

Question 6

What are the advantages of lower cost strategies?

Answer 6

• A business may become profitable, as profit per unit can increase
• A business may be able to prevent competitions from increasing their market share if they can’t match costs or prices
• A business may save money on some costs to allow expansion or development of new lines
• Saving can be put towards differentiation at later date

Question 7

What are the disadvantages of lower cost strategies?

Answer 7

• Sales may fall as customers may perceive a product as being poor quality
• A business may lose its market share if other businesses copy the low-cost approach
• Lowing costs now means there is little room to make changes in the future
• Lowering costs may make it difficult to differentiate in the future if the cost advantage disappears

Question 8

What are differentiation strategies?

Answer 8

Differentiation strategy is where a business seeks to become unique in its industry that is valued by consumers.

Question 9

How is high-quality products a differentiation strategy?

Answer 9

• By ensuring that quality is better than that of competitors. (More durable, reliable, better support or offering extended warranties)

Question 10

How is multiple branding a differentiation strategy?

Answer 10

• By providing different brands in the same market
• This would involve providing similar products with very subtle differences that would appeal to different customers

Question 11

How is innovation/research and development a differentiation strategy?

Answer 11

• Developing a product with unique features that no other business currently produces
• This will involve identifying a market that is not yet filled and providing the product before competitors do

Question 12

What are the advantages of differentiation strategies?

Answer 12

• Differentiation is a way to improve the way a business connects with customers, and can develop customer loyalty
• If able to charge a premium price, the business can make revenue gains
• By developing customer loyalty, market share can be increased

Question 13

What are the disadvantages of differentiation strategies?

Answer 13

• Rival businesses can copy the differentiated approach, negating any gains
• Differentiation has an initial cost that must not outweigh the benefits
• Differentiation can be a time-consuming process, and during that time consumer tastes or preferences may change