Question

Discuss Porter’s two strategies for businesses and provide some examples of where each
can be adopted. Discuss whether one business can adopt both strategies simultaneously.

Answer 1

Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage.

Lets talk about two strategies here,

a) Cost Leadership

b) Differentiation Focus

Cost Leadership

With this strategy, the objective is to become the lowest-cost producer in the industry.

The traditional method to achieve this objective is to produce on a large scale which enables the business to exploit economies of scale.

Why is cost leadership potentially so important? Many (perhaps all) market segments in the industry are supplied with the emphasis placed on minimising costs. If the achieved selling price can at least equal (or near) the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits.

This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are readily acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.

The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers.

Differentiation Focus

In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments.

The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers.

The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants.

Great examples of a differentiation leadership include global brands like Nike and Mercedes. These brands achieve significant economies of scale, but they do not rely on a cost leadership strategy to compete. Their business and brands are built on persuading customers to become brand loyal and paying a premium for their products.