Porter's Generic Strategies (DP IB Business Management): Revision Note

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'

Porters generic matrix

• 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 cost leadership

 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

Ways to achieve differentiation

 Evaluating differentiation

Niche market strategies

• Businesses that operate in 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

Evaluating niche market strategies