Teaching guide: Porter's strategies

This highlights the strategic decisions of managers in terms of the scope of the business’ activities and the positioning within the market.

Model/theory

Key points

Michael Porter analysed the different strategies that businesses might adopt.

Porter argued that the position of a business relative to competitors within its industry determines whether its profitability is above or below the industry average. The ability of a business to earn above average profits depends on whether it has a sustainable competitive advantage.

There are two basic types of competitive advantage a firm can possess: low cost or differentiation. A business may adopt these strategies in many different segments or focus on a specific niche. A business that is not a cost leader or is not differentiated is likely to be ‘caught in the middle’ and not be profitable.

Cost leadership

When adopting a cost leadership strategy a business aims to become the low cost producer in its industry. It may try to achieve this position through economies of scale, patented technology that makes its processes more efficient or by gaining control over supplies. If a firm can achieve and sustain overall cost leadership, then it will achieve above average profits if it can charge similar prices to its rivals.

Differentiation

If a business adopts a differentiation strategy it seeks to be unique in its industry. It chooses one of more benefits that buyers value and seeks to meet these better than competitors. In return, it charges a premium price.

Focus

If a business adopts a focus strategy it concentrates on one segment within the market.The target segment may be different from the rest of the market because buyers have unusual needs.

When you can use this

When teaching strategic choices you could discuss why a business chooses one strategy rather than another and what enables a business to retain a competitive advantage over time. You could also discuss the link between the overall strategy of a business and the functional decisions.