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Strategic Management Paper1

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Question 1 Porter’s generic strategies

Page 3

Question 2 Components of a vision and mission statement

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Question 3 Alternative strategies

Page 10

Question 4 Value chain analysis, different functions of management

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Question 5 Value of resources, the resource based view

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Research / Bibliography

Page 23

Question 1

Michael Porter is considered the mastermind of competitive strategies application. Starting in the early 1980s, he published three books that developed and outlined successful strategies and how to apply them. His most popular books cover his three theories of generic strategy, cost leadership, differentiation, and focus.

The first generic strategy is cost leadership where a firm organises its value adding activities so as to be the lowest cost producer of a product or service in its industry.

The product does not need to be special or different; instead, the attractiveness to the consumer is the price. For instance, Shoprite employs a cost leadership strategy. Its stores are very basic, located in low rent areas and carry a limited range of products. This enables the company to charge a lower price than competitors.

Firms that focus on applying cost leadership must work to cut down on costs in all areas; by combining and sharing resources already in-house. Using firm leverage across all departments is also a strong cost-saving measure, and cutting back on waste must be a company-wide goal. Another angle to costs advantages would be to improve process efficiencies, and to make wise outsourcing decisions. A strong point of this strategy is gaining market share by charging lower prices than the competitors, whilst the main weak point would be competitor-copying, (due to high research and development costs) meaning an overall lowering of price across the market.

The second strategy is differentiation, which emphasises the creation of unique product or service features which persuade customers that it is superior to competitors' offerings. Differentiation is based upon organising value chain activities in such a way as to create differentiated products or services. If the market is flooded with similar products at similar prices, a means of drawing business would be to create a more specific product that would draw consumers willing to pay a higher price for a better-developed product. This strategy can only be implemented with the involvement of highly paid scientists and designers as well as the strong coordination of the research and development and marketing functions of the company.

Differentiation can be achieved by developing superior products on the basis of their design, performance, after sales service and distribution channels. Success in this strategy would include higher profits and customer loyalty, while the downside includes an expensive product that is not valued by consumers or is quickly copied by competitors.

BMW and Mercedes employ differentiation strategies, organising their value adding activities so as to create modern design, high technology, high quality products which command premium prices.

The third strategy is focus, which plays on the differences in consumers in the market, not specific products. If a whole segment of the market can be catered to and consumer loyalty develops without extreme narrowing of product or service, the strategy would be successful. Focus strategies are aimed at meeting the distinct preferences of a large group, or defining a product to better serve a larger group of consumers, even though the market share may be smaller. Success is found when consumers are drawn in and retained, and competitors do not copy the strategy. The downfalls include losing consumers due to preference changes, and losing business in the broader market.

The British car manufacturer TVR employs a differentiation focus strategy targeting the market for high performance cars. Whereas BMW and Mercedes target several segments of the market for motor vehicles, TVR currently target only one segment, selling their products on the basis of their exceptional performance rather than particularly on the basis of

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