hi there in this business topic video we're going to take a look at a very popular and well-known approach to strategic choice marketing and business strategy it's the work of michael porter porter's generic strategies now the challenge facing business leaders and marketers as they try to determine the most effective successful strategy of course is how do you get a competitive advantage over the other firms that are operating your market or industry porter did a lot of work on this area and in particular he looked at the concept of competitive advantage and what strategies could be adopted that would be more likely to succeed and in essence he identified two broad approaches to how successful strategy could be determined he argued that firstly differentiation was the strategy or secondly low cost was a strategy both of which could give a firm a competitive advantage what do we mean by competitive advantage well we're really looking at a sustainable advantage over the competition not just a short-term thing the ability of a business to organize itself and position itself in the market and also make sure that its operations it's all its supporting activities are geared towards offering value to customers that can't be beaten by the competition that value might be through low prices supported by low costs or it could be that the value was perceived to be really high because the products or services differentiate it's highly differentiated which enables the business to charge a higher price and therefore porter's generic strategies essentially was around what are the sources of competitive advantage and i've summarized this and simplified it of course just to help make it easier to understand and apply but essentially he said there are two different types of advantage one is differentiation the second is low cost so let's spend the rest of this short video just examining what we mean by a low cost and differentiation with low cost the objective is to try to become the lowest cost operator in the market in the industry and typically what this involves is organizing the business in such a way that it's able to achieve economies of scale you remember from our revision video and economies of scale that these arise when a unit costs four as output increases and economies of scale are a common feature but not the only feature of successful low-cost businesses the reason why low cost is potentially a very important and powerful source of advantage is that of course if selling prices in the market are broadly similar the business is able to operate at the lowest costs will be able to enjoy better profits per unit sold than the rest of the industrial competitors similarly if the lowest cost operator wishes to adopt a strategy of building market share because its costs are low or lowest it will be able to offer lower prices than the competition and depending on the price elasticity of demand that may allow it to grow market share what kind of products is this suitable for a low-cost strategy well this has changed over the years but it was often said that the best products for this were those which don't require much differentiation don't require much personalization and potentially products where branding is less significant we'll take a look at a few examples but look out for the key features of low cost operators i've mentioned it's a partly or to a large extent determined by the scale of the operation of the business if a business is able to achieve high scale and high economies of scale that will drive unit cost down but that's not necessarily the only source of a low cost advantage it could be that the business is highly efficient perhaps it's invested significantly in automation more so than the competition which enables it to produce more efficiently it could also be that it just has a low-cost culture that is implemented for example lean production methods or it's found ways of eliminating cost and waste from all aspects of the operation and it's often said that the best or the most effective low-cost operators right down to the core of the business have a culture of being low-cost and lots of examples out there of businesses that have built their reputations and market leadership around a low-cost operation the classic ones and the low-cost airlines of course and in retail we've seen the emergence of a number of low-cost retailers who are able to offer lower prices than the competition but these aren't the only ones of course there's a great example in xiaomi in china which has been able to offer a much lower priced series of smartphones and tablets that have proved very effective in building its market share in china against the likes of apple and samsung let's move on to differentiation for a few minutes what do we mean by differentiation well the key here is not as much to gain advantage by having lowest cost but it is to do so by having a product that is so differentiated and distinct compared with the competition that customers value that differentiation they value their differences and are prepared to pay perhaps for that difference and you might imagine there are a number of different ways of persuading customers that your product is in some way differentiated different and therefore better than the competition one of the obvious ways is to have a product with superior quality significantly better product benefits may be more reliable it lasts longer it has features a wider range of features than the rest of the competition it could be that the product is differentiated by it's by way of its distinctive branding which of course is a great source of competitive advantage for those able to build a brand and to sustain brand loyalty but it can also be differentiated in terms of how easy it is to buy the product or service and it may well be for example that the the product is able to succeed because it's been made widely available across all different distribution channels lots of examples of course out there of each of those different sources of differentiation apple perhaps being the best example of a business enables is able to achieve significant product differentiation built around its brand and a very high level of customer loyalty the world's most profitable company must be differentiating its products by definition almost but there are lots of others of course dyson has been able to differentiate its product through a significant advantage in product innovation and building your brand off the back of that and you might also argue that even a hotel business like premier inn whilst it is trying to operate at a lower cost segment compared with other hotel chains the product itself is highly differentiated in terms of its offer of a good night's sleep and of course luxury brands many luxury brands all luxury brands aim to differentiate their products both in terms of perceived and actual quality what porter said was that those are the two key ways of gaining advantage low cost and differentiation but the danger is if you are if you are neither low cost and neither highly differentiated the danger is that you get stuck in the middle and the problem of being stuck in the middle is that you are faced with competitors who have lower costs and therefore may be able to offer lower prices and similarly you are also faced with competitors who have a highly or more differentiated product or service and therefore they're more likely to appeal to customers who value that differentiation so porter basically argued that businesses stuck in the middle between low cost and differentiation would be likely to suffer competitive disadvantage and i guess we all have different views on this here are four examples of businesses i think maybe have suffered from being stuck in the middle certainly in recent years partly because it's not always clear what the business stands for is it a low-cost operator or not mcdonald's for example has suffered from for many quarters of stagnant and declining sales particularly in its core u.s market u.s fast food market as it's struggled to compete against fast food operators that are more clearly differentiated in the burger market sony has often been accused of lacking product differentiation similarly smiths and morrisons there's perhaps two examples of retailers in the uk who have struggled struggle to maintain their share of course it can now be argued and it often is argued that actually differentiation and low cost are not mutually exclusive so a quick word about what's known as hybrid strategies and this potentially is very powerful isn't it it's where the business is operating at low cost and therefore able to offer low prices but it also has a proposition that is pretty clearly differentiated and therefore has all the benefits of differentiation including brand loyalty brand awareness and i think ikea is a great example of that you know the value proposition from a customer point of view is that uh you're buying low price low price goods but generally of good quality reliable if you can put them together and with a certain style but it's also differentiated differentiated in terms of its design in terms of who the customer the target customer is and also ikea has been able to differentiate its products by localizing the product ranges in each of its international markets so look out for hybrid strategies where a business is operating at low cost but it also attempts to gain the benefits of differentiation that's been a brief introduction to porsche's generic strategies