Porter's Five Forces and Blue Ocean Strategy (Cambridge (CIE) A Level Business): Revision Note

An introduction to Porter's Five Forces model

• Porter’s Five Forces identify the key pressures on an industry that impact the ability of a business to compete with rivals

  • It helps managers think strategically about the environment in which the business operates

Porter's five forces

• Once a business fully understands these pressures in their context, they can take strategic decisions to achieve and sustain a  competitive advantage

Explanation of Porter's five forces model

Porter's generic strategies

• Once a business has applied the Five Forces model to its own circumstances, Porter recommended a range of generic strategies to increase its chances of competing

  • On the basis of cost or through differentiation

  • 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'

Porter's generic matrix

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

• Differentiation

  • Businesses that cannot be the most competitive on cost should make its products distinct from those of rivals

  • This 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, whose 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

Niche market strategies

• Businesses that operate in a niche markets should adopt one of two focus strategies that closely meet the needs of its specific group of customers

• Cost focus strategy 

  • This involves being the lowest cost competitor within the market niche

    • 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

    • 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

Stuck in the middle

• Failing to adopt one of the strategies would result in being unable to compete successfully with rivals

  • 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

  • Cost leadership and differentiation are not compatible

    • Low prices combined with high quality can negatively affect consumer perceptions of the product

Evaluation of Porter's generic strategies

Blue ocean strategy

• Blue Ocean strategy is the simultaneous pursuit of differentiation and low-cost strategies

  • This opens up a new market space and creates new demand, so there is less fighting over existing demand

  • Uncontested market space is captured by products that other businesses have not yet adopted, making competition irrelevant

  • There is ample opportunity for profitable and rapid growth

• Businesses pursuing this strategy follow the Four Actions Framework to identify a new value curve which combines cost and differentiation in a new, innovative way

The four actions framework

• The four actions in the framework are:

  • Raise

    • Question which features or products should be better than the industry standard

  • Create

    • Question which features or products have never existed and should be created

  • Reduce

    • Question which features of products should be downplayed to levels below industry standards

  • Eliminate

    • Question which features or products have been overcompeted and eliminate them