How does a business choose which markets and products to compete in?
Strategic direction in terms of which markets to compete in and what products to offer, Porter's generic strategies of cost leadership, differentiation and focus, and the risks of being stuck in the middle.
A focused answer to AQA A-Level Business 3.8, covering strategic direction in terms of which markets and products to compete in, Porter's generic strategies of cost leadership, differentiation and focus, and the risks of being stuck in the middle.
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What this dot point is asking
AQA wants you to explain strategic direction (which markets to compete in and what products to offer), Porter's generic strategies of cost leadership, differentiation and focus, and the risk of being stuck in the middle. Questions usually ask you to recommend and justify a generic strategy for a named firm.
Strategic direction
Strategic direction is about the big choices of where to compete (which markets and segments) and what to offer (which products). It builds on the analysis of the strategic position: a firm plays to its core competences and the opportunities the environment offers. The Ansoff matrix frames the product-market choice; Porter's generic strategies frame how the firm will win in its chosen markets.
Porter's generic strategies
Stuck in the middle
Porter argued a firm must commit clearly to one generic strategy. A firm stuck in the middle is neither the cheapest nor distinctive enough to justify a premium, so it loses price-sensitive customers to true cost leaders and quality-seeking customers to differentiators. With no clear competitive advantage, it attracts neither group strongly and tends to earn below-average returns. The lesson is that a committed strategic direction beats a half-hearted blend.
Choosing a direction
The choice depends on the firm's core competences (scale favours cost leadership; design or brand favours differentiation), the market structure (room for a niche favours focus), and its resources. A clear, committed direction that plays to the firm's strengths is what delivers a sustainable competitive advantage.
A strategy must also be defensible over time, not just attractive today. Cost leadership only lasts while the firm keeps its cost advantage, so it must keep driving efficiency before rivals catch up or new technology erodes its scale advantage. Differentiation only lasts while the point of difference stays valued and hard to copy, so the firm must keep innovating and protecting its brand. Focus strategies can be undermined if a large rival decides to enter the niche or if the niche grows large enough to attract the mass-market players. So choosing a direction is not a one-off decision; the firm must continually defend and renew its chosen source of advantage as the environment changes.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 202116 marksEvaluate whether a cost-leadership or a differentiation strategy is more appropriate for a new entrant to the UK clothing retail market. (16 marks)Show worked answer →
Define both, apply them, and judge for a new entrant.
Cost leadership means being the lowest-cost producer and competing on price, which needs scale economies, efficient operations and tight cost control. For a new entrant this is hard, because established giants already have the scale that drives down unit costs, so a newcomer would struggle to undercut them profitably.
Differentiation means offering something distinctive (design, quality, sustainability, brand) that customers will pay a premium for. This is more achievable for a new entrant, which can carve out a niche (for example ethical or premium clothing) where it is not competing head-on with the low-cost incumbents.
Judgement: for a new entrant lacking scale, differentiation is generally more appropriate, since cost leadership favours large established players; the firm should find a clear point of difference. The strongest answers weigh the firm's resources and the market structure. Markers reward defining both strategies, applying them to a new entrant in clothing retail, and a supported conclusion.
AQA 20186 marksExplain the risk of a business being stuck in the middle between cost leadership and differentiation. (6 marks)Show worked answer →
Porter argued a firm should commit clearly to either cost leadership or differentiation. Being stuck in the middle means doing neither well.
Such a firm is not the cheapest, so it loses price-sensitive customers to true cost leaders, and it is not distinctive enough to command a premium, so it loses quality-seeking customers to differentiators. Caught between the two, it has no clear competitive advantage, attracts neither group strongly, and tends to earn below-average returns. The lesson is that a clear strategic direction beats a half-hearted blend. Markers reward explaining why the firm loses both customer groups and so lacks a competitive advantage, ideally with an example.
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Sources & how we know this
- AQA A-level Business (7132) specification — AQA (2015)