On October 23rd, 2014, we updated our
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Low cost relative to competitors is the main pursuit but not at the cost of quality or service.
The attained low cost position needs strengthening through reinvesting in high margin new equipment, machinery etc to further enhance the low cost leadership
Factors of Cost Leadership
Aggressive construction of efficient-scale facilities
Vigorous pursuit of cost reductions from experience curve
Cost minimization in areas such as R&D, services, sales force and advertising
Tight cost and overhead control
Differentiating a product/service implies creating a perceived uniqueness in the industry through
- design or brand image
- customer service
- dealer network
- other special features
Differentiation does not mean total disregard to cost except that cost is not the primary strategic target.
Differentiation insulates a company from rivalry through brand loyalty or price insensitivity.
Cost OR Differentiation
- Toyota competes on cost (price)
- Mercedes competes on differentiation
Toyota is much larger company.
An organization should choose either of the alternatives, not both.
Being all things to all people can be ruinous that Porter calls ‘being stuck in the middle’.
Stuck in the Middle
Such strategies are not sustainable in the long run because of factors such as a clash of cultures.
An organizational structure that is supportive of cost leadership can be ruinous for differentiation.
Conflicts can arise due to policies such as
- tight control system
- pursuit of scale economies
- dedication to learning curve.
Relates to targeting a particular buyer group, segment of product line or geographic market.
The Focus strategy is built on the premises of serving a narrow market so that it can perform more effectively than the competitors who operate more broadly.
Cost : imitation
technology changes proximity to differentiation
Differentiation : imitation
loss of attraction of differentiation base
Focus : imitation
target segment gets unattractive
new focusers arrive
Elements of Low-cost Skills/resources required Organizational requirement Capital Tight cost control Engineering skill Frequent & detailed reports Close supervision Structured organization Easy product design Incentives based on target Low-cost distribution Strong supply chain
Elements of Differentiation Skills/resources required Organizational requirement Strong marketing Strong coordination Product engineering Subjective measurement Creative flair Amenities to attract skilled people Strong research Leadership in Quality Technology
Elements of Focus
Combination of the Cost and Differentiation policies directed to particular strategic target
Hindrances to Low-cost
Technology changes nullify the past investment or learning
Low-cost learning by newcomers through imitation or new investment
Inability to adopt to the required changes in the market
Hindrances to Differentiation
Imitation narrows perceived differentiation
Buyer need falls
Cost differential is too wide to hold on to brand loyalty
Hindrances to Focus
Cost differential between broad range and focus widens
Difference between the broad range & the focused product narrows
Competitors find submarket within the strategic target