cost leadership strategy vs differentiation strategy

Porter suggests that another factor affecting a company’s competitive position is its competitive scope. To put these strategies into context, you might think about Wal-Mart as pursuing a cost-leadership strategy and Harley Davidson as pursuing a differentiation strategy differentiation strategy .A strategy in which an organization seeks to distinguish itself from competitors through the perceived quality of its products or services. Cost Leadership is based on the idea of gaining efficiency, exploiting economies of scale and reducing the overall cost structure. This type of strategy is often called a hybrid strategy. This is a plan for companies to reduce costs. 6 Business Strategy: Differentiation, Cost Leadership, and Blue Oceans. According to Porter, achieving cost leadership and differentiation is usually conflicting because the internal resources and capabilities of a firm needed to support one are not compatible with the other. The cost advantages accrue from different sources depending on the structure of the industry. A cost-focus strategy is a low-cost, narrowly focused market strategy. In his various books, Porter developed three generic strategies that, he argues, can be used singly or in combination to create a defendable position and to outperform competitors, whether they are within an industry or across nations. “PURE” COST LEADERSHIP STRATEGY VS. the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. Home » Essay Samples » The cost leadership, differentiation and scope strategies. Low cost strategy is centered on the capability of the company to produce and deliver products of competitive quality at lower costs. This strategy is especially beneficial in a market where the price is an important factor. Another differentiation strategy is to design products specifically for a customer. Competitive strategies are the method by which you achieve a competitive advantage in the market. The company must be willing to standardize its offerings in order to manage costs, which implies that exceptions requested by prospective customers must be limited or excluded in order to keep costs … Differentiation, Niche and Cost Leadership Strategies: A Hotelling Based Analysis Abstract Costs are an important determinant of prices charged by firms. Differentiation strategy is one of three Porter’s Generic Strategy; others are cost leadership and focus.. Match. A strategy in which an organization concentrates on a specific regional market, product line, or group of buyers in combination with its pursuit of either an overall cost leadership or differentiation strategy. Let us have a look at your work and suggest how to improve it! Difference between Cost Leadership Approach and Differentiation Strategy Cost leadership strategy is the method by which a firm sets out to become a low-cost producer in the industry. For cost advantage, the supply chain systems are linked with an automated manufacturing system to reduce inventory and remove duplication of effort. Many automobile dealers advertise that they are the largest volume dealer for a specific geographic area. Products and services can be designed to meet the needs of buyers. Low cost Strategy vs Differentiation Strategy. Lean production methods such as Just in Time. The primary objective of a firm aiming to attain cost leadership is to become the lowest cost producer in comparison to the competitors. Gravity. The duration of 2009 to 2012 was highly fortunate for the Amazon Company since one of the chapters of this platform turned the perspective of the people about reading technology. Competitive scope defines the breadth of a company’s target market. - Cost leadership - Compete with a wide range of priced businesses. This strategy is about simultaneously focusing on two drivers of competitive advantage: cost and differentiation. It is the world’s largest distributor of products to the world’s largest restaurant company-McDonald’s. A strategy in which an organization attempts to gain a competitive advantage by reducing its costs below the costs of competing firms. Some companies that have successfully implemented one of Porter’s generic strategies have found that they could not sustain the strategy. For instance cost, leadership and differentiation together will make no sense since differentiation is an expensive strategy method. A focused cost leadership strategy requires competing based on price to target a narrow market (Table 5.6 “Focused Cost Leadership”).A firm that follows this strategy does not necessarily charge the lowest prices in the industry. Martin-Brower, the third-largest food distributor in the United States, serves only the eight leading fast-food chains. This generic strategy calls for being the low cost producer in an industry for a given level of quality. Test. Differentiation may lead to customer brand loyalty and result in reduced price elasticity. Such customization may range from individually designing a product for a single customer to offering a menu from which customers can select options for the finished product. A not-for-profit can use a Cost Leadership strategy to minimize the cost of getting donations and achieving more for its income, while one pursuing a Differentiation strategy will be committed to the very best outcomes, even if the volume of work it does, as a result, is smaller. Superiority arises from factors other than low cost, such as customer service, product quality, or unique style. We refer to them as trade-off strategies because Porter argues that a firm must choose to embrace one strategy or risk not having a strategy at all. As a generic strategy, differentiation involves developing the online business and its products in ways that make them different from the competition. Similarly, what is focused differentiation strategy example? There are two main types of differentiation strategies that a business may carry out: Broad differentiation strategy. When a firm pursues differentiation strategy, it attempts to become unique in the industry, by offering those products and services, which have value to the customers. The traditional method to achieve this objective is to produce on a large scale which enables the business to exploit economies of scale. A strategy in which an organization concentrates on a specific regional market, product line, or group of buyers in combination with its pursuit of either an overall cost leadership or differentiation strategy. Products and services can be designed to meet the needs of buyers. For example, a firm is able to be the low cost producer in only one product line. Spell. But the neglected facts are, 1. Major changes in technology may drastically change production processes so that previous investments in production technology are no longer advantageous. Option one: take the low cost path, cutting costs as much as possible and then pass those savings to the customer in the form of lower prices. Focused cost leaders such as Checkers Drive In do not charge high prices like REI and Nat Nast do, but their low cost structures enable them … In many settings, cost leaders attract a large market share because a large portion of potential customers find paying low prices for goods and services of acceptable quality to be very appealing. Use of bargaining power to negotiate the lowest prices for production inputs. Differentiation does not allow a firm to ignore costs; it makes a firm’s products less susceptible to cost pressures from competitors because customers see the product as unique and are willing to pay extra to have the product with the desirable features. Cost leadership, a concept by Michael Porter, illustrates a method to affirm and manage the competitive advantage.Cost leadership, basically, refers to the lowest cost of operation in the industry. However, a cost-leadership strategy is more likely to generate increases in market share. Product leaders do not have the lowest-cost operations because their customers are not as price-sensitive. Because this type of strategy involves a unique product, price is not the significant factor. Login or Join CIPS, For addition reading on this topic visit Supply Chain Management, See how global supply chains give procurement the opportunity to take advantage of the strengths and innovation of other countries, In its simplest form a supply chain is the activities required by the organisation to deliver goods or services to the consumer, You can work in various areas of the supply chain, but the main goal when managing a supply chain is adding value, When we discuss supply chain strategy we are discussing ‘value’ that can be derived from our supply chain, A demand driven supply chain focuses on the demand from the consumer data and feeds this data through to the supply base so driving greater efficiency, “The Future of Procurement and Supply Management” paper offers a reflection of what the profession may look like fifteen years from now, SCND covers all movements and storage of raw materials, work-in-process inventory and finished goods from the point-of-origin to point-of-consumption, See how organisations which are ‘agile’ react as quickly as is practicable to provide a cost effective response to customer demand, Global supply chains are networks that can span across multiple continents and countries for the purpose of sourcing and supplying goods and services, Organisations which are ‘agile’ react as quickly as is practicable to provide a cost effective response to customer demand, Collaborative procurement is a method by which companies can engage with each other to enhance the effectiveness (SC/Sourcing/Procurement/Cost), Global Standard for Procurement and Supply. Building a strategy on a differentiation requires a company to continuously invest in and develop: He describes three basic strategic options available to organisation’s for gaining competitive advantage. Ldr 531 Leadership Strategy to Regain Confidence. The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. With its limited customer list, Martin-Brower need only stock a limited product line; its ordering procedures are adjusted to match those of its customers; and its warehouses are located so as to be convenient to customers. This strategy is particularly effective for organizations in industries where there is limited possibility of product differentiation and where buyers are very price sensitive. Cost leadership strategy The cost leadership strategy requires the sale of a “standard, or no-frills” product (Porter, 1985, p.13) combined with “aggressive pricing” (Porter, 1980, p.36). Choices between a cost or value position. Porter, author of Competitive Strategy, is widely known in business circles and is thought of as the father of modern business strategy theory.His central thesis is that businesses can create and sustain a competitive advantage in the marketplace by following one of two strategic choices: 1) cost leadership or 2) differentiation. These shirts retail for more than $100. To make a success of a Differentiation strategy, organisations need: Companies such as Dyson, Dell and Apple are good examples of organisations that operate with a differentiation strategy. Porters 5 Generic Strategies. Cost Leadership vs Differentiation 4 Levels of strategic decisions and choices -basic competitive strategy options -complementary growth strategy options -functional strategies to support Porter, there are three generic strategies that a company can use to achieve competitive advantage: Overall Cost Leadership, Differentiation, and Focus (Dess, McNamara, & Eisner, 2016). Thus, for firms to be able to recover the cost of marketing research or R&D, they may need to add a product feature that is not easily copied by a competitor. http://www.woltersworld.comGeneral competitive strategies for businesses. In the low cost strategy, a company must have a thorough understanding of costs and how to continually reduce them. According to the business literature, for example, integrating cost leadership and differentiation strategy is indeed advantageous and well suited for today's business world. The two products may be physically identical, but stores are able to sell the private-label products for a lower price because very little money was put into advertising to differentiate the private-label product. Tip: Generic strategies apply to not-for-profit organizations too. There are basically two strategic paths a business can travel down. Firms pursuing a differentiation strategy are vulnerable to different competitive threats than firms pursuing a cost-leader strategy. Cost leadership strategy cannot be applied to every product or service. As a leader Katrina has a responsibility to account, supervise, motivate, counsel, and ensure employees are productive at … However, providing such individualized attention to customers may not be feasible for firms with an industry-wide orientation. How we use it and. Created by. To find out more on Cost Vs Differentiation analysis and how to conduct this for your organisation, then view the full Knowledge paper. The primary purpose of this paper is to study the impact of costs associated with differentiation and niche strategies on firm’s positioning and pricing Acquiring qualit… They need to show: Companies such as Aldi or Lidl are good examples of organisations that operate with a cost leadership strategy. A strategy of cost leadership requires close cooperation between all internal functional areas of a business. Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs … concentrates on meeting the specialized needs of its customers. The findings contradict with equity accounting theory and the theory of irrelevance of capital structure issued by Modigliani and Miller (1958), but they support financial decisions, intense competition and the strategy chosen by A focused cost leadership strategy requires competing based on price to target a narrow market (Figure 5.6 "Focused Cost Leadership"). Differentiation strategy is built on a belief that one needs a clear and unique positioning. There are typically three types of competitive strategies that can be implemented. Low cost Strategy vs Differentiation Strategy. With the use of his generic strategy model, a firm, understanding where its competitive advantage lies, can then formulate and implement an effective business strategy geared towards the sustainability of this advantage. Differentiation. Changes in customer tastes are especially obvious in the fashion industry. This technology was named as ‘E-book’ technology. jdonohoe13. Two or more firms competing for cost leadership may engage in price wars that drive profits to very low levels. The company’s market scope is expansive and include nearly all type of customers searching for a car. This is certainly true for Walmart, for example. A broad differentiation strategy consists of building a brand or business that is different in some way from its competition. Cost Leadership. The product difference may be based on product design, method of distribution, or any aspect of the product (other than price) that is significant to a broad group of consumers. COST LEADERSHIP AS A RESULT OF DIFFERENTIATION STRATEGY. The cost leadership strategy usually targets a broad market. No argument that application of cost leadership strategy is necessary for the betterment of an organization. Login to view our members-only guide to Cost Vs. Differentiation. Toyota Company as everything for every customer. At the other end of the customization scale, customers buying a new car, even in the budget price category, can often choose not only the exterior and interior colour but also accessories such as CD players, rooftop racks, and upgraded tires. The feature that customers like and find attractive about a product this year may not make the product popular next year. Their priority is to deliver the best new product, at any cost. 3. Cost advantage; Differentiation; Both can be a lot more broadly approached or even narrow, which leads to the feasible competitive strategy. In other words, a company trying to charge lower prices for its products. Firms using a narrow focus strategy can also tailor advertising and promotional efforts to a particular market niche. Cost leadership strategy is much more than cost reduction initiatives that get lot of prominence in strategic planning and review session of any company as a means to improve the bottom line of a company by improving its efficiency. Learn. For a variety of reasons, including the differences between intended versus realized strategies discussed in an earlier section, none of these competitive strategies is guaranteed to achieve success. Several studies have shown that a differentiation strategy is more likely to generate higher profits than a cost-leadership strategy, because differentiation creates stronger entry barriers. You can get your paper edited to read like this. Read more: How to Create a Cost Leadership Strategy. This is usually achieved by large scale production which enables the firm to attain economies of scale or by innovating the production process. Chan Kim & Renée Mauborgne: Blue ocean strategy is about pursuing both differentiation and low cost.Under traditional competitive strategy differentiation is achieved by providing premium value at a higher cost to the company and at a higher price for customers. 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