Cost Leadership, Differentiation, Focus
Terms in this set (19)
•Cost leadership→ A firm pursuing a cost-leadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors.
oThis strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products eithers at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses.
oEven without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time.
successful cost leadership
oAccess to capital required to make a significant investment in production assets.
•E.g. specialized machines
oSkill in designing products for efficient manufacturing
oHigh level of expertise in manufacturing process and engineering
disadvantages of cost leadership
oBeing overly aggressive in cutting price
oLow cost methods are easily imitated by rivals
oBecoming too fixated on reducing costs and ignoring
•Buyer interest in additional features (tastes)
•Declining buyer sensitivity to price
•Changes in how the product is used
oTechnological breakthroughs open up cost reductions for rivals
•Thus, firms can find themselves locked in to a given process or technology that could rapidly become obsolete. Such was the case with Timex Watch Company during the 1960s and 1970s when the company was the low-cost producer of mechanical watches. When quartz and digital watches became popular during the late 1970s, Timex was so committed to its mechanical watch and process technology that it could not easily adapt to technological change.
a competitive business strategy whereby firms attempt to gain a competitive advantage by increasing the perceived value of their products and services relative to the perceived value of other firm's products and services.
oA differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that people perceive to be better than of different from the products of the competition.
oThe value added by the uniqueness of the product may allow the firm to charge a premium price. The firm hopes the price will cover the costs incurred in offering the unique product.
o** Importance of customer perception
successful differentiation strategy
oAccess to leading scientific research
oHighly skilled and creative product development
oStrong sales team
oCorporate reputation for innovation and quality
to differentiate products, firms focus on:
oThe attributes of its products or services:
oThe relationship between itself and its customers
oLinkages within or between firms
•E.g. pharmaceuticals: genetics, biology, chemistry, and pharmacology
•Sports teams and brands
disadvantages of differentiation
A disadvantage associated with differentiation is that other firms may attempt to "out differentiate" firms that already have distinctive products by providing a similar or better product. Thus, differentiation strategies, while effective in generating customer loyalty and higher prices, do not completely seal off the market form other entrants.
potential sources of sustained competitive advantage
oLinkages within a single firm
oLevel of service and support
organizational structure of cost leadership
•Few layers in the reporting structure
•Simple reporting relationships
•Small corporate staff
•Focus on narrow range of business functions
organizational structure of differentiation
•Cross-divisional/ cross-functional product development teams
•Willingness to explore new structures to exploit new opportunities
•Isolated pockets of intense creative efforts
management control systems of cost leadership
•Tight cost control systems
•Quantitative cost goals
•Close supervision of labor, raw material, inventory, and other costs
•A cost leadership philosophy
management control systems of differentiation
•Broad decision-making guidelines
•Managerial freedom within guidelines
•Policy of experimentation
compensation policies for cost leadership
•Reward for cost reduction
•Incentives for all employees to be involved in cost reductions
compensation policies for differentiation
•Rewards for risk-taking, not punishment for failures
•Rewards for creative flair
This dimension is not a separate strategy per se, but describes the scope over which the company should compete based on cost leadership or differentiation.
oFocus strategies aim at a specific and typically small niche. These niches could be a particular buyer group, a narrow segment of a given product line, a geographic or regional market, or a niche with distinctive, special tastes and preference. The basic idea behind a focus strategy is to specialize the firm's activities in ways that other broader-line (low-cost or differentiation) firms cannot perform as well.
advantages of focus strategy
oThe focuser knows its market niche and knows it well
oThe focuser can stay close to customers and respond quickly to their changing needs
oFocuser can develop strong brand loyalty which can be difficulty for other competitors to overcome
drawbacks of focus strategy
oOperates in small scale making it difficult to lower costs significantly; technological advances has minimized this drawback
oCompetitors find effective ways to match a focuser's capabilities in serving niche market
oNiche can become part of the overall market
oSegment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered