A firms relative position within an industry is given by its choice of competitive advantage cost leadership vs. Low cost leadership and differentiation strategies laura allard november 21, 2010 william hogan management cases upper iowa university abstract this paper discusses low cost leadership and differentiation business strategies. Sharing the same view point, hill 1988 cited by akan et al. Best cost strategy creates competitive advantage as it looks at the broad market and there is much differentiation between products of their rivals where as the low cost strategy they compete with rivals cost effectively by trying to reduce the cost of production inside the company and there is very little differentiation between their products. Cost leadership and differentiation strategies cost leadership approach and differentiation strategy introduction the relative position of a firm in an industry determines whether the company makes profits above or below the industry average. Contrary to this view, this article presents a contingency framework in which differentiation can be a means for firms to establish an overall low cost position and discusses that a combination of. The five generic competitive strategies semantic scholar. The effects of cost leadership strategy and product differentiation. Companies that use a cost leadership strategy and those that use a differentiation strategy share one. Ikea is a great example of a business with an integrated cost leadership and differentiation strategy. Its important to note this isnt an eitheror decision.
Leadership and differentiation strategies in the east african community market. Companies have traditionally opted between either a predominately low cost, or a differentiation strategy as a means of seeking competitive advantage. For example, if two companies make essentially identical products that sell at the same price in the market place, the one with the lower costs has the advantage of a higher level of profit per sale. A notforprofit 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. The report will develop key points using the porter competitive model as a guide. A critique of porters cost leadership and differentiation strategies 40 strategy can bring about in gaining a low cost position, as porter 1985, p. Cost leadership and differentiation strategies are popular research topics within the field of strategy and. The most revolutionary development in the american automobile market then was the popularity of the closedbody cars sloan, 1972, pp. Differentiation strategy is one of three porters generic strategy.
Ta b l e 1 comparison of cost and differentiation strategies. This particular strategy focuses on market research data to understand the client and also to identify what the current competitors are doing to fulfill what the market is expecting. The two approaches to strategies we are going to examine are. The financial leverage measure for each firm is based on the book value of debt and assets. Choose from 192 different sets of product differentiation and low cost strategy flashcards on quizlet. A focused differentiation strategy requires offering unique features that fulfill the demands of a narrow market table 5. Distinguish between cost leadership and differentiation. Jun, 2018 a lowcost provider strategy can always defeat a differentiation strategy when buyers are satisfied with a basic product and dont think extra attributes are worth a higher price.
Bestcost strategy vs lowlow cost strategy essay 464 words. Several strategy experts, led by harvard business schools michael porter in his work. Pdf the theoretical analysis dealing with the possibilities of supporting certain generic strategies is useful in order to guide the efforts needed. Differentiation versus low cost or differentiation and low. Jan 22, 2018 low cost strategy is a type of pricing strategy in which the firm offers the products at low price. Traditionally the belief that low cost and differentiation are mutually exclusive has. This strategy of the walmart is focused on the potentiality of the company to bring forth and convey products of competitive excellence at lower costs. Eachstakes outadifferent market position a broad crosssection gi of buyers gi iii a narrovlf buyer segment or market niche overall lovv cost provider strategy broad diherentiation strategy focused lovv cost strategy lovlfercost differentiation type of competitive advantage being.
In a differentiation strategy firms attempt to have their products be perceived as unique in order to obtain a premium price. Focused cost leadership and focused differentiation mastering. The company that pursues low cost strategy as its winning strategy is walmart. Exploring the implications of lowcost leadership and. Important cost drivers that shape the low cost leadership strategy include 1 economies of scale, 2 experience or learning curve effects, 3 degree of vertical integration, and even 4 location of activity performance. The findings contradict with equity accounting theory. A focused or market niche strategy based on differentiationconcentrating.
Mar 14, 2011 best cost strategy creates competitive advantage as it looks at the broad market and there is much differentiation between products of their rivals where as the low cost strategy they compete with rivals cost effectively by trying to reduce the cost of production inside the company and there is very little differentiation between their products. Cost leadership strategy vs differentiation strategy free essays. Mar 09, 2015 despite recent years extensive efforts to reduce costs, sas has maintained its differentiation strategy and the attempt to integrate it with a cost leadership strategy has revealed unprofitable. Know the advantages and disadvantages of focus strategies. Hill michigan state university in the policy literature there is an assumption that the generic businesslevel strategies of differentiation and overall cost leadership are generally inconsistent. On the other side of the spectrum theres apple computer, bmw, and nike who have used a differentiation strategy, to build tremendous brand equity.
However, government intervention or subsidies are also possible examples. Is it possible to use information technology to do both at the same time. A low cost strategy is more likely, however, to generate increases in market share. In differential strategy company produce goods and services that is different from the other goods and services in the same industry. Low cost strategy and differentiation strategy on hr. It sells unique products that you cant get elsewhere. Types of strategies cost leadership,differentiation, focus. Research writings of davis 1984 cited by prajogo 2007, p. There could be small businesses or involved in a single business or a large, complex and diversified conglomerate with several different businesses. Generic strategies apply to notforprofit organizations too. The effect on the field of strategy is an increase.
The corporate strategy in these cases is about the basic direction of the firm as a whole. Corporate real estate and competitive strategy vu research portal. The differentiation strategy is one of the three main marketing strategies, along with the low cost provider strategy and the focus strategy. Low cost strategy vs differentiation strategy cool. Learn product differentiation and low cost strategy with free interactive flashcards. Focused differentiation is the second of two focus strategies. Case study on differentiation strategy target stores differentiation strategies introduction. Compare a lowcost strategy vs differentiation strategy. In a low cost strategy, the true winner is the company with the actual lowest cost in the market place. As with a focused lowcost strategy, narrow markets are defined in. A critique of porters cost leadership and differentiation. Positioning analysis cost leadership and differentiation duration.
The nature of the focused differentiation strategy. Business level strategy explained strategy training. Cost leadership strives towards cutting costs to a minimum possible levels in order to provide customers with lower prices and. Low cost or differentiation center for simplified strategic. It represents a greater value for the customer, created either by lower prices or by providing greater benefits and services that justify higher prices. Since company produce goods and services at low cost, they can be able to sell the products in the market at low price comparatively to their rivalry firms. Firms can tailor their use of these cost drivers to build low cost leadership across different valueadding activities. On porters model of generic strategies, the horizontal axis is the degree to which a company pursues a low cost or a differentiation strategy. Strategies often include both product differentiation strategy and the cost leadership strategy. Oct 07, 2006 but then theres walmart and dell, who have shown us that the low cost strategy can be effective. Porter distinguishes three generic strategies for sustainable competitive advantage.
For a list of products the present study was focalized on the price level associated to the evolution of competitive advantage reflected in the market share between 20052009, compared to its level in 200002. There are basically two strategic paths a business can travel down. In 1980 porter introduced a model of generic strategies that has. Cost leadership strategy vs differentiation strategy. The ratio of total sales to total strategy of product differentiation. Take steps to ensure hr tactics support business strategy. According to michel porter, the strategies can be classified into three types. Differentmiation versus low cost or differentiation and low cost. It will describe low cost strategy and differentiation strategy and its impact in key hr function such as hr planning, recruitment and selection, orientation, training and development, career planning, performance management, compensation management, health and safety and international operations. The firm can gain cost advantages by increasing their efficiency, taking advantage of economies of scale, or by getting the raw material at low cost. Subsequently, a competitor analysis between these two airline business models traditional and low cost.