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Cost Leadership and Differentiation

Cost Leadership and Differentiation

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Strategy, Business - Cost Differentiation
Strategy, Business - Cost Differentiation

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Categories:Types, Business/Law
Published by: smh9662 on Aug 26, 2013
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Stockholm School of EconomicsInstitute of International BusinessCourse 2210, M.Sc. Thesis in International Business
Cost Leadership & Differentiation -
An investigation of the fundamental trade-off between Porter’s costleadership and differentiation strategies
Abstract
This thesis examines the fundamental trade-off between low cost and differentiation strategy at a business strategylevel. In 1980 Porter introduced a model of generic strategies that has influenced much of the current thinking instrategy formulation. Although Porter did not coin the terms, he was the first to discuss the importance of choosingand focusing on one of the three alternatives: 1.Cost leadership, 2.Differentiation, and 3.Focus. Any attempt tocombine or reconcile strategies would result in firms becoming “stuck in the middle”, a poor strategic choice due tothe existence of an inevitable trade-off. The dearth of recent research on the topic suggests that the initial debate hasfaded since the beginning of the 1990s, even though some discussions still take place in strategy textbooks andoccasionally in the business press. IKEA, McDonalds, Southwest Airlines and Wal-Mart are examples of companiesthat are pointed out as having successfully reconciled both strategies. In order to investigate the question of aninevitable trade-off in general and the current state of art of the research topic in particular, a thorough literaturereview has been conducted. It is accompanied by a cross-check examination of contemporary practitioners’ positionin the matter, that is, whether current practitioners principally believe that strategies are mutually exclusive, or,reconcilable. Even though the lack of a concise definition of the concept “mixed strategy” or “combination strategy”(or “combined strategy”) greatly hinders research on the topic, both theory and practice support the existence of atrade-off.
Presentation: March 16
th
2007, 13.15-15 (room C512)Advisor: Patrick RegnérAuthor: Martina Minarik (19238)Opponents: Agnes von Arbin Ahlander (19417),Golnaz Hashemzadeh Bayegi (19545)
 
1
Index
1.
 
Introduction...…………………………….…………………………………………………1.1.
 
Why is this topic of interest?……………………………………………………..1.2.
 
Purpose……………………………………………………………………………1.3.
 
Delimitations……………………………………………………………………...1.4.
 
Disposition.……………………………………………………………………….2.
 
Method……………………………………………………………………………………...2.1.
 
Research design…………………………………………………………………..2.2.
 
Data.………………………………………………………………………………2.3.
 
Research quality.………………………………………………………………….3.
 
Theoretical Framework...…………………...……………………………………………....3.1.
 
What is strategy?………………..…...……………………………………………3.2.
 
The concept of “Strategic groups”………………………………………………..3.3.
 
Porter.……………………………………………………………………………..4.
 
Literature Review...…………………………………………………………………………4.1.
 
Conceptualisation of competitive strategies.……………………………………..4.2.
 
Competitive strategy and market share..………………………………………….4.3.
 
Mixed strategy and performance.………………………………………………...4.4.
 
Summarizing Table.………………………………………………………………5.
 
Interviews with Practitioners…...…………………………………………………………..5.1.
 
Mixed strategy and performance.………………………………………………...5.2.
 
Competitive strategy and market share.…………………………………………..5.3.
 
Trade-off………………..………………………...………………………………6.
 
Analysis……………………………………………………………………………………..6.1.
 
Interpreting findings on the trade-off issue..……………………………………...6.2.
 
Lacking a definition of “mixed strategy”…………………...…………………….6.3.
 
Strategy vs. Operational efficiency……………………………………………….6.4.
 
The author’s word on the topic…………………………………………………...7.
 
Conclusions…………………………………………………………………………………Appendix A…………………………………………………………………………………8.
 
Specification of sources & References……………………………………………………..
 
2
1. Introduction
Cost leadership and differentiation strategies are popular research topics within the field of strategy and have been widely discussed, in particular since Michael Porter presented his modelof generic strategies in 1980. Some rearchers, in fact, refer to this model as being among themost significant contributions to the strategic management literature. Whether cost leadershipand differentiation strategies are mutually exclusive is a far less discussed issue however, asevidenced by the relatively scarce literature on the topic. During the end of the 1980s and thebeginning of the 1990s there was a debate going on regarding the existence of a trade-off but itseem to have faded with the introduction of Japanese cost control methods, i.e. Total qualitymanagement (TQM) and Just in time (JIT). Grant (2005) argues: “Common to the success of Japanese companies in consumer goods industries such as cars, motorcycles, consumerelectronics, and musical instruments has been the ability to reconcile low cost with high qualityand technological progressiveness. The total quality managements methods that they adoptedexploded the myth that there is a trade-off between high quality and low cost.”
1
Thus whileadherents of Porter’s theory argue that cost leadership and differentiation strategies areirreconcilable, opponents advocate that a trade-off does not necessarily need to be, and refer tocompanies i.e. IKEA, Southwest Airlines, Toyota, IBM, Caterpillar, Wal-Mart and McDonald’sas examples of firms that have successfully reconciled both strategies and thus enjoy “dualcompetitive advantages”.
1.1. Why is this topic of interest? 
Considering the impact of Porter’s theories, in particular on managers, it is of interest to make acritical examination. Traditionally the belief that low cost and differentiation are mutuallyexclusive has been strongly embraced by practitioners. As some researchers start to question the
inevitable
trade-off, augmented attention and renewed debate on the topic is necessary. If the
1
Grant (2005), p 244 

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