It is a concept developed by Michael Porter, this generic strategy here implies that the manufacturer in

an industry produce products at the lowest cost for a given level of quality to establish competitive
advantage. The firm sells its products either at average industry prices to earn a profit higher than that of
rivals, or below the average industry prices to gain market share [3] . The sources of cost advantage are
varied and depend on the structure of the industry. They may include the pursuit of economies of scale,
proprietary technology, preferential access to raw materials, and other factors. A cost leadership strategy
aims to exploit scale of production, well defined scope and other economies (e.g. a good purchasing
approach), producing highly standardized products, using high technology. [4]

Deal directly with customers

One way in which a firm can reduce cost is by dealing directly with end customers. DELL, for instance,
served its customers with high performance computers at relatively low price. Personal Computers were
customized according to buyers’ specifications, and assembly started only after Dell received the order.
By reaching straight to the customers, it helps to reduce the costs for distribution channels in which PCs
flow from manufacturers to customers via retail stores, distributors, resellers and direct distribution.
Also, knowing what is the customer’s wants and needs facilitate in building strong relationship between
a firm and its customer, creating loyalty. This special service is a form of product differentiation. Though
distribution channels are a form of product differentiation as well, I believe the benefits of serving the
customers directly would outweigh the benefits gained through various distribution channels or at least
equalized. Therefore, firm using distribution channels initially can try to switch to this approach to
reduce costs.

On the flip side, not every firm can do the same way as good as Dell. Research has shown that firms that
engaged in this approach ended up with lower profit margins as compared to before. If that is the case,
then it is advisable not to carry on this method but to switch back.

Location advantages

Different locations have different prices of input and the most significant being differences in wage rates
between countries. For example, in the automobile industry, labour costs in United States accounts for
30-45% of the vehicle’s costs while only less than 10% in China (Source from Xinhua). And in India, the
workforce is generally more educated, despite the low wages. As such, firm could actually relocate its
manufacturing production from developed countries to developing nations such as China and India to
take advantage of their low labour costs. In this case, firm’s products are differentiated with lower costs.

However, there are a few considerations before making this decision, which is the relocation of
production base to developing countries, could result in higher overall costs. This could be due to higher
transportation costs if suppliers are in turn located further away from the production. Firm would then
need to consider the tradeoffs between low wage rate and low transportation costs. Another factor is
the quality of the products produced, in which products may turn defects. Regular quality control is
required and thus resulting in higher costs.
Just-In-Time (JIT) Inventory Management

The firm produces goods to meet customer demand exactly, in time, quality and quantity, whether the
`customer’ is the final purchaser of the product or another process further along the production line [7] .
By incorporating this JIT approach, it makes production operation more efficient and inventory turnover
is faster and shorter production lines. Products are produced with minimum waste – time, resources as
well as materials and fewer defects. Besides, holding no finished goods inventory can result in lower
inventory holding costs, thus help in increasing the profit margin of the firm. A manufacturing firm’s
return on investment (ROI), efficiency, and quality can be improved if JIT is being put into practice
correctly. The cost and burden of lodging and managing idle parts can also be alleviated. In that respect,
company spokesman for Dell Venancio Figueroa, says “With our pull-to-order system, we’ve been able to
eliminate warehouses in our factories and have improved factory output by double by adding production
lines where warehouses used to be” (Songini, 2000). From the above statement, we can see that Dell has
utilized the JIT management and is a success. Therefore, firm still can produce at a lower costs and yet
not affecting production differentiation.

Unfortunately, JIT has limitations. “In just-in-time, everything is very interdependent. Everyone relies on
everybody else” (Greenberg, 2002). Any JIT weaknesses could in turn cause a flaw in the supply chain,
which can be very costly. For this reason, it is crucial in making the right decision.

E-Commerce

CONCLUSION

If a firm can achieve cost leadership and differentiation simultaneously, the benefits are great because
differentiation leads to premium prices, and at the same time that cost leadership implies lower costs.
An example of a firm that has achieved success in both a cost advantage and differentiation is McDonald.
Therefore, such firm is able to attain above average performance and sustainable competitive advantage
as compared to other competitors who only engage in one generic strategy. However, one very
important point to note is that if a firm is unable to balance the resources and capabilities well, more
often than not the firm would get stuck in the middle position and has trouble competing with rivals, for
instance JCPenney. Hence, it is best for the firm pursuing product differentiation strategy to minimize its
costs yet compete against others using differentiation rather than both strategies.