COST LEADERSHIP

X DIM

DIFFERENTIATION STRATEGY
THE STRATEGIC GROUP
MODEL
To understand competitive behavior and performance within an industry, we can
map the industry competitors into strategic groups. We do this as shown:
 Identify the most important strategic dimensions such as expenditures on research and development,
technology, product differentiation, product and service offerings, pricing, market segments,
distribution channels, and customer service.

 Choose two key dimensions for the horizontal and vertical axes, which expose important differences
among the competitors. The dimensions chosen for the axes should not be highly correlated.

 Graph the firms in the strategic group, indicating each firm’s market share by the size of the bubble
with which it is represented
STRATEGIC GROUPS AND THE
MOBILITY BARRIER IN THE U.S.
DOMESTIC AIRLINE INDUSTRY
• strategic group: The set of companies that pursue a
similar strategy within a specific industry.

• mobility barriers Industry-specific factors that

separate one strategic group from another.

1. Competitive rivalry is strongest between firms that

are within the same strategic group.
2. The external environment affects strategic groups
differently.
3. The five competitive forces affect strategic groups
differently.
4. Some strategic groups are more profitable than
others.
COMPETITIVE PROFILE
MATRIX (CPM)
 The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its particular
strengths and weaknesses in relation to a sample firm’s strategic position.
 Critical success factors in a CPM include both internal and external issues; therefore, the ratings refer
to strengths and weaknesses, where 4 = major strength, 3 = minor strength, 2 = minor weakness, and
1 = major weakness.
 The critical success factors in a CPM are not grouped into opportunities and threats as they are in an
EFE. In a CPM, the ratings and total weighted scores for rival firms can be compared to the sample
firm. This comparative analysis provides important internal strategic information. Avoid assigning the
same rating to firms included in your CPM analysis.
 Strategic Group

Minor weakness

Different score
Key Success
Factor in
Industry Major strength

Strongest firm
COMPETITIVE ADVANTAGE
1. Is the ability of an organisation to add more value for its customers than its rivals and
therefore attain a position of relative advantage
2. Is what gives a firm an edge over its rivals
3. Arises from the selection of the generic strategy that best fits the organisation’s
competitive environment
4. The key drivers of competitive advantage are cost leadership and differentiation of
product
THE BASIS OF THE GENERIC STRATEGIES

1. Porter argues that a firm’s strengths ultimate fall into one of two headings:
cost advantage and differentiation
2. By applying these strengths in a broad or a narrow focus, three generic
strategies result: cost leadership, differentiation and focus
3. They are called generic strategies because they are not specific to a firm
or an industry
SHOULD WE?
Business Level Strategies

Two Generic Business Level Strategies

Cost Leadership:
• generate economic value by having lower costs
than competitors
Example: Wal-Mart

Product Differentiation:
• generate economic value by offering a product
that customers prefer over competitors’ product
Example: Harley-Davidson
GENERIC STRATEGIES AT A GLANCE
Low cost
• Low cost culture
• Economies of scale
• Eliminate unnecessary
costs
• Enjoy high profits through
cost advantage
Differentiation
• Adding value through:
• Product features
• Product quality
• Distinctive offering
• Offer something new or
different
• High costs but charge
premium price
GUESS WHICH ONE IMPLEMENT
DIFFERENTIATION
GUESS WHICH ONE IMPLEMENT COST
LEADERSHIP
COST LEADERSHIP
1. This strategy concentrates on aiming to become the lowest cost producer in the
industry through economies of scale
2. In this way the firm can compete on price with every other producers in the
industry and earn higher unit profits
3. Cost reduction provides the focus of the organisation’s strategy
4. Competitive advantage is achieved by driving down costs
COST LEADERSHIP TYPE
Type 1 is a low-cost strategy that offers products or services to a wide range of
customers at the lowest price available on the market.
Type 2 is a best-value strategy that offers products or services to a wide range of
customers at the best price-value available on the market.

The best-value strategy aims to offer customers a range of products or services at the
lowest price available compared to a rival’s products with similar attributes. Both
Type 1 and Type 2 strategies target a large market.
 Cost Drivers: Cost-Leadership

• Cost Leadership:
 Cost of input factors, economies of scale, and learning-curve and
experience-curve effects
 Competitive advantage = economic value created (V-C) > competitors
 Walmart vs. Kmart
 Dell vs. Compaq, Gateway, & HP
Economies of Scale and Diseconomies of Scale
BENEFITS OF COST
LEADERSHIP

1. Enjoy higher than average profits

2. Engage in price war
3. Eliminate rivals
4. Defend market share
1. Increase market share
2. Build barriers to the entry of
newcomers to the market
3. Weaken the threat of substitutes
4. Enter new markets
FIVE FORCES AND COST
LEADERSHIP
The five forces The cost leader is
Entry barriers Able to cut prices to discourage potential entrants to
the market
Buyer power Able to offer a competitive price to buyers with
power
Supplier power Protected from a powerful buyer by low costs
Threat of substitution Able to make use of low price as defence against
substitutes
Rivalry Is better able to compete on price
SOURCES OF COST
LEADERSHIP
1. Size - economies of scale 1. Low cost labour
2. Greater labour efficiency and 2. Design for low cost production
effectiveness
3. Use the latest technology to reduce costs
3. Control of overheads and or enhance productivity
4. Superior management 4. Relocation to low cost site
5. Greater operating efficiency and 5. Favourable access to low cost sources of
effectiveness supply
6. Low cost production 6. Reduction in waste
FIRMS THAT SUCCEED IN COST
LEADERSHIP
Firms that succeed in cost leadership have the following strengths:
 Access to the capital required to make significant investment in fixed assets
 Design skills for efficient manufacture
 A high level of expertise in manufacturing process engineering
 Efficient distribution channels
Examples of cost leadership : Airasia, Toyota, Wal-Mart Tesco
RISKS OF COST LEADERSHIP
1. Vulnerability to even lower cost operators
2. As technology improves, a competitor may be able to leapfrog the
production capabilities, thus eliminating the competitive advantage
3. It could lead to a damaging price wars
4. There might by difficulty in sustaining cost leadership in the long run
5. A firm following a focus strategy might be able to achieve even lower cost
within their segment
A MISCONCEPTION IN COST
LEADERSHIP
•Cost leadership is often seen as a strategy that aims to attract customers with
low prices that are made possible by low costs
•But cost leadership does not necessarily mean selling at the lowest price
•It might mean selling at the industry average price but enjoying above
average profits through low cost production
•The low costs result in high profit margins
DIFFERENTIATION STRATEGY
A business level strategy intended to:
increase the perceived value of the focal firm’s products and/or services relative to the value of
competitor’s products and/or services

1. Success in a differentiation strategy means:

 Gaining a competitive advantage by making their product different from competitors
 Competing on the basis of value added to customers
 Persuading customers that the firm’s product is superior to that offered by rivals
 Customers being willing to pay a premium price to cover higher costs

2. Differentiation can be based on product image or durability,after-sales,quality,additional

features,after sales
3. And it requires talent, research capability and strong marketing
PORTER GENERIC STRATEGY
 Value Drivers: Differentiation

 Product features, customer service, customization, and complements

 Competitive advantage = economic value created (V-C) > competitors
 Marriott line of Hotels
DIFFERENTIATION: BENEFITS
1. Differentiation offers the prospect of charging a premium price
2. Demand for a differentiated product will be less elastic than that for competitors
products
3. Differentiation can result in above average profits
4. Differentiation can create additional barriers to entry to the market for newcomers
THE FIVE FORCES AND DIFFERENTIATION
Five forces A firm pursuing a differentiation strategy…
Entry barriers Benefits from customer loyalty which discourages
potential entrants
Buyer power Enjoys some protection since large buyers have less
power to negotiate because of the absence of close
alternatives
Supplier power Is better able to pass on supplier price increases to
customers
Threat of substitution Is protected from the threat of substitutes by customer
loyalty
Rivalry Benefits from brand loyalty to keep customers from
rivals
SOURCES OF
DIFFERENTIATION
1. Creation of strong brand
2. Superior performance
3. High quality
4. Additional features offered
5. Innovation in packaging
1. Speed of distribution
2. Higher service levels
3. Greater flexibility
4. Delivery
5. Quality of the materials
BASES OF DIFFERENTIATION
Almost anything can be a base of differentiation
The wide range of customer needs can be filled by a wide range of bases of
differentiation

 tangible thing (product features, location, etc.)

 intangible concept (reputation, a cause, an ideal, etc.)
 limited only by managerial creativity
BASES OF DIFFERENTIATION
Three Categories
1) Product Attributes
exploiting the actual product
2) Firm—Customer Relationships
exploiting relationships with customers
3) Firm Linkages
exploiting relationships within the firm and/or relationships with other firms
FIRMS THAT SUCCEED IN A
DIFFERENTIATION STRATEGY
1. Firms that succeed in a differentiation strategy have:
 Have access to leading scientific research
 A strong creative product development team
 Strong sales team with the ability to successfully communicate the strengths of the product
 Reputation for quality and innovation

2. Examples:
 BMW
 Miele - high quality domestic appliances
 James Purdey – rifles
 Bang and Olufsen- high quality hi-fi
 Mercedes
RISKS OF DIFFERENTIATION
STRATEGY
1. There are difficulties of sustaining differentiation
2. Differentiation involves higher costs
3. There is a risk of creating differences that customers do not value
4. Customers might become price sensitive and choose on price rather than uniqueness
5. It might involve differentiation on dimensions that become less important to customers over
time
6. Customers may no longer need the differentiation factor
7. Imitators may narrow the differentiation
8. Rivals pursuing a focus strategy may be able to achieve even greater differentiation in their
market segments
PORTER GENERIC STRATEGY
FOCUS STRATEGY
1. In a focus strategy the firm concentrates on one (or at most a limited number of)
segments of the market
2. The premise behind this strategy is that the needs of the group can be bettered served by
focussing entirely on it
3. The firm might feel more secure in the niche with greater insulation from competition
4. A focus strategy means that the firm’s efforts are not spread too thinly
5. Focus strategies are
1. Cost focus: cost leader in a particular segment
2. Focus differentiation: differentiation in the chosen segment
REQUIREMENTS OF A FOCUS
STRATEGY
1. A focus strategy requires…
2. The identification of a suitable target customer group
3. Identification of the specific needs of that group
4. Confirmation that the market is sufficiently large to sustain the business
5. Estimation of the extent of competition within the segment
6. Production of products to meet the specific needs of that group
7. A decision on whether to opt for cost leadership or differentiation within
the segment
BENEFITS OF A FOCUS
STRATEGY
1. It involves lower investment in resources
2. The firm benefits from specialisation
3. It provides scope for greater knowledge of a segment of the market
4. It makes entry to new markets easier and less costly
5. Firms using a focus strategy often enjoy a high degree of customer loyalty
FOCUSSED COST LEADERSHIP
1. A strategy that aims…
2. To attract one type of customer with a low cost product
3. To be the lowest cost operator in one particular niche segment of the market
4. Example :Hyundai
FOCUSSED DIFFERENTIATION
1. A strategy that aims to attract one type of customer with a differentiated product
2. It involves distinctiveness in one segment
3. Aims to exploit unique position in a niche segment of the market
4. Not the cheapest but the best or most distinctive in that segment
5. Example: BMW, Mercedes
PROBLEMS ASSOCIATED WITH FOCUS
STRATEGY
1. Limited opportunities for growth
2. Sacrifice of economies of scale that would be available from a larger market
3. The firm could outgrow the market
4. Danger of decline in the chose segment or niche
5. A reputation for specialisation inhibits move into new sectors
6. Risk of imitation
7. Risk of changes in the target segment
STUCK IN THE MIDDLE
1. Porter argued that a firm must make a conscious choice about the competitive advantage
it seeks to develop
2. If it fails to choose one of these strategies,it risks being “stuck in the middle”,trying to be
all things to all people,and ends up with no competitive strategy at all
3. Being stuck in the middle leads to low profitability
4. Competitors with a clear strategy outperform those whose strategy is unclear or attempt a
combination of strategies
EXAMPLES OF STUCK IN THE
MIDDLE
ARGUMENTATION BY: IBS AMERICAS (2020)
WHAT IS WRONG WITH BEING “STUCK
IN THE MIDDLE”?
1. It is difficult to simultaneously become differentiated and low cost
2. The firm loses out to others able to undercut it and to those able to offer a superior
product
3. If a firm differentiates itself by supplying very high quality products it risks undermining
that quality if it seeks to be come a cost leader
4. Such a firm also suffers from a blurred corporate culture and the projection of a
confusing image
MULTIPLE STRATEGIES
Firms that are able to succeed at multiple strategies create separate business units for
each strategy
By separating the strategies into
 Different units
 Each with its own culture
 Each with its own brands