Can a firm pursue both a successful cost leadership strategy and differentiation strategy and be successful at both?

A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus.

1. Cost Leadership

In cost leadership, a firm sets out to become the low cost producer in its industry. 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 low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average.

2. Differentiation

In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price.

3. Focus

The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.

The focus strategy has two variants.

(a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments.

References

Porter, Michael E., "Competitive Advantage". 1985, Ch. 1, pp 11-15. The Free Press. New York.

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1) THE PROBLEM

1.1.PROBLEM DEFINITION

Porter distinguished between two types of strategies: differentiation and cost leadership. Choose of one puts constraints on using the second.

1.2.RESEARCH DESIGN

Define each strategy, advantages, disadvantages, implementation and application.
Draw a conclusion and the impact of using one strategy on the other strategy.

2) DIFFERENTIATION

2.1.DIFFERENTIATION DEFINITION

Differentiation consists in differentiating the product or service offered by the firm, in other words, creating something that perceived by customers as being unique, it could be achieved in various ways, through design, brand image, technology, features, customer service, and dealer network.

2.2.HOW TO IMPLEMENT DIFFERENTIATION STRATEGY

Ideally, the firm should differentiate itself along several dimensions.

Firstly, to implement differentiation, a firm may focus directly on product or attributes, i.e. features complexity, timing of product introduction, or location.

Secondly, a firm may focus on the relationship between itself and its customers, for example through product customization, consumer marketing and product reputation.

Finally, differentiation may be implemented by focusing on the linkage within or between firms, which includes linkage within functions of a firm, linkage with other firms, product mix, distribution channels and service support.

2.3.ADVANTAGES OF DIFFERENTIATION

Differentiation creates value by enabling a firm to charge a premium price that is greater than the extra cost incurred by differentiation; The Company does so with confidence because of a highly developed and strong corporate identity.
The company can readily pass along higher supplier costs to its customers because of the lack of substitute or alternative products on the market.
Having a loyal customer following helps stabilize the company's revenue and lessens the impact of market downturns because of customer loyalty in good times and bad times.
A company must worry about competitors' copying its business methods and stealing away its customers.
Implementing a differentiation strategy is costly.
It may take years before a company achieves a strong brand image that sets it apart. During that time, the company faces the risk of changing consumer tastes or preferences. In such a case, the company may not have sufficient customer demand to offset its higher costs, which may lead to a loss.

2.4.DISADVANTAGES OF DIFFERENTIATION

A company must worry about competitors' copying its business methods and stealing away its customers.
Implementing a differentiation strategy is costly.
It may take years before a company achieves a strong brand image that sets it apart. During that time, the company faces the risk of changing consumer tastes or preferences. In such a case, the company may not have sufficient customer demand to offset its higher costs, which may lead to a loss.

2.5.DIFFERENTIATION APPLICATION

Apple: is the perfect example it Providing uniquely superior benefits, all three revolutionary Apple products – the iPod, iPhone, and iPad – provided some level of both superior and different benefits. With the iPhone, many things were clearly superior such as the processing power, ram and the touchscreen. Other things were clearly different such as the way you could order it online directly from Apple or in an Apple stores.

3) COST LEADERSHIP

3.1.COST LEADERSHIP DEFINITION

Cost leadership is about organizing all your resources around producing goods and services at the lowest cost possible. By having the lowest costs associated with providing your products, you put your business in the unique position of being able to charge your customers the lowest price in the market for those products.

3.2.HOW TO IMPLEMENT COST LEADERSHIP

Reductions through experience, economies of scale, modify supply chain, lean manufacturing, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, etc.

3.3.COST LEADERSHIP ADVANTAGES

Higher Profitability: One benefit available to low-cost operators in an industry is higher profit margins. If you can sell products and services with a lower cost basis and competitive pricing, your margins are greater than companies that invest more to produce products of a similar quality.
Increased Market Share: earn higher profits and use it to increase customer demand and market share. Companies that are able to offer products at a lower-than-typical market price can usually induce more business from budget-conscious buyers.
Sustainability: Companies that have low-cost leadership are also typically in a more sustainable business position. During tough economic times, downturns in a given industry or when price wars beat down price potential, companies with lower costs of doing business have a better chance of survival.
Capital for Growth: Another major benefit of low-cost leadership is that you have more capital resources available to fund growth or further investments.

3.4.COST LEADERSHIP DISADVANTAGES

In an attempt to maintain a low cost position, a firm might reduce costs in critical areas such as customer service. These cost reductions have the potential of driving away some customers who seek better customer service.
Another turn-off for customers is the lack of innovation or new products. For a firm to introduce new products or new features in products, research and development need costs. However, for the low cost strategist, these extra costs should be eliminated; as a result, this delay in innovation has a negative effect on customers who desire the innovations.

3.5.COST LEADERSHIP APPLICATION

Carrefour Egypt: the most popular retailer in Egypt, Carrefour sells a bit of everything, with an emphasis on low prices.

Carrefour’s low pricing policy was apple to appeal to the Egyptian culture, it offers the best-quality products for the lowest prices, and is able to offer and sustain its low prices because of its ability to exert pressure on its suppliers to give it deep price reductions.

4) CONCLUSION

4.1.MY OPINION

Choose of one puts constraints on using the second because Porter’s view of the two strategies implies that cost leadership and differentiation viewed as opposite ends of a single scale. For an illustration, Cost leadership and differentiation as opposite ends of a single scale Cost leadership on one side and Differentiation on the other side.

If the firm strategy is differentiation it means extra cost needed to be unique thus we can’t use cost leadership in this case, and if we targeting cost leadership it means lean manufacturing, may be low quality or reduced features which definitely means we are far from differentiation.

The two strategies are incompatible, because the two strategies are mutually exclusive.

That means if the strategy founded at one of the ends of the scale. Any location on the scale, which is not one of the ends, illustrates an unclear strategy, or “stuck in the middle”.

In other words, a trade-off is required because a firm cannot move away from an end without its strategy become increasingly unclear, or “confused”, which eventually will cause it to loose profits.

Risk of becoming too broad: Stuck in the middle” attract either high volume customers nor premium price customers

4.2.APPLICATION

SAS and its low cost alternative Snowflake is a good example illustrating the strategies are incompatible. To meet the raising competition from low cost carriers, SAS took the decision to introduce Snowflake, its own low cost alternative. 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. The reason is that SAS is a differentiator and so the differentiation strategy is present in the whole company. Reducing costs increases margins and makes SAS to a better differentiator as long as the strategy remains clear. Attempting to integrate too many elements of cost leadership into its differentiation strategy however damages the initial strategy.”

And we can imagine what if Apple want to implement the two strategies, the differentiation which is the main strategy and cost leadership, I think the company will fail because to be cost leadership you should do something towards reducing costs , like invest less in R&D , or use low quality materials which finally lead to reduced features and less innovation in contradiction to well known for apple and it will lose its’ customers as a result the company will fail in applying the hybrid strategy.

Why can't we pursue both differentiation and cost leadership?

Why is it so Hard to be Both? In the face of competition, it is unrealistic to be both because cost leadership and differentiation take very different disciplines. A cost leader will choose standardization and will sacrifice non-conforming customers in order to maintain its meaningfully lower costs.

Can a business firm successfully compete on both ends ie low cost and differentiation strategies?

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.

Which is better a cost leadership strategy or a differentiation strategy?

The results indicate that both cost leadership and differentiation strategies have a positive impact on contemporaneous performance. However, the differentiation strategy allows a firm to sustain its current performance in the future to a greater extent than a cost leadership strategy.

Is a hybrid strategic approach focused on both differentiating and cost effectiveness?

The hybrid' strategies combine the feature of both low cost and differentiation elements (Gopalakrishna & Subramanian, 2001; Proff, 2000). The hybrid strategy facilitates the sale of product at lower prices than the competitor while at the same time offering higher quality for the product.