Question

Short Answer (10 points each) 17. Explain the organizational requirements necessary for a differentiation versus a cost leadership strategy. Be sure to explain what steps the organization must take in order to compete using each strategy.

Answer 1

Competitive Strategy refers to a way of creating competitive advantage over competitors. It represents a greater value for the customer, created either by lower prices or by providing greater benefits and services that justify higher prices.

Generally speaking, there are four possible ways to differentiate a business – to become a cost leader (meaning that you become the lowest-cost producer in the industry) and to become a differentiation leader (meaning that you compete in areas other than price valued by customers), both in a narrow or broad scope of business’ activities.

Choosing the right competitive strategy is crucial strategy development step for the corporate, business unit and products and/or services success.

Cost Leadership Strategy:

Cost strategy is built on no-frills. Cost leadership strives towards cutting costs to a minimum possible levels in order to provide customers with lower prices and thus boost their savings. Cost strategy prerequisites normally relate to high technical capabilities and access to capital for the company to invest in technology and assure economies of scale.

In most of the cases cost strategy for first-movers lead to significant increase in market share and capacity utilization, that further drives down costs.

In order to achieve the minimizing the cost the organisation has to take following steps:

1. It has to achieve high productivity

2. The capacity utilization should be maximum

3. It has to use of bargaining power to negotiate the lowest prices for production inputs

4. It has to follow lean production methods like JIT

5. Effective production process

6. Effective distribution channels

Differentiation Strategy

Differentiation strategy is built on a belief that one needs a clear and unique positioning. Differentiation leadership focuses in providing perks that add value for consumers, while higher prices are a sort of “make up” for their higher costs.

Building a strategy on a differentiation requires a company to continuously invest in and develop:

1. Superior product quality (features, benefits, durability, reliability)
2. Branding (strong brand recognition, desire and loyalty)
3. Industry-wide distribution across all major channels (i.e. the product or brand is an essential item to be stocked by retailers)
4. Marketing capabilities (advertising, sponsorship etc.)

Differentiation strategy could be further divided into:

1. Purification (decrease in price; decrease in perceived value) – examples: EasyJet, Tata, Logan etc.
2. Hybrid (decrease in price; increase in perceived value) – examples: IKEA (SCM optimisation), Loreal (new brands as a response to crisis) etc.
3. Sophistication (increase in price; increase in perceived value) – examples: Mercedes (status), VW (reliability); Toyota (TQM)
Despite the fact that these brands pointed out above achieve significant economies of scale, they do not rely on a cost leadership strategy to compete. Strong marketing capabilities enable them to sell products for a premium and at the same time persuade customers to become brand loyal.