Competitive Strategy - Discussion Topic 2

According to Michael E. Porter, there are three potentially successful generic strategic approaches

to outperform competition. A firm can simultaneously pursue more than one approach

successfully, or get ‘stuck in the middle’.

Can cost leadership and differentiation strategies co-exist in a firm? Substantiate with examples

The cost leadership and differentiation strategies are the commonly used strategy. In view of

Michael Porter, for a firm to earn superior profits and outperform its competitors, it must make a

clear choice between a cost leadership and a differentiation strategy in order to avoid “the inherent

contradictions of different strategies”

Porter also suggested that each generic strategy requires a different culture and totally different

philosophy, in order to succeed. The firm stuck in the middle is almost guaranteed low profitability.

It either loses the high-volume customers who demand low prices or must bid away its profits to get

this business away from low-cost firms. The firm stuck in the middle also probably suffers from a

blurred corporate culture and a conflicting set of organisational arrangements and motivation

system.

Cost Leadership Strategy:

Cost leadership requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost

reductions from experience, tight cost and overhead control, avoidance of marginal customer

accounts, and cost minimization in areas like R&D , service , sales force, advertising, and so on.

Ford had achieved unchallenged cost leadership through limitation of models and varieties,

aggressive backward integration, highly automated facilities and aggressive pursuit of lower costs

through learning. Learning was facilitated by the lack of model changes. Customers were willing to

pay a price premium to get such features. General Motors stood ready to capitalise on this

development with a full line of models. Ford faced enormous costs of strategic readjustment given

the rigidities created by heavy investments in cost minimization of an obsolete model.

Differentiation Strategy

Differentiation strategy is one of differentiating the product or service offering of the firm, creating

something that is perceived industry wide as being unique. Approaches to differentiating can take

many forms: design or brand image (Mercedes in automobiles) technology (Hyster in lift trucks, Boss

in stereo components, and iPhone in mobile), features, customer service, dealer network (Caterpillar

tractor in construction equipment) or other dimension.

Differentiation provides insulation against competitive rivalry because of brand loyalty by customers

and resulting lower sensitivity to price. It also increases margins, which avoids the need for a low-

cost position.

Differentiation yields higher margins with which to deal with supplier power, and it clearly mitigates

buyer power, since buyers lack comparable alternatives and are thereby fewer prices sensitive.

Achieving differentiation may sometimes preclude gaining a high market share. It often requires a

perception of exclusivity, which is incompatible with high market share. Achieving differentiation

will imply a trade-off with cost position if the activities required in creating it are inherently costly,

such as extensive research, product design, high quality materials or intensive customer support.

Whereas customers industry-wide acknowledge the superiority of the firm, not all customers will be

willing or able to pay the required higher prices (though most are in industries like earthmoving

equipment where despite high prices Caterpillar has a dominant market share). In other businesses,

differentiation may not be incompatible with relatively low costs and comparable prices to those of

competitors.

The implementation of a combined competitive strategy results in multiple sources of competitive

advantage (e.g., economies of scale and brand/customer loyalty) as compared to advantages gained

through pursuit of single competitive strategies. Moreover, the pursuit of a combined competitive

strategy, and each of the single competitive strategies will generate superior incremental

performance over the inability to successfully pursue any of the singular competitive strategies (i.e.,

stuck in the middle).

Furthermore, firms that pursue a differentiation strategy may also be able to achieve a low-cost

position by emphasizing efficiency in their value creating activities, thereby further strengthening

their competitive position vis-a-vis their rivals. The success of Japanese companies such as Toyota,

Canon, and Honda has been attributed to the simultaneous pursuit of cost leadership and

differentiation strategies. Successful organizations adopt a combination of competitive aspects to

build a Hybrid Strategy.