Cost leadership and product differentiation

This often implies a lower market share and is a strategy that could be pursued when the low cost leadership position is occupied by a strong competitor. Where either of these two strategies is not available, the business can choose to focus on a niche or Cost leadership and product differentiation segment of the market as shown in box no.

For example, GE uses finance function to make a difference. Companies that are successful in achieving Cost Leadership usually have: Both supplies and labor are costly and there is additional overhead when contractors must consider the insurance and licensing components of the business.

For each generic strategy, carry out a SWOT Analysis of your strengths and weaknesses, and the opportunities and threats you would face, if you adopted that strategy.

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The advantage is static, rather than dynamic, because the purchase is a one-time event. Sharing the same view point, Hill cited by Akan et al.

Cost Leadership and Product Differentiation

And would you ever consider a small company with just a few routes? Differentiation drives profitability when the added price of the product outweighs the added expense to acquire the product or service but is ineffective when its uniqueness is easily replicated by its competitors.

Generic strategies apply to not-for-profit organizations too. That means managing costs in marketing and non-marketing functions such as production, supply, etc. The second dimension is achieving low direct and indirect operating costs.

The Focus Strategy Companies that use Focus strategies concentrate on particular niche markets and, by understanding the dynamics of that market and the unique needs of customers within it, develop uniquely low-cost or well-specified products for the market.

Cost Leadership requires a very detailed internal focus on processes. Though Porter had a fundamental rationalisation in his concept about the invalidity of hybrid business strategy, the highly volatile and turbulent market conditions will not permit survival of rigid business strategies since long-term establishment will depend on the agility and the quick responsiveness towards market and environmental conditions.

Variants on the Differentiation Strategy[ edit ] The shareholder value model holds that the timing of the use of specialized knowledge can create a differentiation advantage as long as the knowledge remains unique.

A firm may be attempting to offer a lower cost in that scope cost focus or differentiate itself in that scope differentiation focus. Examples of Differentiation Strategy: How you do this depends on the exact nature of your industry and of the products and services themselves, but will typically involve features, functionality, durability, support, and also brand image that your customers value.

But whether you use Cost Focus or Differentiation Focus, the key to making a success of a generic Focus strategy is to ensure that you are adding something extra as a result of serving only that market niche. Porter suggested combining multiple strategies is successful in only one case.

Good research, development and innovation. In particular, Miller [10] questions the notion of being "caught in the middle". The danger of this strategy is that as an industry matures, the products tend to be increasingly regarded by the market to be generics or commodities. This is where flat fee brokers have penetrated the market using cost leadership as an effective strategy to find new clients.

The differentiator can increase margins and avoid the need to compete in the low cost section of the market. Cookie-Cutter Home Renovations Contractors can cost a lot of money. But combinations like cost leadership with product differentiation were seen as hard but not impossible to implement due to the potential for conflict between cost minimization and the additional cost of value-added differentiation.

Realtors are allowed to legally charge up to six percent in commission on a transaction. There are two main ways of achieving this within a Cost Leadership strategy: Increasing profits by reducing costs, while charging industry-average prices.

Focus is not normally enough on its own. This is generally a strategy that only the market leader or perhaps a strong number two or three could successfully pursue. Specializing helps them work with wholesale distributors to get the best pricing on the standard package they sell to clients.

The answer is that each of these airlines has chosen a different way of achieving competitive advantage in a crowded marketplace.

Differentiation, on the other hand, demands an outward-facing, highly creative approach. Examples of firm using a focus strategy include Southwest Airlines, which provides short-haul point-to-point flights in contrast to the hub-and-spoke model of mainstream carriers, United, and American Airlines.

Porter's generic strategies

Otherwise, they risk attack on several fronts by competitors pursuing Focus Differentiation strategies in different market segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry. To apply differentiation with attributes throughout predominant intensity in any one or several of the functional groups finance, purchase, marketing, inventory etc.

At the heart of a successful differential strategy is the development of a customer franchise, based on brand loyalty.Refer to the matrix on the right for analysing the cost leadership versus differential strategy direction for your business and for analysing competitive strategies.

The low relative cost/low degree of differentiation position (box no. 4) is where you would expect to find the market leaders.

Porter's Generic Strategies

Cost Leadership vs. Differentiation Strategy. Add Remove. Can a business unit, or firm, follow both a cost leadership strategy and a differentiation strategy simultaneously? Companies that practice cost leadership strategy sell products at or below average industrial price to earn market share and make profit in the process.

Cost leadership. Cost leadership and product differentiation are two important business-level strategies is so widely recognized that they are called: _____. Cost leadership business strategy focuses on gaining advantages by reducing its costs to below those of all its competitors. Cost Leadership and Product Differentiation.

Competitive Advantage - Definition A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices/5(1). Cost Leadership And Product Differentiation Competitive Advantage - Definition A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.

Porter's generic strategies detail the interaction between cost minimization strategies, product differentiation strategies, and market focus strategies of porters. [1] Porter described an industry as having multiple segments that can be targeted by a firm.

Cost leadership and product differentiation
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