Monday, November 28, 2011

Can two generic strategies be pursued simultaneously?

The answer seems to be: It is possible but it is very rare.
Building on the types of strategy excerpt, I hereby summarize conditions in which both cost leadership and differentiation can be achieved and the risks associated with following each independently. (Based on Porter’s work)
Companies can achieve both cost leadership and differentiation when:

Competitors are stuck in the middle: If competitors are not following the low-cost leadership strategy, it enables the firm to invest in pursuing the low cost strategy while not sacrificing differentiation. Because differentiation is usually costly, the firm would not be able to pursue the
low-cost leadership strategy had any of the firm’s competitors pursued it. Hence, this situation is temporary until one of the competitors invests in standardizing the product and gaining cost advantage.

A firm pioneers a major innovation: A firm can achieve both low cost leadership and differentiation if the firm introduces a major technological innovation and is the only one to do so. The firm can continue to enjoy this position till other firms catch up. The way then to maintain this position is (at the risk of sounding clich├ęd) is to constantly innovate

Cost is strongly affected by market share or interrelationships

Some of the risks of pursuing each of the two generic strategies independantly are:
Risks of low-cost leadership:
a) Cost leadership may not be sustained if competitors imitate or
technology (based on which the firm had a cost advantage) changes (and the
firms cost are locked in)
b) Proximity in differentiation is lost: The cost advantage is
based on a firm’s ability to provide nearly as good a product (proximity to a
firm whose product is differentiated) at a lower cost. If the competitor’s product is extremely differentiated (in terms of better quality, more features etc) then the firm would risk losing consumers who prefer paying a price premium for the differentiated product
c) Other firms achieve an even lower cost in certain segments
Risks of differentiation:
a) Differentiation may not be sustained owing to competitors who imitate or the basis for differentiation become irrelevant/less important to consumers
b) Cost proximity is lost: The cost leader is able to lower the price to such an extent that few customers who earlier preferred the differentiated product now switch to the low-cost product.
c) Other firms achieve an even greater differentiation in segments

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