This week we will study Porter's generic strategies that companies use to gain competitive advantage:
- The cost leadership strategy that consists in producing goods or providing services with features that are acceptable to customers at the lowest cost, compared to the cost of your competitors. "The cost leadership strategy represents attempts by firms to generate competitive advantage by achieving the lowest cost in the industry. The focus of firms implementing a cost leadership strategy is on stringent cost control and efficiency in all areas of operation".1
- The differentiation strategy that consists in producing goods or providing services with features that are perceived as being unique in the industry and that are sustainable in the long term. "Such differentiation can be based upon design or brand image, distribution, and so forth. In particular, differentiator firms create customer value by offering high-quality products supported by good service at premium prices".1
- Focus strategy, which defines the scope of the strategy, cost leadership or differentiation, adopted by the company, in other words, it has to do with the size of the market segment where the company will implement the adopted strategy. Generally, it refers to a specific (narrow) market segment.
Every strategy has advantages and risks. The implementation of a particular strategy depends on the characteristics of the company, in other words, corporations should implement the strategy that best fits into its industry and culture.
Indeed, some authors suggest that companies should avoid implementing more than one strategy simultaneously. For example, Porter considers that each strategy provides a unique way of creating sustainable competitive advantage, and consequently, companies need to make a decision, for example between cost-leadership and differentiation strategies, or they will become stuck-in-the middle without coherent strategy, as stated by Acquaah & Ardekani.
Examples of companies that have adopted successfully a single strategy are:
- Cost leadership strategy: Wal-Mart and Air Asia
- Differentiation strategy by brand: Harley Davidson and Mercedes Benz.
- Differentiation strategy by design: Titan watches with gold studded gems, diamonds and precious metals.
- Differentiation strategy by positioning: Domino's Pizza “30 minutes delivery”.
- Differentiation strategy by technology: Apple Computers
- Differentiation strategy by innovation: 3M.
However, the article cited at the end of my blog collects some evidence that companies can achieve better results by implementing the two strategies simultaneously: cost-leadership and differentiation strategies. The research is divided into three parts: first, it analyzes related literature; then, it presents a case study; finally, it compiles information from some field interviews with managers of a company that has implemented both strategies simultaneously. The general idea is that "low cost and differentiation strategy may be compatible approaches in dealing with competitive forces"1, especially in today's global markets. The hybrid strategy is more than just the implementation of both strategies at the same time (“stuck-in-the-middle” strategy), it requires a strong emphasis on both strategies, in other words, it "depends on the ability to deliver enhanced benefits to the customers with low price while achieving sufficient margins for reinvestment to maintain and develop bases of differentiation".1
Examples of companies that have adopted successfully a single strategy are IKEA (differentiate in design + low cost), Toyota (quality - although under pressure + price), and Tesco.
The general results of this study suggest that:
- Companies that implement both strategies are better prepared to adapt to environmental changes, to learn new skills and adopt new technologies.
- When a company implements a hybrid strategy, it creates more sources of competitive advantage than those created with a single competitive strategy.
- The hybrid strategy generates "superior incremental performance"1 that a single strategy.
In conclusion, the implementation of both technologies might produce better results to corporations since "differentiation enables the company to charge premium prices and cost leadership enables the company to charge the lowest competitive price. Thus, the company is able to achieve a competitive advantage by delivering value to customers based on both product features and low price".1
Although the study suggests that there should be a more detailed research to confirm the results, I consider that companies should adopt a hybrid approach, especially large corporations with a broad range of products and services and with presence in global markets. Such is the case of the example presented in the study, in which a home appliances company implements a hybrid strategy, depending on the market: saturated market, stable market or emergent market.
Do you think that smaller companies, with a limited offer of products and services or that serves to a single type of market can also be benefited from a hybrid strategy?
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