Business and Business Opportunity

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RESPONSE:

1. What is cost leadership strategy and differentiation strategy? Is it possible for a company or business unit to follow a cost leadership strategy and a differentiation strategy? Why or why not? Give an example to support your answer.

a. Cost leadership strategy emphasizes efficiency by producing high volumes of standardized products. In this way, the firm hopes to take advantage of economies of scale and experience curve effects. For example, the product is often a basic no-frills product produced at a relatively low cost and made available to a very large customer base. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. The associated distribution strategy is to obtain the most extensive distribution possible. Promotional strategy often involves trying to make a virtue out of low cost product features. To be successful, this strategy usually requires a considerable market share advantage or preferential access to raw materials, components, labor, or some other important input. Without one or more of these advantages, the strategy can easily be mimicked by competitors. Successful implementation also benefits from:

· Process engineering skills
· Products designed for ease of manufacture
· Sustained access to inexpensive capital
· Close supervision of labor
· Tight cost control
· Incentives based on quantitative targets.

Examples include low-cost airlines such as EasyJet and Southwest Airlines, and supermarkets such as KwikSave. http://en.wikipedia.org/wiki/Porter_generic_strategies#Cost_Leadership_Strategy

b. Differentiation Strategy

Differentiation involves creating a product that is perceived as unique (as opposed to the lowest cost). The unique features or benefits should provide superior value for the customer if this strategy is to be successful. Because customers see the product as unrivaled and unequaled, the price elasticity of demand tends to be reduced and customers tend to be more brand loyal. This can provide considerable insulation from competition. However there are usually additional costs associated with the differentiating product features and this could require a premium pricing strategy. In order to maintain this strategy the firm should have:

· Strong research and development skills
· strong product engineering skills
· Strong creativity skills
· Good cooperation with distribution channels
· Strong marketing skills
· Incentives based on subjective measures
· Be able to communicate the importance of the differentiating product characteristics
· Stress continuous improvement and innovation
· Attract highly skilled, creative people http://en.wikipedia.org/wiki/Porter_generic_strategies#Cost_Leadership_Strategy

These are two polar opposite strategies, and by definition, it is unlikely a company would be using both strategies. Although they are both broad, differentiation strategy is based on uniqueness competency, while cost leadership has the low cost strategy. In fact, Porter has been criticized and several commentators have questioned the use of generic strategies claiming they lack specificity, lack flexibility, and are limiting. In many cases trying to apply generic strategies is like trying to fit a round peg into one of three square holes: You might get the peg into one of the holes, but ...