INTRODUCTION: In the competitive market industries of category of domestic, international or global have very competitive rivalry. Cost leadership and differentiation strategies are commonly used strategic management dimensions in the literature (Dess and Davis, 1984; Nayyar, 1993). But to achieve market superiority over competitors and profitability it has to make clear choice over the strategy used in order to avoid ‘the inherent contradiction of different strategies’ (Porter, 1996, p. 67) In today’s market for a company to survive, it has to create two corporate strategies 1.
Lowest price without jeopardizing the quality. 2. Better quality, simple way of operation and better look that means ability to be creative and innovative. According to Porter (1985) all generic competitive strategies have different way of cresting sustainable competitive advantage. And a company must always choose a strategy or else it will be stuck in the middle without coherent strategy (Acquaah & Yasai – Ardekani, 2006). Many companies for example Wal – Mart and AirAsia have been implementing a single strategy very successfully.
Examples of companies which has used differentiation strategy as single strategy successfully: * Differentiation by Brand: Harley Davidson and Mercedes Benz * Differentiation by Design: Titan watches – with gold studded gems, diamonds, precious metals. * Differentiation by Positioning: Domino Pizza ‘ 30 minutes delivery’ * Differentiation by Technology: Apple Computers * Differentiation by Innovation: 3M. Furthermore there are successful companies which apply hybrid – strategy which implies both cost leadership & differentiation strategy at the same time.
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Eg: German’s Automotive, Tesco supermarket, IKEA. Competitive Strategy: It is the way by which firms choose to accomplish and hold their competitive advantage. Regarding competitive strategy Porter stated that “taking offence or defensive actions to create a defendable position in an industry, to cope with …………competitive forces and thereby yield a superior return for the firm”. Companies have established different approaches to competitive strategy, as per the crisis companies should apply respective strategy. The basic of generic strategy:
Porter stated that company’s strength is divided into two attributes: cost advantage and differentiation. By applying these attributes in a broad and narrow focus, three generic strategies result: cost leadership, differentiation and focus. They do not represent any industry nor they are specific to any company. PORTER’S GENERIC STRATEGIES: Diagram 1: (Porter, 1980) Normally means “pursue a quality approach”. Enables a price premium to be charged for the quality difference. Normally means “pursue a quality approach”. Enables a price premium to be charged for the quality difference.
Aim to have lowest cost-base industry. Will facilitate favourable / cheaper pricing and thus grow market share in elastic industries particularly. Aim to have lowest cost-base industry. Will facilitate favourable / cheaper pricing and thus grow market share in elastic industries particularly. Competitive Advantage Competitive Advantage Differentiation Differentiation Lower Cost Lower Cost Broad Target Broad Target 1. Cost Leadership| Competitive Score Competitive Score 2. Differentiation| Narrow Target Narrow Target 3 A. Cost Focus| 3 B. Differentiation Focus|
Concentrate on one or a small number of market segments. Can be differentiation or cost leadership. Concentrate on one or a small number of market segments. Can be differentiation or cost leadership. Porter initially advised Firms to avoid attempting both Strategies - Stuck in the Middle - as out and out differentiators and cost leaders will tend to be more competitive. The success of Japanese (and other) firms with JIT, Kaizen and TQM techniques appears to provide evidence contrary to this view. Requirements for generic competitive strategies:
Generic Strategy| Commodity Required Skills and Resources| Common Organizational Requirements| Overall cost leadership| Sustained capital investment access to capital| Tight cost control| | Process engineering skills| Frequent, detailed control reports| | Intense supervision of labour| Structured organization and responsibilities| | Products designed for ease | Incentives based on meeting strict quantitative| | Low-cost distribution system| targets in manufacture| Differentiation| Strong marketing abilities| Strong coordination among functions in R&D, product development, and marketing| | Product ngineering| | | Creative flare | | | Strong capability in basic research| Subjective measurement andincentives instead of quantitative measures| | Corporate reputation for quality or technological leadership| Amenities to attract highly skilled labour, scientists, or creative people| | Long tradition in the industryor unique combination of skills drawn from other businesses| | | Strong cooperation fromchannels| | Focus| Combination of the above policies directed at the particular strategic target| Combination of the above policies directed at the regular strategic target|
Four strategic types and their approaches to strategy (Miles and Snow)? : 1. Defender: * protect market share * hold current position 2. Analyser: * seek market opportunities but protect existing areas * hold market share but with some innovation 3. Prospector: * find new opportunities * exploit and take risks 4. Reactor: * respond only to other * often late and inadequate COST AND DIFFERENTIATION STRATEGY: Cost Leadership Strategy - The cost leadership strategy represents cost control and efficiency in all areas of operation (Porter, 1980).
A company that decides to follow cost leadership actually achieves it by performing important value chain activities with lower cost (Porter, 1985). Cost – Leadership strategy strives to supply a standard, no frills, high volume product with a competitive price to customers (Bingxin Li & Juan Li, 2008) which is preferred in developing countries India, China, Indonesia & Malaysia. This make product more competitive than others with brand image and good service (Hutchinson et al. 2007; Frambach et al. 2003; Porter, 1980).
Cost Leadership aim requires strong focus on supply side as oppose to demand side of market – with high level competitor orientation (Day & Wendley, 1988). Cost Leadership strategy used by companies must benchmark them in a profitable position in the market place. As per Porter (1980), efficient cost leadership strategy minimizes cost in areas like R&D, Services, Sales and Advertising. In Japan, Toyota Company has successfully implemented cost leadership strategy with increased efficiency (Schonberger, 1994) which is a different factor make up in this strategy when compared to the western countries. Allen & Helms, 2001) Differentiation Strategy – The generic of differentiation strategy can be based upon design and brand image, distribution & so forth (Frambach. Et al. 2003). It involves by creating a place in the market that is realized as being different in the industry and has the capability to endure for a long run (Porter, 1980). The effectiveness of strategy depends on competitive offering to customers (Slater & Olson, 2001) with unique product for varied customer groups. This is with the aim to create minimum price of product in order to develop satisfaction and loyalty.
A firm with differentiation strategy creates superior characteristics in terms of image, reputation, reliability and equality (Dean & Evans, 1994; Sashi and Stern, 1995). This creates qualitative difference in products & service, engaged in advertising programs, marketing techniques with premium prices (Miller, 1986). According to Acquaah and Yasai – Ardekani (2006). Firms with competitive strategies has advantage over their rivals as they realized how unique their products and services are.
The differentiation strategy has been successfully implemented in France, Sweden, Canada with companies having advantage of Financial and technology resources, human capital and modern management (Aulakh et al, 2000) Focus Porter defined focus as one of the generis strategies but later on mentioned it as moderator of cost leadership and differentiation strategy, Companies which apply this strategy normally focus on the market where there are less competition. (Pearson, 1999). Firms uses this strategy to stress on a specific positioning in the market and so it offers quality and specialized products for that position.
Therefore sometimes focus strategy is referred as niche strategy (Lynch, 2003). This strategy allows the firm the possibility to charge a premium price for its specialized products. Ferrari and Rolls – Royce are examples of company using such strategy. The only problem with the strategy is that niche characteristic is not sufficient to justify company’s attention. Stuck in the middle – When a company fails to make a choice between the strategies then it is implied that the company is stuck in the middle. Thus affecting its profitability and resulting poor financial performance. (Peter, 1980)
THE COMBINATION (HYBRID) STRATEGY: The Porter Generic competitive Strategies (1980, 1985) can’t be given excessive prominence. Competitive forces ( Allen and Helms, 2006; Miller, 1992; Spanos, et al. , 2004) has been termed “ hybrid, mixed, integrated or combination strategies. (Kim. Et al. , 2004; Spanos, et al. , 2004). They combine both low cost and differentiation elements (Gopalakrishna and Subramanian, 2001; Proff, 2000). A combination of cost leadership and differentiation strategies should be distinguish from ‘stuck in the middle’ where firm fails to successfully pursue both. (Acquaah & Yasai – Ardekani, 2006).
A combination or hybrid strategy has been proved to be viable and profitable (Kim et al. , 2004; Miller & Dess, 1993; Wright et al. , 1991). Firms pursuing combined strategy achieved higher performance than the other firms which apply single strategy. Combined strategy also helps the firm to minimize their vulnerability due to reliance on cost – based advantages only (Yasai – Ardekani & Nystrom, 1996). This hybrid strategy success depends on ability to deliver enhanced benefit to customers with low price and sufficient margins to reinvestment. Tesco Supermarket is following same the same strategy (Strategy Explorer, 2010)
THE APPLICATION OF SINGLE STARTEGY: Cost Leadership Strategy: The cost leadership strategy is the basis for long – run compare to price competition. Price competition is easily duplicated (Porter, 1980; Ellis & Kelly, 1992). In retail business cost reduction must be exploited which minimizes cost throughout value chain activities. Important issues in retail business are related with cost of goods sold. (COGS). Large retail business achieve more easily cost leadership due to more power supplier to secure low procurement prices for purchased goods (Ellis & Kelley, 1992; Anderer, 1997).
Datuk Tony Fernandez as CEO of AirAsia Berhad said “Before business can grow it needs to have its cost under control, efficient and profitable and also it must create value”. AirAsia leader of LCC in Malaysia, Thailand and Indonesia will face competition from existing and new players and it need to make consideration & more stressed for the point of becoming the low cost carrier in the airline industries. Differentiation Strategy: It emphasis several dimensions such as image, gain customer loyalty, innovation and level of service (Kim et al. , 2004) by generating differences n product through intensive marketing & image management (Miller 1988) and creating products which are innovative, dependable, durable, and serviceable (Beal & Yasai – Ardekani, 2000) In retail business company, as for manufacturing companies two main arguments against Porter framework have emerged (Mintzberg, 1996; Worztel, 1987; Zentes and Anderer, 1994) – * Strategies that combine several competitive advantages are not considered by Porter. * The reduction of possible competitive advantage to two basic types is simplistic & especially differentiation advantages can be reached in different ways.
The implementation of combination of Cost Leadership and Differentiation Strategy (Hybrid Strategy): This new hybrid strategy may become even more important and more popular as Global competition increase. With generic strategy company improve their ability to adapt quick environment changes and learn new skills and technologies involving customer’s value with products at low cost compare to competitor’s products. Cost leadership enables the company to charge the lowest competitive price and achieving competitive advantage by delivering value to customers based on both product features and low price.
Competitive strategy is not only feasible but generates superior incremental performance result in multiple sources of competitive advantage. This will generate superior performance over the inability to success. The success of Japanese companies such as Toyota, Canon and Honda are best examples of cost leadership and differentiation strategies. (Ishikura, 1983). Porter’s Generic Strategies in Hospitality Industry: 1. Cost Leadership Strategy: Hotelier such as Fairfield Inns, Etap offer services which are basics. Thus by doing so, they keep the cost at minimum and attract lot of market segment. . Differentiation Strategy: Chain of hotels such as Marriott and Hilton apply this strategy by providing guests with high quality and special service and experience. 3. Focus Strategy: Four Seasons only stress on elite guests and Burj Al Arab hotel only target guests such as royal families, celebrities, and rich industrialists. Five Forces Analysis: Porter developed this model as a framework to understand the profitability about the industry. Mentioned below are the five forces: * Supplier’s power * Buyer’s power * The threat of substitutes * The ease of entry to the market The intensity of rivalry in the market Porter Five Forces that shape industry competition: Example of a pharmaceutical company in US: • Potential New Entrants: There are high barriers for entry especially in the US market due to the regulatory compliance, patent laws and the risk associated with the industry this remains a weak competitive force. The cost related to the R&D also limits the Potentials New Entrants. • Suppliers: Supplier power in low as the majority of the pharmaceutical sale is among the ten large pharmaceutical companies also they remain the major costumer for the chemical industry. Buyers: The power of the buyers is a moderate competitive force. Increasing pressure is being applied on the manufacturers to reduce the prices. In the pharmaceutical industry the end-user of the product has very low power as they buy the drugs that the decision maker or the doctor prescribes. • Substitutes: This competitive power is weak when the products have the patent production but gets medium when they are off patent. CONCLUSION: Successful organization adopts a combination of competitive aspect to build a hybrid strategy. i. e. Design and low cost, quality and price .
Only competing on price is not good enough (Daan Assens’s Learning , 2010). Cost leadership and differentiation strategies are very successful in much different kind of industries, for developing, transition and developed economics. Cost leadership, Differentiation and hybrid strategies have been successfully applied for very broad range of products and services from retail products to luxury products. TABLE 1: STRATEGIES USED BY THE COMPANIES No. | Strategy| Where has the strategy been applied | Products/Services that the strategy has been applied | 1. Cost Leadership| Developing, Transition and developed economics (worldwide)| Cars Industry (Toyota), Airline Business (Air Asia), Retail Business (Giant and Carrefour Supermarket)| 2. | Differentiation| Developing, Transition and developed economics (worldwide)| Cars and Motor cycle Mercedes Benz, Harley Davidson, Titan Watches, Domino Pizza, Apple , 3M| 3. | Hybrid – (Combination of Cost Leadership and Differentiation Strategy)| Developing, Transition and developed economics (worldwide)| Car Industry – Toyota, Honda, Furniture Industry - IKEA| REFERENCES: Acquaah, M. & Yasai-Ardekani, M. (2006). Does the implementation of a combination competitive strategy yield incremental performance benefit? A new perspective from transition economy in Sub-Saharan Africa. Journal of Business Research 61, 346 – 354. * Anderer, M. (1997). Internationaliseerung im Einzelhandel. Deutscher Fachverlag, Frankfurt. * Aulakh, Preet S. , Masaaki Kotabe. & Hildy Teegen. (2000). Export Strategies and Performance of Firms from Emerging Economies: Evidence from Brazil, Chile and Mexico. Academy of Management Journal, Vol. 3 (3), 342-61. * Bingxin Li, C. & Juan Li, J. (2008). Achieving Superior Financial Performance in China : Differentiation, Cost Leadership or Both? American Marketing Association, Journal of International Marketing, Vol. 16(3), 1-22. * Daan Assen’s Learning, (2010). Hybrid strategy: sustainable competitive advantage. http://www. daanassen. com/hybrid-strategy-sustainable-competitive-advantage (3 Jan, 2011). * Dess, G. , G. & Davis, P. S. (1984). Porter’s (1980) generic strategies as determinants of strategic group memberships and organizational performance.
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