Page 148 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes strategic thinking. Arguably, they still have a contribution to make in the new century in the
development of strategic options.
Professor Porter argued that the three basic strategies open to any business are:

1. Cost leadership
2. Differentiation
3. Focus.
Each of these generic strategies has the potential to overcome the five forces of competition and
allow the firm to outperform rivals within the same industry. These are called ‘generic’ because
they can be used in a variety of situations, across diverse industries at various stages of
development.

Figure 8.1: Generic Strategic Options
Competitive advantage
Lower cost Differentiation

Broad target Cost leadership Differentiation
Competitive scope

Narrow target Focus

Source: M. E. Porter (1985), Competitive Advantage, The Free Press, New York, Michael Porter.
Cost Leadership

Cost leadership is a strategy whereby a firm aims to deliver its product or service at a price
lower than that of its competitors. Overall cost leadership is achieved by the firm by maintaining
the lowest costs of production and distribution within an industry and offering “no-frills”
products. This strategy requires economies of scale in production and close attention to efficiency
and operating costs. The firm places a lot of emphasis on minimizing direct input and overhead
costs, by offering no-frills products.

Example: Deccan Airways, Timex, Nirma.
A cost leadership strategy is likely to work better where the product is standardized, competition
is based mainly on price and consumers can switch easily between different suppliers. However,
a low cost base will not in itself bring competitive advantage. The product must be perceived as
comparable or acceptable by consumers. Firms pursuing this strategy must be effective in
engineering, purchasing, manufacturing, and physical distribution. Marketing can be considered
as less important, as the consumer is familiar with the product attributes.

Notes An important feature of cost leadership is the effect of the experience curve, in
which the unit cost of manufacturing a product or delivering a service falls as experience
increases. In the same way that a person learning to knit or play the piano improves with
practice, so the unit cost of value added to a standard product declines by a constant
percentage (typically 20 to 30%) each time cumulative output doubles (Grant, 2002). This
allows firms to set initial low selling prices in the knowledge that margins will increase
Contd...

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