Page 32 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Unit 2: Strategy and Operations Strategy

efficient competitor. Lower cost provides protection against suppliers because there is more Notes
flexibility in the organization to cope with input cost increases. Any new entrant will find it
difficult to overcome entry barriers because of scales of economy and as the activities taken to
achieve low costs are both rare and costly to imitate.
Finally, it places the organization in a favourable position when pitted against substitutes
compared to competitors in the industry.
Cost leadership is valuable if:
1. Buyers do not value differentiation very much
2. Buyers are price-sensitive
3. Competitors will not immediately match lower prices

4. There are no changes in
(i) consumer tastes
(ii) technology
(iii) exogenous prices/costs

There are a number of risks in using this strategy. These risks relate to the fast changing business
environment. The most important risk to cost leadership is technological change that nullifies
past investment or learning of the organization. Sometimes the inability of the management to
see or anticipate the changes required in the product or market change, is a risk. The
organization’s advantage can also be neutralized if there is low cost learning by industry
newcomers or inflation in costs of supplies or processes that provide the organization a
competitive advantage.

2.2.2 Differentiation Strategy

In a differentiation strategy, a firm seeks to be unique in its industry along some dimensions
that are widely valued by buyers. It selects one or more attributes that many buyers in an
industry perceive as important, and uniquely positions itself to meet those needs. Differentiation
will cause buyers to prefer the company’s product/service over brands of rivals. An organization
pursuing such a strategy can expect higher revenues/margins and enhanced economic
performance.
The challenge is finding ways to differentiate that create value for buyers and that are not easily
copied or matched by rivals. Anything a company can do to create value for buyers represents
a potential basis for differentiation. Ways to differentiate products/services include:
1. Product features
2. Linkage between functions

3. Timing
4. Location/convenience
5. Product mix
6. Links with other firms
7. Customization
8. Product complexity/sophistication

9. Marketing (image, etc.)
10. Service and support

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