Page 150 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes Compared with the low-cost leader, competitors will have higher costs - see line Y-Y in the
Figure 8.2. After successful completion of this strategy option, the costs of the lowest-cost producer
will be lower by than those of other competitors–’see line X-X in the Figure 8.2.
This will deliver above-average profits to the low-cost leader.
To follow this strategy option, an organisation will place the emphasis on cost reduction at
every point in its processes. It should be noted that cost leadership does not necessarily imply a
low price. The company could charge an average price and reinvest the extra profits generated.

Differentiation Strategy

Differentiation consists of offering a product or service that is perceived as unique or distinctive
by the customer. This allows firms to command a premium price or to retain buyer loyalty
because customers will pay more for what they regard as a better product. A differentiation
strategy can be more profitable than a cost leadership strategy because of the premium price.

Products can be differentiated in a number of ways so that they stand apart from standardized
products:
1. Superior quality
2. Special or unique features
3. More responsive customer service

4. New technologies
5. Dealer network.

Example: Hero Honda, Nike athletic shoes, Sony, Asian Paints, Mercedes-Benz,
BMW etc.
Nokia achieves differentiation through the individual design of its product, while Sony achieves
it by offering superior reliability, service and technology. Mercedes-Benz differentiates by
stressing a distinctive product service image, while Coca Cola differentiates by building a
widely recognized brand. This strategy is often supported by high spending on advertising and
promotion to sustain the brand identity.

McDonald’s is differentiated by its brand name and its ‘Big Mac’ and ‘Ronald McDonald’ products
and imagery. In order to differentiate a product, Porter argued that it is necessary for the
producer to incur extra costs, for example, to advertise a brand and thus differentiate it.
The form of differentiation varies from industry to industry. In construction industry, equipment
durability, spare parts availability and service will feature, while in cosmetics, differentiation is
based on sophistication and exclusivity. Differentiation is aimed at the broad mass market. It is
a viable strategy for earning above average profits because the resulting brand loyalty lowers
customers’ sensitivity to price. Buyer loyalty also serves as an entry barrier because new entrants
must develop their own distinctive competence to differentiate their products in some way to
achieve buyer loyalty.
It is essential for the success of this strategy that the premium price for the differentiated product
must exceed the cost of differentiation. For successfully carrying out the differentiation strategy,
the following are required:
1. Creative flair

2. Engineering skills
3. R&D capabilities

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