Page 153 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Unit 8: Business Level Strategies

1. Risks of cost leadership: Notes
(a) Cost leadership may not be sustained
(i) If competitors imitate
(ii) If technology changes

(iii) If other bases for cost leadership erode.
(b) Proximity in differentiation is lost.
(c) Cost focusers achieve even lower costs in segments.
Proximity in differentiation means that companies that choose cost leadership strategy
must offer relatively standardized products with features or characteristics that are
acceptable to customers. In other words, the company must offer a minimum level of
differentiation–at the lowest competitive price. If this minimum level of differentiation is
lost, then the strategy of cost leadership will fail.

2. Risks of differentiation:
(a) Differentiation may not be sustained
(i) If competitors imitate.
(ii) If features of differentiation become less important to buyers.

(b) Cost proximity is lost.
(c) Firms that follow focus strategy may achieve even greater differentiation in segments.
(d) Dilution of brand identification through product-line.
A company following a differentiation strategy must ensure that the higher price it charges
for its higher quality is not priced too far above the competition, otherwise customers will
not see the extra quality as worth the extra cost. In other words, if the price differential
between the standardized and differentiated product is too high, the risk is that the company
provides a greater level of uniqueness than the customers are willing to pay for.

3. Risks of Focus: The competitive risks of focus strategy are similar to those previously
noted for cost leadership and differentiation strategies, with the following additions:
(a) Focus strategy is not sustained if competitors imitate it.

(b) The target segment may become structurally unattractive.
(i) if structure erodes.
(ii) if demand disappears.
(c) Competitors may successfully focus on an even smaller segment of the market, out
focusing the focuser, or focus only on the most profitable slice of the focuser’s
chosen segment.

(d) An industry-wide competitor may recognize the attractiveness of the segment served
by the focuser and mobilize its superior resources to better serve the segment’s
need.
(e) Preferences and needs of the narrow segment may become more similar to the
broad market, reducing or eliminating the advantage of focusing.

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