Strategy is defined as a sequence of choices the business makes to successfully implement an appealing strategy by prioritizing on the key activities the business should and should not take into consideration. These decisions influence how the business presents itself and how it interacts in the market place in the presence of its competitors. As discussed by Porter (2008), if the key determinant of a company’s profitability is its attractiveness in the industry, then a secondary determinant that is the position of that company in that industry is very essential. Although an industry experiences low returns, a company that is strategically positioned has the potential of generating superior profits. A company’s place in the industry is primarily determined by its strength that falls in the categories of differentiation as well as cost advantage. These strategies are adopted by a company in order to gain competitive edge in a company.
Cost leadership strategy calls for a company to have a low cost of production in an industry for a certain level of quality in comparison to their competitors. The company either sells its products at an average market price to earn higher profits as compared to its rivals or sell at lower price below average to earn a market share. In addition to selling their products at a low price so as to become market leaders, the company employing the cost leadership strategy makes sure that its product are of a high value and has features differentiating the product from that of its competitors (Ireland et al, 2008). This is a market strategy that targets widely and is very efficient for companies that produce their products at a low price because even in the event of decrease in prices, the company is still capable of making profits for a long period of time. However, when this strategy is implemented to the extreme cases, the company runs the risk of producing commodities that no consumer wants to buy. As explored by Ireland et al (2008), the reduction of cost could compromise on the quality of the product decreasing the sells of the product tremendously.
Differentiation as a strategy involves selecting one more issues that affect consumers and uniquely positioning the business to directly target their needs. This strategy is associated with the charging of a premium price due to the high cost of production with the aim of achieving the high quality products inclusive of the value-added features unique to the consumer. As explored by Porter (2008), the firms that successfully implement this strategy should have access to scientific research, excellent marketing skills, a good reputation for innovation and quality, and a creative product development team. Contrary, greater risks are involved with the implementation of this strategy including; imitation by competitors and changes in tastes and preferences by the consumers.
According to Ireland et al (2009), involves the continuous innovation so as to fit the requirements for the consumers. Since differentiation only targets a certain group of consumers, it is important for them to keep up with their demands, tastes and preferences. In order to do this, the company constantly advertises its products so as to let the customers know about their improved products. The provision of goods that are specifically produced to meet the needs of the targeted consumers require a lot of money to produce. These costs together with the costs incurred in advertising are likely to affect the cost of the final product and so it is difficult for a firm to incorporate both differentiation and cost leadership strategies.
The cost leadership strategy is always trying to deal with the issue of efficiency while the differentiation strategy always requires the company to be innovative. This makes it difficult to merge the two because in the lowering of the cost of production, innovation is definitely compromised. In the implementation of an integrated strategy involving both low cost and differentiation, then the firm needs to make decisions that involve flexibility. According to Ireland et al (2009) the strategy requires that the method of production is very efficient so as to cut the costs and the also to be flexible in order to change from the production of one production to another. Quality control systems, flexible manufacturing systems as well as advanced information systems contribute to efficiency and flexibility. An example of a company that has successfully implemented this integrated strategy is Target which is a chief competitor of Wal-Mart. It purchases in bulk and because of its many outlets, it is able to build economies of scale. In addition, it tries to maintain very efficient stores so as to keep the cost at a minimum. With the aim of differentiating its products, it has formed alliances with other brand names so as to efficiently position itself in the market.
Conclusively, when companies like Hyundai and Casio that are trying to implement a cost leadership strategy and are at the same time spending substantial amounts of money in advertising, then they are using efficiency to produce goods at a cheaper cost. These companies try to maintain efficient store that are accessible to the local markets so as to keep the cost at a minimum. The firm could also be involved in creating a variety of products by forming alliances with other companies therefore pursuing a product differentiation strategy by emphasizing their lower costs.
Porter, M. (2008). HYPERLINK “http://www.amazon.com/exec/obidos/ASIN/0684841487/ref=nosim/quickmba” Competitive Strategy: Techniques for Analyzing Industries and Competitors. Boston: Harvard Business Review. Print.
Ireland, D., Hitt, M. & Hoskisson R. (2009). Strategic Management: Competitiveness and Globalization: Concepts & Cases. New York: Cengage Learning. Print.
Ireland, D., Hitt, M. & Hoskisson R. (2008). Understanding Business Strategy: Concepts and Cases. New York: Cengage Learning. Print.