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Distinguish between cost leadership and differentiation strategies. Is it possible for a company or business unit to follow a cost leadership strategy and a differentiation strategy simultaneously - Essay Example

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The essential basis of above the average profitability is a sustainable advantage in the end. A firm can possess two categories of competitive…
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Distinguish between cost leadership and differentiation strategies. Is it possible for a company or business unit to follow a cost leadership strategy and a differentiation strategy simultaneously
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COST LEADERSHIP AND DIFFERENTIATION STRATEGIES Cost Leadership Approach and Differentiation Strategy Introduction
The relative position of a firm in an industry determines whether the company makes profits above or below the industry average. The essential basis of above the average profitability is a sustainable advantage in the end. A firm can possess two categories of competitive advantage, that is, low costs and differentiation. The two fundamental basic types combines with the latitude of activities by which the company seeks to achieve. There are three generic stratagems for achieving the above average performance within the industry; the cost leadership, focus, and differentiation. Focus put on the cost leadership approach and differentiation strategy; this paper looks at the differences and the simultaneous working together of the two (Porter & Tanner 2012, pp. 12).
Difference between Cost Leadership Approach and Differentiation Strategy
Cost leadership strategy is the method by which a firm sets out becoming a low-cost producer in the industry. The cost advantages accrue from different sources depending on the structure of the industry. It may comprise the pursuit of economies of scale, preferential mobility to raw materials and the propriety technology. Low-cost producers tend to find and exploit all the sources of cost advantage. A firm that achieves and can sustain the overall cost leadership is above the average performer in the industry. Such company can command the prices near or at the industry standard (Porter & Tanner 2012, pp. 26).
On the other hand, differentiation strategy is the method by which a firm seeks uniqueness in the industry. The distinctiveness is along some of the dimensions widely valued by the buyers. The procedure selects one or a number of attributes that majority of the customers in the industry perceive as significant. Companies in this category exceptionally position themselves to meet the identified needs of its clients. The exclusivity of this strategy is where the company rewarded with a premium price for its uniqueness (Porter & Tanner 2012, pp. 76)
Cost Leadership Approach and Differentiation Strategy Simultaneously
It is possible for the company to follow a cost leadership while it follows a differentiation strategy at the same time. Though it does not work for every company. A good example of an organization that can embrace the two approaches together is the Toyota corporation. The Toyota produces quality cars at low price accompanied by differentiating strategy. For example, the introduction of luxury brands of BMW cars and the Mercedes-Benz new series (Porter & Tanner 2012, pp. 138).
Some scholars such as Porter argue that cost leadership and differentiation approaches are irreconcilable. A business unit unable to achieve one of the competitive strategies most often is stuck in the middle of the competitive marketplace lacking any competitive advantage. Therefore, according to the Porter, the unit is doomed below the average performance (Porter & Tanner 2012, pp. 150).
A trade-off is not necessarily a must. Companies such as Toyota, IBM, Southwest Airlines, IKEA, McDonald’s, and Wal-Mat are firms that succeeded to reconcile both strategies and enjoy a dual competitive advantage. Businesses that have lower costs and a high-quality differentiation strategy offers low prices accompanied with high quality. It, therefore, complicates things and follows the cost leadership strategy (Porter & Tanner 2012, pp. 179).
The success of the consumer goods industries such as motorcycle, cars, musical instruments, and consumer electronics in Japan gives room to reconcile the low cost with the high quality and the technological progressiveness. Therefore, the total quality management approaches adopted exploded the myth that a trade-off is possible between the low cost and high quality (Porter & Tanner 2012, pp. 188).
Conclusion
The two strategies, one that aims at minimizing the costs incurred in company’s production and operations process and the other focuses on the uniqueness of its products. The two strategies harmonizes in satisfying the consumer demand. For instance, they drive towards facilitating subsidized prices to the clients and enhancing a brand loyalty among the same customers. The two approaches can work both in isolation and together towards meeting company’s goal.
Reference
Porter, L., & Tanner, S. 2012. Assessing Business Excellence. Hoboken: Taylor and Francis. Read More
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