Cost Leadership Strategy - Report Example

Why is it important to differentiate your product Would a cost leadership strategy be more effective Why or Why not INTRODUCTION: With the technological innovations and large scale globalization of the economy one can see a variety of products are available for consumption. The marketing of those products is becoming more challenging on the part of the sellers as there is a presence of 'over choice' for the customers. The companies to thrive in the market need to be more strategic in planning their activities. To attract the customers to their products, companies of today are being deeply involved in good customer relationship management. Apart from that the new channels of the marketing are being developed to cater to the growing consumerism. The use of internet and cell phones made the purchasers to shift from 'marketplace'1 to the 'marketspace'2. The companies are to appeal both to the cognitive as well as to the emotional aspect of the buyers to sell their products in this fast changing consumer preferences. The task of diversifying the product or value addition to it to get more consumer acceptability is becoming more and more complex in this era. The marketing stalwarts are to devise different strategies to achieve success in making their product moving. Sometimes they differentiate their product and justify the demand of a premium price for the same while in other cases they reduce the manufacturing cost of the produce thereby making it cost effective. In this paper discussions are made regarding pros and cons of two such strategies such as 'Product Differentiation' and 'Cost Leadership' strategies and an analysis has been made regarding their applicability in different situations. Importance of Product Differentiation: Before the globalization process started the national firms were catering to the local needs thus making the choices for the customers restricted. But with globalization new companies with a varied range of products entered the market giving customers ample scope to choose the best among them. This gives rise to hyper competition for the companies to sell a similar kind of product. As choosing among the multiple products mainly based on differences between various attributes of the same, addition of value to the product as per the requirement of the customer became one of the important marketing strategies. "Product Differentiation is the modification of a product to make it more attractive to the target market" (http://en.wikipedia.org/wiki/Product_differentiation). It can be used as a complement or means of implementing market segmentation. This differentiation is being made to create a perception of uniqueness in the mind of a customer(Irene, Handouts). It gives a brand reputation thus catching the emotions of the customers to buy the particular product even if by giving a premium price. With product differentiation the changing needs of the buyer is duly addressed. The techno savvy buyer gets the goods with latest technology with a high price he has to pay for the same. For example "General Motors offers the OnStar system on selected vehicles. It includes GPS(Global Positioning System)for locating the car's exact position. The Driver can locate te nearest ATM, Hospital, convenience store, gas station and even book a room. The driver can a press a button in case of emergency to get immediate aid."(Kotler 318). Thus differentiation of the product always preceeds market research and study of various market segments. Some products are capable of high degree of differentiation (e.g. automobiles, furniture, cell pones etc.) while the scope for differentiating some other are very very less( e.g. steel). This differentiation can be made to various product attributes such as its form, features, performance, durability, style etc. Also we can differentiate a service by modifying its mode of delivery, installation, training etc. The primary task in this process is determing that "which features are worth adding. For each potential feature the company sould calcualte the customer value versus company cost" (Kotler 319). If the customer value exceeds the company cost it is quite desirable to add that value. This requires information on the target group of customers. For example McDonald's has installed a number of computer stationsto cater to the internet inclined customers in Paraguay. Like the feature and form, style of a product also creates a different feel for the customer to buy the same. "Aesthetics play key role in such brands as Absolut Vodka, Apple computers, Montblanc Pens, Godiva Chocolate, and Harley-Davidson motorcycles"(Kotler 320). Similarly packaging plays a vital role in attracting the customers e.g. Arizona Iced Tea being packed in long-necked, wide-mouthed elegant bottle. A lot of product differentiation can also be made by advertising in a different way to make the buyers more emotionally attached to the products. Thus differentiation impacts performance through two mechanisms: Reduced price sensitivity: Consumers may become willing to pay a premium price for the differentiating factor/s. Reducing directness of competition: As the product becomes more different, categorization becomes more difficult and hence draws fewer comparisons with its competition. (http://en.wikipedia.org/wiki/Product_differentiation) As discussed earlier all the products are not capable of being differentiated much so as to get a larger chunk of the market. Also in case of products subject to rapid technological obsolescence such as computers, cell phones etc. giving a high price for the value added may be more taxing to the buyers. Thus another strategy called Cost leadership strategy can be applied in that case. Effectiveness of Cost Leadership Strategy: "A firm pursuing a cost-leadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors" (http://www.ecofine.com/strategy/Cost%20leadership.htm). Cost leadership is not necessarily mean low price but certainly means the reduced manufacturing costs. In a market where the pressures from intense competition does not allow a hike in price there the cost advantage firms will generate more profits. Thus in this strategy the focus is on lowering the cost of production. But if in an area a number of low cost firms will operate then the profit generated will not very high. "The ability of a valuable cost-leadership competitive strategy to generate a sustained competitive advantage depends on that strategy being rare and costly to imitate"(http://www.ecofine.com/strategy/Cost%20leadership.htm). The sources of cost advantages are economies of scale, economies of scope and an efficient labour system, 'No frills'3 product and a lean organization etc. Higher volume of production owing to larger size and very thin management staff lead to reduction in cost per unit of production. Often the cost leaders produce the standardized items which are simple and can be priced at optimum or lower level than the competitor firm adopting other marketing strategy. The cost leaders use technologies that are independent of scale. They have also access to factors of production at a low cost. Figure-1: Value of a cost advantage The figure cited above describes the relative advantage of the cost leaders over other firms with regard to the competitive forces shown above. (Source: intra.som.umass.edu/galvin/slides/Fall05-bhchap4.ppt) One example of cost leadership firm is Wal-Mart, the company in retail segment achieved phenomenal success by adopting cost leadership strategy since the day of its inception. (http://www.icmr.icfai.org/casestudies/catalogue/Business%20Strategy2/BSTR096.htm) Comparative advantage of both Cost leadership and Differentiation Strategy: Situations where Cost Leadership strategy is effective Situations where Product Differentiation strategy is effective 1.When price competition among rival sellers is a dominant competitive force 2.When the industry's product is a standard, commodity-type item readily available from a variety of sellers 3.When there are not many ways to achieve product differenciation that have value to the buyer 4.When most buyers use the product in the same ways and have much the same needs / requierements 5.When buyers incur low switching costs in changing from one seller to another and are prone to shop for the best price 6.When buyers are large and have significant bargaining power 1. When it is difficult to enter the market where a cost leader firm is operating 2. When the product type is highly capable of being differentiated by addition values. 3. When market segment requires a specific kind of product or service. 4.It is not mass marketing rather can be termed class marketing where Source: (http://www.ecofine.com/strategy/Cost%20leadership.htm ) Conclusion: The growing consumerism, changing buyer's interest and production of a wide array of goods and services in this globalized economy give a new challenge to the marketing managers to prove their existence. No marketing strategy may it be Product Differentiation or Cost leadership can absolutely fit to any situation. With the evolution of new market situations te strategies are also keeps on changing. WORKS CITED Anonymous, Power Point Presentation on Cost Leadership Strategy. 2 November 2006 "Cost Leadership Strategy." Integarted Knowledge. 2003. ecofine.com, 2 November 2006. Kalish, Ira. "Wal- Mart's Cost Leadership Strategy." 2 November 2006. Kotler, Phillip Marketing Management. India: Pearson Education, Inc. 11th Edition, 2004 "Product Differentation." Wikipedia, The free Encyclopedia. 25 October 2006. Wikimedia Foundation Inc. 2 November 2006. School of Business and Economics. Handouts for Strategic Marketing Management. University of Exeter Read More