Positioning Strategy: Differentiation, Cost Leadership, Focus
One of the main premises of strategic management is the need to carve one's own unique space in the marketplace. Although each industry may have its own set of unique circumstances and peculiarities, a number of fundamental business strategies have been generalized to assist managers with strategic positioning.
The strategic framework presented below views all strategies in terms of Scope of Activities (Market Focus) and Bases of Advantage (Differentiation).
Cost Leadership is a strategy, by which a business offers an average product at a low cost to the broadest possible market. Economies of scale result in cost savings, partially passed to consumers. (e.g. Wal-Mart)
Cost Focus is a strategy, by which a business offers an average product at a low cost to a specific customer group. Customer relationship largely depends on the cost of the product and a unique connection with a customer. (e.g. Vanguard Funds; Fido, Solo, Virgin brands by Canada's telecom giants)
Product Differentiation is a strategy that focuses on offering a unique product to the broadest possible market. The product offering necessitates continuous innovation in light of the highly competitive market forces. (e.g. Apple's iPhone, iPad, iPod line-ups)
Differentiation Focus is a strategy that focuses on offering a unique product to a specific customer group. The customer relationship largely depends on the uniqueness of the product and the way the customer is being served. (e.g. Rolex watches; Rolls Royce cars)
Cost Differentiation is the most difficult strategy to attain. It requires offering a unique product at a low cost to a relatively broad market. This strategy creates the highest benefits and is consistent with the Blue ocean strategy, a strategy that reinvents its market place and competes in entirely new dimension. (e.g. Ikea; Henry Ford's assembly line; Apple's products)
In a similar framework shown below, businesses can pursue the following strategies 1) Product Differentiation 2) Customer Focus 3) Cost Leadership or combinations of 1) and 3) with 2). This framework argues for non-existence of a strategy that can be both 1) and 3) as a result of eventual tradeoffs between cost and differentiation. This further suggests the uniqueness and the rarity of Cost Differentiation strategy presented earlier.
Relevant to our discussion, is the below framework, representing the relationship between costs, willing to pay, the price charged and various business strategies. The difference between price charged and costs represents firm's profit, while the difference between willingness to pay and cost is the total value created.
As seen from the above diagram, Cost Differentiation strategy is consistent with a low cost structure, high willingness to pay (value to the consumer) and a price below the average in the industry.
Cost Leader has the lowest cost structure and charges the lowest fee. At the same time, consumers demonstrate a lower willingness to pay for possibly inferior product offering.
Differentiation strategy is consistent with higher cost structure, higher prices and higher utility to the consumer.
During the times of economic downturn, cost leadership strategy is generally expected to perform better. At the same time, firms must try to differentiate their product in one way or another, by means of superior product offering, branding, etc. Cost Differentiation is rare but those, who can attain it, will ultimately succeed.