Differentiation vs low cost provider

It is the straightforward strategy of selling at a lower price than your competitors. But even such a basic strategy comes in two different types -- the low-cost-provider strategy and the focus low-cost strategy.

Differentiation vs low cost provider

Porter claimed that a company must only choose one of the three or risk that the business would waste precious resources. The breadth of its targeting refers to the competitive scope of the business.

Porter defined two types of competitive advantage: The focus strategy has two variants, cost focus and differentiation focus. If a firm is targeting customers in most or all segments of an industry based on offering the lowest price, it is following a cost leadership strategy; If it targets customers in most or all segments based on attributes other than price e.

It is attempting to differentiate itself along these dimensions favorably relative to its competition. It seeks to minimize costs in areas that do not differentiate it, to remain cost competitive; or If it is focusing on one or a few segments, it is following a focus strategy.

A firm may be attempting to offer a lower cost in that scope cost focus or differentiate itself in that scope differentiation focus. The least profitable firms were those with moderate market share.

Generic Strategies

This was sometimes referred to as the hole in the middle problem. Firms in the middle were less profitable because they did not have a viable generic strategy. Porter suggested combining multiple strategies is successful in only one case.

Differentiation vs low cost provider

But combinations like cost leadership with product differentiation were seen as hard but not impossible to implement due to the potential for conflict between cost minimization and the additional cost of value-added differentiation.

Since that time, empirical research has indicated companies pursuing both differentiation and low-cost strategies may be more successful than companies pursuing only one strategy. They claim that a low cost strategy is rarely able to provide a sustainable competitive advantage.

In most cases firms end up in price wars. Instead, they claim a best cost strategy is preferred. This involves providing the best value for a relatively low price.

Cost Leadership Strategy[ edit ] This strategy also involves the firm winning market share by appealing to cost-conscious or price-sensitive customers. This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio price compared to what customers receive.

What is low cost strategy? definition and meaning - timberdesignmag.com

To succeed at offering the lowest price while still achieving profitability and a high return on investment, the firm must be able to operate at a lower cost than its rivals.

There are three main ways to achieve this. The first approach is achieving a high asset utilization. In service industries, this may mean for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast.

In manufacturing, it will involve production of high volumes of output. These approaches mean fixed costs are spread over a larger number of units of the product or service, resulting in a lower unit cost, i.

For industrial firms, mass production becomes both a strategy and an end in itself. Higher levels of output both require and result in high market share, and create an entry barrier to potential competitors, who may be unable to achieve the scale necessary to match the firms low costs and prices.

The second dimension is achieving low direct and indirect operating costs. This is achieved by offering high volumes of standardized productsoffering basic no-frills products and limiting customization and personalization of service. Production costs are kept low by using fewer components, using standard components, and limiting the number of models produced to ensure larger production runs.

Overheads are kept low by paying low wages, locating premises in low rent areas, establishing a cost-conscious culture, etc. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. The associated distribution strategy is to obtain the most extensive distribution possible.

Promotional strategy often involves trying to make a virtue out of low cost product features.A low-cost leader strategy: striving to be the overall low-cost provider of a product or service that appeals to a broad range of customers (a couple of examples are Sam’s Club and Southwest Airlines).

The Cost Leadership Strategy. Porter's generic strategies are ways of gaining competitive advantage – in other words, developing the "edge" that gets you the sale and takes it away from your competitors. Jun 29,  · Differentiation strategies coincide with higher price points than low-cost providers because it costs more money to provide a better overall solution.

Emphasizing the value-added elements above. Cost Leadership & Differentiation - This thesis examines the fundamental trade-off between low cost and differentiation strategy at a business strategy level.

In Porter introduced a model of generic strategies that has influenced much of the current thinking in. Being a low-cost provider is a basic business strategy.

It is the straightforward strategy of selling at a lower price than your competitors. But even such a . Being a low-cost provider is a basic business strategy. It is the straightforward strategy of selling at a lower price than your competitors.

But even such a basic strategy comes in two different.

Porter's generic strategies - Wikipedia