Master of International Business Administration

Strategic Management - Winter15035

Dr.Saneya El Galaly

Yasser Hassan El Sayed, ESLSCA 45A, Strategic Management, Assignment #1

Presented by:

Yasser Hassan El Sayed

Feb 18, 2015
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Table of Contents

TABLE OF CONTENTS ............................................................................................................................................1

1) THE PROBLEM ......................................................................................................................................................2
1.1. PROBLEM DEFINITION ................................................................................................................................2
1.2. RESEARCH DESIGN ......................................................................................................................................2

2) DIFFERENTIATION ................................................................................................................................................2
2.1. DIFFERENTIATION DEFINITION ...................................................................................................................2
2.2. HOW TO IMPLEMENT DIFFERENTIATION STRATEGY ..................................................................................2
2.3. ADVANTAGES OF DIFFERENTIATION ...........................................................................................................2
2.4. DISADVANTAGES OF DIFFERENTIATION .....................................................................................................3
2.5. DIFFERENTIATION APPLICATION.................................................................................................................3

3) COST LEADERSHIP ................................................................................................................................................3

3.1. COST LEADERSHIP DEFINITION ...................................................................................................................3
3.2. HOW TO IMPLEMENT COST LEADERSHIP ....................................................................................................3
3.3. COST LEADERSHIP ADVANTAGES ................................................................................................................3
3.4. COST LEADERSHIP DISADVANTAGES ...........................................................................................................4
3.5. COST LEADERSHIP APPLICATION.................................................................................................................4

4) CONCLUSION .......................................................................................................................................................4
4.1. MY OPINION ...............................................................................................................................................4
4.2. APPLICATION ..............................................................................................................................................5
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1) THE PROBLEM
1.1. PROBLEM DEFINITION
Porter distinguished between two types of strategies: differentiation and cost
leadership. Choose of one puts constraints on using the second.

1.2. RESEARCH DESIGN

 Define each strategy, advantages, disadvantages, implementation and
application.
 Draw a conclusion and the impact of using one strategy on the other strategy.

2) DIFFERENTIATION
2.1. DIFFERENTIATION DEFINITION
Differentiation consists in differentiating the product or service offered by the firm, in
other words, creating something that perceived by customers as being unique, it could
be achieved in various ways, through design, brand image, technology, features,
customer service, and dealer network.

2.2. HOW TO IMPLEMENT DIFFERENTIATION STRATEGY

Ideally, the firm should differentiate itself along several dimensions.

 Firstly, to implement differentiation, a firm may focus directly on product or

attributes, i.e. features complexity, timing of product introduction, or location.

 Secondly, a firm may focus on the relationship between itself and its customers,
for example through product customization, consumer marketing and product
reputation.

 Finally, differentiation may be implemented by focusing on the linkage within or

between firms, which includes linkage within functions of a firm, linkage with
other firms, product mix, distribution channels and service support.

2.3. ADVANTAGES OF DIFFERENTIATION

 Differentiation creates value by enabling a firm to charge a premium price that is
greater than the extra cost incurred by differentiation; The Company does so
with confidence because of a highly developed and strong corporate identity.
 The company can readily pass along higher supplier costs to its customers
because of the lack of substitute or alternative products on the market.
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 Having a loyal customer following helps stabilize the company's revenue and
lessens the impact of market downturns because of customer loyalty in good
times and bad times.

2.4. DISADVANTAGES OF DIFFERENTIATION

 A company must worry about competitors' copying its business methods and
stealing away its customers.
 Implementing a differentiation strategy is costly.
 It may take years before a company achieves a strong brand image that sets it
apart. During that time, the company faces the risk of changing consumer tastes
or preferences. In such a case, the company may not have sufficient customer
demand to offset its higher costs, which may lead to a loss.

2.5. DIFFERENTIATION APPLICATION

Apple: is the perfect example it Providing uniquely superior benefits, all three
revolutionary Apple products – the iPod, iPhone, and iPad – provided some level of both
superior and different benefits. With the iPhone, many things were clearly superior such
as the processing power, ram and the touchscreen. Other things were clearly different
such as the way you could order it online directly from Apple or in an Apple stores.

3) COST LEADERSHIP
3.1. COST LEADERSHIP DEFINITION
Cost leadership is about organizing all your resources around producing goods and
services at the lowest cost possible. By having the lowest costs associated with providing
your products, you put your business in the unique position of being able to charge your
customers the lowest price in the market for those products.

3.2. HOW TO IMPLEMENT COST LEADERSHIP

Reductions through experience, economies of scale, modify supply chain, lean
manufacturing, tight cost and overhead control, avoidance of marginal customer
accounts, and cost minimization in areas like R&D, service, sales force, advertising, etc.

3.3. COST LEADERSHIP ADVANTAGES

 Higher Profitability: One benefit available to low-cost operators in an industry is
higher profit margins. If you can sell products and services with a lower cost
basis and competitive pricing, your margins are greater than companies that
invest more to produce products of a similar quality.
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 Increased Market Share: earn higher profits and use it to increase customer
demand and market share. Companies that are able to offer products at a lower-
than-typical market price can usually induce more business from budget-
conscious buyers.
 Sustainability: Companies that have low-cost leadership are also typically in a
more sustainable business position. During tough economic times, downturns in
a given industry or when price wars beat down price potential, companies with
lower costs of doing business have a better chance of survival.
 Capital for Growth: Another major benefit of low-cost leadership is that you
have more capital resources available to fund growth or further investments.

3.4. COST LEADERSHIP DISADVANTAGES

 In an attempt to maintain a low cost position, a firm might reduce costs in critical
areas such as customer service. These cost reductions have the potential of
driving away some customers who seek better customer service.
 Another turn-off for customers is the lack of innovation or new products. For a
firm to introduce new products or new features in products, research and
development need costs. However, for the low cost strategist, these extra costs
should be eliminated; as a result, this delay in innovation has a negative effect
on customers who desire the innovations.

3.5. COST LEADERSHIP APPLICATION

Carrefour Egypt: the most popular retailer in Egypt, Carrefour sells a bit of everything,
with an emphasis on low prices.
Carrefour’s low pricing policy was apple to appeal to the Egyptian culture, it offers the
best-quality products for the lowest prices, and is able to offer and sustain its low prices
because of its ability to exert pressure on its suppliers to give it deep price reductions.

4) CONCLUSION
4.1. MY OPINION
Choose of one puts constraints on using the second because Porter’s view of the
two strategies implies that cost leadership and differentiation viewed as opposite ends
of a single scale. For an illustration, Cost leadership and differentiation as opposite ends
of a single scale Cost leadership on one side and Differentiation on the other side.

If the firm strategy is differentiation it means extra cost needed to be unique thus we
can’t use cost leadership in this case, and if we targeting cost leadership it means lean
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manufacturing, may be low quality or reduced features which definitely means we are
far from differentiation.

The two strategies are incompatible, because the two strategies are mutually exclusive.

That means if the strategy founded at one of the ends of the scale. Any location on the
scale, which is not one of the ends, illustrates an unclear strategy, or “stuck in the
middle”.

In other words, a trade-off is required because a firm cannot move away from an end
without its strategy become increasingly unclear, or “confused”, which eventually will
cause it to loose profits.

Risk of becoming too broad: Stuck in the middle” attract either high volume customers
nor premium price customers

4.2. APPLICATION
SAS and its low cost alternative Snowflake is a good example illustrating the strategies
are incompatible. To meet the raising competition from low cost carriers, SAS took the
decision to introduce Snowflake, its own low cost alternative. Despite recent years’
extensive efforts to reduce costs, SAS has maintained its differentiation strategy and the
attempt to integrate it with a cost leadership strategy has revealed unprofitable. The
reason is that SAS is a differentiator and so the differentiation strategy is present in the
whole company. Reducing costs increases margins and makes SAS to a better
differentiator as long as the strategy remains clear. Attempting to integrate too many
elements of cost leadership into its differentiation strategy however damages the initial
strategy.”

And we can imagine what if Apple want to implement the two strategies, the
differentiation which is the main strategy and cost leadership, I think the company will
fail because to be cost leadership you should do something towards reducing costs , like
invest less in R&D , or use low quality materials which finally lead to reduced features
and less innovation in contradiction to well known for apple and it will lose its’
customers as a result the company will fail in applying the hybrid strategy.