and high volume strategy are likely to involve high initial investment
costs and are often associated with ‘commodity’ type products where price
discounting and price wars are common.
Remember, low cost does not need to equate automatically to low price.
Products provided at average, or above average, industry price (while
maintaining cost leadership) can generate higher than average margins.
The basic drivers of cost leadership include:
● Economy-of-scale: This is perhaps the single biggest influence on unit
cost. Correctly managed, volume can drive efficiency and enhances
purchasing leverage. Additionally given large-scale operations, learn-
ing and experience effects (see later) can be a source of cost reduction.
● Linkages and relationships: Being able to link activities together and
form relationships can generate cost savings. For example, a ‘Just-in-
Time’ manufacturing system could reduce stockholding costs and
enhance quality. Forging relationships with external organisations is
also vital. If industry partners were to share development and distri-
bution costs, or activities were ‘outsourced’ to specialist operators, a
substantial reduction in overheads is possible.
● Infrastructure: Factors such as location, availability of skills and gov-
ernmental support greatly affect the firms cost base. Given the devel-
opment of information technology and the global economy, it is possible
to have a worldwide infrastructure and selectively place activities in
low cost areas.
Differentiation
Here the product offered is distinct and differentiated from the competi-
tion. The source of differentiation must be on a basis of value to the cus-
tomer. The product offering should be perceived as unique and ideally
offer the opportunity to command a price premium. Will customers pay
more for factors such as design, quality, branding and service levels?
The skills’ base is somewhat different from a cost leadership strategy
and will focus on creating reasons for purchase, innovation and flexibility.
Remember, often it is the perception of performance as opposed to actual
performance that generates differentiation.
There are several ‘downsides’ to this type of strategy. Firstly, it can be
costly with associated costs outweighing the benefits. Secondly, innov-
ation and other initiatives can be duplicated by competitors. Thirdly, cus-
tomer needs change with time and the basis of differentiation can become
less important as customers focus on other attributes. For example, in the
car market, safety may now be seen as more important than fuel economy.
Common sources of differentiation include:
● Product performance: Does product performance enhance its value to
the customer? Factors such as quality, durability and capability all offer
potential points of differentiation. Performance is evaluated relative
to competitor’s products and gives customers a reason to prefer one
product over another.
Strategy formulation 153