Porter is considered by many as the most influential strategist in the field of business-strategy. His three generic strategies introduced in 1980 has become a dominant paradigm in business policy literature and has had a deep and pervasive influence on the way of thinking in strategy formulation.
The development of a competitive strategy is the search for a favourable competitive position in an industry, aiming to establish a profitable and sustainable competitive advantage over its rivals by choosing activities that are superior in a way that is of value to customers (Porter, 1985; Porter, 1996).
In order to formulate an overall strategy and to understand a firm’s environment as well as to achieve a competitive advantage to outperform rivals in the industry, a company has to apply two frameworks: Porter’s five forces of suppliers, buyers, potential entrants, substitutes and rivalry is a means to define the sustainability and long-term profitability of one industry versus others and thus help to understand the industry attractiveness. The three generic strategies namely cost leadership, differentiation and focus strategy as the second framework provide the context for the actions to be taken into account to achieve a superior performance. Hence, they should be an essential component in any firm’s strategic plan (Porter, 1980; Porter, 1985; Porter, 1996).
Porter was the first to discuss the importance of choosing and focusing on one of the alternatives of the generic strategies. His view that the generic strategies of cost leadership and differentiation are mutually exclusive was highly debated among scholars. While adherers of the ‘Porter’s school of thought’ agree with Porter about that there is a trade-off between cost leadership and differentiation strategies, the ‘opposing school’ argue that the generic strategies a reconcilable and synergetic.
To sum up it can be said that cost leadership and differentiation strategies are not necessarily conflicting strategies.
Porter has defined three generic strategies for achieving competitive advantages to outperform rivals in the industry: cost leadership, differentiation and focus strategy (Porter, 1980; Porter, 1985). Since the inception the generic strategies have been examined from many scholars (Hambrick, 1983; Dess & Davis, 1984; Wright, 1987; Hill, 1988; Kim & Lim, 1988; Nayyar, 1993; Helms, 1997; Eonsoo, 2004; Akan et al., 2006).
This paper aims to examine if there is a trade-off between cost leadership and differentiation as a business strategy based on academic literature.
When examining the literature on the topic, there was an intensive debate between ‘Porter’s school of thought’ (e.g. Dess and Davis, 1982,; Hambrick, 1983; Nayyar, 1993) and the ‘opposing school’ (e.g. Miller and Friesen, 1986; White, 1986; Wright, 1987; Hill, 1988; Jones and Butler, 1988; Murray, 1988; Kim & Lim, 1988, Grant, 2005) as to whether the generic strategies of differentiation and cost leadership are mutually exclusive (Porter’s school of thought) or whether they can be achieved simultaneously (‘opposing school’).
The cost leadership strategy focuses on achieving a competitive advantage by having the lowest cost compared to competitors. Cost leadership emphasize production of a standardized product at very low per-unit costs for many buyers who are price-sensitive. A low overall cost position often requires a high relative market share or other advantages such as favourable access to raw materials (Porter 1980; Akan et al., 2006).
The factors that lead to a low-cost position usually provide significant entry barriers for competitors in terms of economies of scale or cost advantages (Porter, 1988).
Firms known for successful implementing a cost leadership strategy are Texas Instrument, Black and Decker, Du Pont, Wal-Mart and Home Depot (Porter, 1980; Akan et al., 2006).
Differentiation can be divided in product innovation and intensive marketing and image management. It requires further that a company provides a unique product or service that is recognisable industrywide and that differ through its design, features or after-sales services from competitors and is perceived as exclusive from the consumer. Hence, all activities which cause high costs that might hinder high market share. (Porter, 1980; Phillips et al., 1983; Porter, 1996). The strategy is implemented successfully when the product offers superior value and quality to the customer, which lead to high brand loyalty and thus to an entry barrier for competitors (Porter, 1988).
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- Daniela Scheele (Author), 2013, The trade-off between cost leadership and differentiation, Munich, GRIN Verlag, https://www.grin.com/document/268956