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` Michael E Porter the name in itself needs no identity as
any management student will be very well aware of this
name.
` As stated above being a management guru porter is the
genius behind a lot of theories and the same theories are
very successful in their approach.
` But we cannot look at just one side of the coin and have
to evaluate the other side also.
` In process of doing the same this presentation is about
the positive as well as negative aspect of porter¶s
strategy of differentiation and cost leadership strategy.

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According to Porter:
 The cost leadership strategy requires the sale of a
³standard no frills´ product combined with ³aggressive
pricing´ thus the strategy involves making a fairly
standardized product and underpricing everybody else.
 An important requirement of it is the investment of heavy
capital in the state of art equipment
 According to this theory the market share leader can
underprice competition because of its lower cost due to
its cumulative experience.

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The cost reduction effort of this strategy can be classified
under three categories:
1. Reducing unit manufacturing costs through higher unit
volume, efficient scale facilities and experience curve
2. Exercising strict control over engineered costs
3. Minimizing discretionary costs like R&D, service, sales
force, advertising, quality control and so on.
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 Differentiation as the name suggest calls for a
product or service that is perceived industry wide
as being unique
 In this strategy a firm seeks to be unique in its
industry along some dimensions which are widely
valued by customers
 It selects one or more attributes that many buyers in
an industry perceive as important and uniquely
positions itself to meet those needs and it is
rewarded for its uniqueness with a premium price.

 
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 According to the Kiechel:

 Major reliance on modern capital equipment:
 the firm need a heavy upfront capital investment in the
state of art equipment which means that in order to
maintain cost leadership a firm should therefore buy the
largest most modern plant in the industry so with such
high stakes only the most stout hearted can play.
 Reliance on the experience curve:
 According to this theory the market share leader can
underprice competition because of its lower costs due its
cumulative experience thus further hastening its drive
down the curve.
 A frequent result of such an aggressive strategy can be
kick- em, punch- em, wrestle- em to the ground war. Wars
like these often end without winners because price cuts
are easy to imitate and they may not result in long term
advantage.
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 Porter maintains that achieving a low overall cost
position often requires a high relative market share or
other advantages such as favorable access to raw
materials but how does one acquire high market share in
the first place?
 As Gale suggests market share leader accomplish this
distinction via a strategy of differentiation higher quality
rather than through cost leadership.
 Porter cites General Motors(low cost) and
Mercedes(differentiation) as the profit leaders in the
industry, but GM¶s success raises two important
questions.
 First it is not clear, how GM achieved low cost? Was it
because of the persistent pursuit of cost leadership
strategy as suggested by porter or was low cost mainly
the result of high market share GM enjoyed or both.
 GM came with the idea of a car for every purse and
purpose and rationalized its cars into five price quality
segments and dominated the market with a 50% of market
share.
 It was GM¶s differentiation strategy that spelled the doom
of Henry ford¶s model t and his cost leadership strategy.
So it is ironic that even the most prestigious handiwork
Cadillac of the man wrote the book on market
segmentation and differentiation failed the threshold of a
differentiated product in porter¶s scheme of things.
 Behind the success of GM and whirlpool there are both
the differentiated and as well as cost leadership strategy
 Porter has shown that GM is a successful practitioner of
cost leadership strategy another example is of whirlpool
but the fact is that their success is not just the result of
cost leadership strategy but followed by differentiation
strategy.
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 Cost leadership requires aggressive construction of

efficient scale facilities, vigorous pursuit of cost
reduction from experience, tight cost and overhead
control, avoidance of marginal customer accounts and
cost minimization in areas like R&D, services, sales force,
advertising, and so on. Low cost relative to competition
becomes theme running through quality, services and
other areas.
 The above philosophy of cost leadership on the cost side
thoroughly matches porter¶s earlier advocacy of
aggressive pricing on the revenue front however in his
later book he seems to suggests a different pricing
posture.
 According to Mintzberg: price differentiation may have to
follow cost leadership, implied as a necessary evil
 Mintzberg made an interesting statement ,he calls cost
leadership a differentiation strategy as differentiation
strategy means differentiation of product from its
competitors whether physical or non physical that means
the basis of differentiation is not quality but low price.
 Based on these arguments Mintzberg takes the position
that business strategy has only two dimensions:
differentiation and scope.
 Speed agrees with this and argues that if a cost leader is
unwilling to compete on a lower price then it must retain
enough appeal to induce customers to buy its products
at a price equivalent to those of its competitors.

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 Two types of differentiation strategy:

 Broad differentiation strategy: presents a view of
differentiation that is far more inclusive because they do not
make distinction between the premium price quality segment on
the one hand and mid price segment on the other.
 E.g. Mercedes and BMW as premium price segment and Toyota
and Honda
 Best cost provider strategy : a hybrid version that adopts a
middle ground between low cost and differentiation
 E.g. Lexus
 Differentiation better than cost leadership:
 Both the strategies are said to be equally successful but for the
success of most of the firms differentiation plays a more
important role as companies tend to be oriented more on
customer value than to the cost side of the profitability .
 The foundation of differentiation strategy generally is to
provide superior quality compared to the competition.
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 At first Porter says that differentiation and high market share doesn¶t
go together and it is generally because differentiation is usually costly
 Contrary to porter¶s thinking high market share can be achieved by
pursuing a strategy of differentiation. Market share leadership can
provide three major benefits/;
 It can dramatically lower cost and may even lead to cost leadership
 It can be a major contributor to long term competitive advantage
 It can be a significant source of differentiation.
 Differentiation strategy can often lead to a low cost position and such a
favorable outcome is brought about by increase in sales volume, the
learning curve and economies of scale and scope.
 Even higher quality can lead to lower cost:
 porter says that differentiation is usually costly and low overall cost
position may not be incompatible with differentiation
 But a product design aimed at ease of manufacturing can reduce the
production cost.
 Simplifying product design by reducing the no of parts can also result
into lower cost and it may improve quality also.
 E.g. 1997 Toyota Camry had 7 fewer parts than in 1996 still its much
better than its counterpart.
 Innovative process technology can also lead to lower cost, in some
cases it may even produce higher standards of quality simultaneously
with lower cost.
 E.g. introduction of solid technology in TV sets
 Process technology in mobile phones
 Quality assurance can also result in reducing the cost.

 
 
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 There is a big difference between cost reduction and cost advantage as
cost reduction being a temporary and easily imitated phenomenon can
face a phase where it has to sacrifice its position to the highly
competitive leaders seeking cost leadership hence proving it to be short
term strategy.
 High market share as a result of long term competitive advantage:
 High market share is a key player in achieving competitive advantage as
if the market share of a company is low then it will be marginal in the
market and also the sales volume of the marginal supplier may be too
low to provide the customer with the appropriate and satisfying service.
 Market share leadership enhances the differentiation:
 Once a brand attains a position of market share leader then it can create
the halo in the market and transcend the product with quality as it is
believed that the best selling product have the best quality.


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 Cost leadership and differentiation are not dichotomy but a part of
broad continuum and can be combined to gain competitive advantage
 E.g. global TV set industry which Japanese firms were able to achieve
higher quality and lower cost at the same time.
 Pure cost leadership incompatible with differentiation strategy:
 Porter have constantly maintained that each generic strategy represents
a fundamentally different route to competitive advantage and hence a
firm can select one among the generic strategies otherwise it will be
stuck in the middle.
 Porter states that each firm has its own style of management, culture,
resources structures and philosophies so the strategic of cost
leadership usually requires that a firm to be a cost leader, so it has been
labeled as pure cost leadership in order to differentiate from cost leader
that may come as a result of pursuing differentiation strategy.
 These both strategies are not merely dimensions that could be mixed
or matched but a set of strategies that are both coherent and logically
consistent
„eed to redefine porter¶s narrow view of differentiation:
 So in order to change porter¶s perspective of differentiation we should
focus on other points also as a lot of brands come with a mid ranged
price and better customer perceived quality than the competition
 Following this companies need not to adopt porter¶s rigid culture and
philosophy of pure cost leadership to achieve high market share.
 Organizational culture can play an important role in shaping firm
behavior that is why porter has cautioned against the pitfalls of the pure
cost leadership.
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Differentiation the cornerstone of competitive strategy:
 The competitive strategy has only two dimensions
 Differentiation and scope
 Road to market share leadership: differentiation at moderate prices:
 Providing a high quality product and charging a premium price is not
the only way of to achieve successful differentiation in the consumer
market. Another viable alternative is to seek market share leadership by
catering to a broad middle class by offering higher quality relative to
competition at moderate prices.
 E.g. Toyota Camry, Coleman, Kenmore and Zenith
 Segmentation versus differentiation:
 A firm is rewarded for uniqueness with a ³premium price´
 Differentiation is inherently relative and so a firm¶s value chain must be
compared to that of the competitors. Thus the first step is to define
what its competition is?


 The case of Mercedes has often been cited as an example of a
company pursuing a differentiation Strategy. As reported in the April
1996 issue of Consumer Reports, the luxury Mercedes-Benz E-Class
model, the luxury BMW 5-series model, and the mid-price Ford Taurus ±
all medium sized cars, had a sticker price range, respectively, of
$39,900-$49,900, $37900-$49,900, and $17,995-$22,000. it is clear from
the example that Mercedes primary competition is BMW, not Ford
Taurus. Buyers of the Mercedes and Ford represent different classes of
customers that belongs to two distinct price-quality segments: Price
segment for Mercedes and mid-price segment for Ford.
 From the above we cannot discuss differentiation separately from price-
quality segmentation. Differentiation can be visualized two ways:
 Differentiation across or between segments and
 Differentiation within segments.
 Mercedes and Ford is the example of differentiation between segments
and Mercedes and BMW is the example of differentiation within
segments.
 From the above discussion it is not meaningful to say that a firm
pursuing a differentiation strategy can charge ³premium prices´.

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 A country¶s geography play an important role in creating a cluster of
native firms that compete generally on a common theme.
 E.g. America¶s vast and open landscape has given rise to large cars
boulevard ride.
 Germany produces high performance cars because of Europe¶s narrow
street.
 Consumer union recognizes four broad dimensions in rating cars:
 Performance, comfort, reliability, and fuel economy
 The two major German competitors in luxury cars have positioned
themselves in the performance segment: Mercedes and BMW
 Volvo has positioned itself in the luxury automobile segment by
consistently focusing on safety, Toyota provided Lexus 400 to provide
the smoothest and quietest ride.


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 Just as low cost leader cannot ignore differentiation, leaders in
differentiation too cannot ignore costs.
 Although there are differences in how technology and markets evolve,
they share two common phases of transition:
1. Standardization of product or services, which marks the transition from
a high perceived value strategy to low delivered cost strategy
2. Rejuvenation which marks the transition in the opposite direction, from
an emphasis on delivered cost back to high perceived value
 In the evolving market success does nit come from a single minded
pursuit of either cost leadership or differentiation strategy. Rather it
comes from an outpacing strategy to outdistance the competition.
 An outpacing strategy involves an explicitly developed ability to add one
strategy to the other as a market goes through a back and forth
transition between standardization and rejuvenation.
 Outpacing strategy is not middle of the road strategy, depending upon
the industry phase it is dominated by either product or process
 Second the timing of the shift from one phase to another involves an
element of risk and even luck
 Third, the strategy may nit easy to implement because the
organizational setting for creating product value is often the opposite of
one for seeking low cost.
 A manufacturer needs a standard product to achieve a successful
evolution of the learning curve
 Instead of introducing a stream of product continually, a follower of this
strategy relies instead on setting the industry pace through major
periodic model changes.
The Major themes that have emerged from this critique are:
 The cost leadership strategy is not really a low cost strategy but a
differentiation strategy based on low price
 Differentiation and scope are the only two dimensions of business strategy
 Market share leaders compete more on the basis of differentiation than on
low cost
 Differentiation strategy can lead to market share leadership which in turn can
lead to low cost
 Cost leadership strategy as characterized by porter cannot be combined
with differentiation strategy because the two are based on different
organization cultures and philosophies
 We need to modify porter¶s narrow view of differentiation that is grounded in
uniqueness and premium price




 
  

 

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