Which competitive strategy does your company pursue? Cost leadership or differentiation? If your answer to this question is "both," you are probably on the right track. Today, more and more large-sized companies around the world rely on hybrid strategies that successfully combine low cost and differentiation advantages.
Porter’s Generic Competitive Strategies
Competitive strategies define how a company tries to achieve a competitive advantage in the market. According to Michael E. Porter (1980), three basic types of strategies can be distinguished:
- Cost Leadership
The aim of this strategy is to generate a comprehensive cost advantage within the industry in order to be able to offer products or services at a price below the market price. With other words, it attempts to win market share by appealing to cost-conscious or price-sensitive customers. An often-cited example of successful implementation of a cost leadership strategy is the German retailer Aldi. By leveraging economies of scale and focusing on non-branded items, Aldi was able to maintain its image as lowest-price provider for a long period of time.
Differentiation involves creating products or services that are perceived by customers as unique and for which they are willing to pay premium prices. Thus, competition is not based on price but quality. In order for such a strategy to work out, the distinguishing features should be difficult to copy by competitors. This calls for the ability to innovate. An excellent example of the use of a differentiation strategy is Apple. It frequently sets new industry trends through innovative product design and has cultivated a loyal customer base other companies can only dream of.
- Focus Strategy
Companies that use focus strategies concentrate on serving a narrow market niche. This may be a specific customer group, geographical region, or product line. Within the niche, they seek to achieve either a cost or differentiation advantage. The basic idea is that by focusing entirely on a particular market segment they will serve the needs of the target group better than competitors with a broad scope. The focus strategy is often used by start-ups.
Porter argued that in order to ensure long-term profitability, a company needs to make a choice between these three strategies. Otherwise, it runs the risk of getting “stuck in the middle.”
The postulate of the incompatibility of cost and differentiation advantages is considered disproved from a current viewpoint. Thanks to modern production technologies and organizational structures, it is now possible to achieve both high quality and productivity at the same time. More importantly, pursuing singular generic strategies is considered to be no longer sufficient in today’s competitive environment. Increased competition and cost pressures as side effects of globalization as well as changing customer expectations require companies to adopt a multidimensional strategic approach. These days, most customers expect to get everything at once: differentiated, high-quality products combined with excellent service at a low price. Hybrid strategies that integrate cost and differentiation advantages represent a way for companies to respond to these changes in the competitive environment more flexibly and effectively and stay competitive (Piller & Schoder, 1999). Recent empirical studies have shown that companies that pursue a hybrid strategy may achieve higher performance than those companies using a singular strategy (Acquaah & Yasai-Ardekani, 2006; Spanos et al, 2004; Jenner, 2000). Some well-known examples include IKEA, Swatch, Dell, Toyota, Sony, or Canon.
Two types of hybrid strategies can be distinguished:
- Sequential or „outpacing“ strategies (Gilbert & Strebel, 1987) first concentrate on one of the two strategic options, and then the other. For instance, an innovative company may first undergo a phase of differentiation in which it markets a new product that offers high value to customers and can be sold at a premium price. Next it needs to push back any competitors that will inevitably appear on the scene by making a strategic shift to gaining cost leadership. Through product and process standardization, the company will lower prices enabling it to sustain its competitive advantage. With the development of new products, the cycle repeats.
- Simultaneous strategies aim to generate cost and differentiation advantages at the same time. One way to achieve that is mass customization, that is by producing customized products at a price similar to those of mass-produced products. Customization may be achieved through design or mixing-and-matching of components (e.g., Dell).
Some key success factors for the implementation of hybrid strategies are innovative strength, close orientation towards customer needs, and organizational learning. In addition, just like generic strategies, hybrid strategies require companies to make consistent strategic decisions how to pursue competitive advantages and align resources and capabilities accordingly. Otherwise, they may indeed fall into the “stuck in the middle” trap.
Acquaah, M., & Yasai-Ardekani, M. (2006). Does the implementation of a combination competitive strategy yield incremental performance benefit? A new perspective from transition economy in Sub-Saharan Africa. Journal of Business Research, 61(4), 346 - 354.
Jenner, T. (2000). Hybride Wettbewerbsstrategien in der deutschen Industrie: Bedeutung, Determinanten und Konsequenzen für die Marktbearbeitung. Betriebswirtschaft, 60(1), 7 - 22.
Gilbert, X., & Strebel, P. (1987): Strategies to Outpace the Competition. Journal of Business Strategy, 8(1), 28 – 36.
Piller, F.T., & Schoder, D. (1999). Mass Customization und Electronic Commerce: Eine empirische Einschätzung zur Umsetzung in deutschen Unternehmen. Zeitschrift für Betriebswirtschaft, 69(10), 1111 – 1136.
Porter, M.E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York: The Free Press.
Spanos, Y.E., Zaralis, G., & Lioukas, S. (2004). Strategy and industry effects on profitability: Evidence from Greece. Strategic Management Journal, 25(2), 139 – 165.