Hey guys, so I decided to write a special post today. I pulled some inspiration from a Strategic Management course that I was enrolled in while I studied abroad in Istanbul. I believe that some of the insight I explore in this rewritten essay can be of huge value to some of my blog readers, which is why I chose to revisit this topic and repurpose it in a way that my audience would receive it better. Some of the terminology can be a bit weird, but I picked out a few examples that should be able to drive these concepts home for you. As always, reach out if you have any questions.
Pursuing a low-cost manufacturing method while striving to pursue a differentiation method is unquestionably harmful for corporate performance. Being stuck in the middle of these two methods is risky for one’s company for two primary reasons. One main reason being that low-cost leaders will be able to steal away some customers on the basis of a lower price. The other main reason is that high-end differentiators will be able to steal away customers with the appeal of better product attributes. The strategies, type of customers, and needs of these customers also differ between providers. This fact serves as another struggle that a best-cost provider will encounter when trying to maintain both strategies. The bottom line is that a “stuck in the middle” strategy will rarely produce a sustainable competitive advantage or a distinctive competitive position.
“Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different….” states strategy guru, Michael Porter, “…. The essence of strategy is choosing what not to do.” In this case, being a best-cost provider is exactly what corporate entities should not do. Many people argue that it is possible, however, I can argue that it is very unlikely to succeed. I believe this because each generic competitive strategy positions a company differently in its market and competitive environment. A low-cost provider position itself to compete offensively on the basis of low price, win the business of price sensitive customers, set the floor on market price and defend against price war conditions should they arise. This position is on the complete opposite end of the spectrum that a differentiator provider would offer. In their case, a differentiator would position itself to command a premium price for its product and increase unit sales. This is because additional buyers would be won over by the differentiating features. Also, a differentiator would gain buyer loyalty to its brand because some buyers prefer the differentiating feature and are thus brand loyal. Furthermore, customers of this strategy care less about a low price so more features are built in that buyers are willing to pay for. This results in an overall premium price to cover the extra costs of these additional features.
Besides the way a company positions itself when deciding which competitive strategy to use, there are also other factors built in to this decision. The remaining factors being that: each provider establishes a central theme for how a company will endeavor to outcompete rivals, each creates some boundaries for maneuvering as market circumstances unfold, each points to different ways of experimenting with the basics of the strategy, and lastly, each entails differences in product line, production emphasis, marketing emphasis and means to sustain the strategy. To further explain the conflict that will occur when attempting to employ a mix between a low-cost provider and a differentiator I will lay out a real world example.
In this past decade the American tire company, Goodyear Tires, faced a lawsuit concerning the quality of their products. In attempt to differentiate themselves among their competition they formed a partnership with the Ford car company. Specifically, all tires on the Ford Explorer SUV were being manufactured with Goodyear tires. The cheap rubber material that Goodyear was using to make the tires was causing them to explode while drivers were on the road. In effort to manufacture these tires at a low-cost Goodyear’s plan completely backfired on them. Rough roads on the freeway ate away at the cheap rubber material and caused the tires to de-tread. Once tread failure occurred, users were driving a vehicle that weighs 33,000 pounds at highway speeds of sixty plus miles per hour. The lack of tread in the tires coupled with the weight and speed of the vehicle made it very difficult to control. This is why it led to so many serious injuries and even deaths in some instances. It was reported that tires were exploding within 2000 miles of uses. Explosion was occurring almost immediately so there were no warnings to signal such a dangerous situation; you’re talking about a tire that is designed for 200,000 miles of use.
As you can see with the Goodyear tire example, their company image was ruined. To this day they are still trying to gain their reputation back. This proves that it is best to compete either on being a low-cost provider or a differentiator, but never both. When lawsuits start being thrown in the companies face defining a strategy goes back to square one. To build a sustainable competitive advantage a company must compete on broad differentiation or low-cost. Goodyear let greed get the best of them by using cheap material and sending the message that their products were high quality. Eventually the target audience will find out and unethical practices behind closed doors will catch up to you.
Michael porter emphasized that a firm should adopt only one competitive strategy and failure to do so will result in a “stuck in the middle” scenario. He discussed the idea that practicing more than one strategy will lose the entire focus of the company. Following, a clear direction of the future path cannot be established. Fundamentally differentiation will incur costs to the organization, which blatantly contradicts the basis of low-cost strategy. On the other hand, standardized products with features acceptable to a large group of customers will obviously not need differentiation. What’s more, Porter has also discussed the possibility of implementing a hybrid strategy. Present-day, this hybrid endeavor to combine strategies still proves to be extremely difficult in the heat of highly unpredictable market conditions and rapid changes in environments both internally and externally. For this reason it remains essential to focus on one competitive strategy.
A niche strategy is a perfect way to combat an unfocused direction. In becoming a niche provider an organization chooses a market where buyers have distinctive preferences. It is best to employ this strategy when: there is geographic uniqueness; it is difficult or costly to meet specialized needs of niche members; or few other rivals are specializing in the same niche. By focusing on a narrow market segment a corporation can better meet the needs of that target market; especially because other providers will not have the resources or competencies to serve such a niche. The Ferrari car company is a great example of a big-name organization serving a niche market. They offer superb quality sports-cars to customers who enjoy showing off their flashy lifestyle. Instead of trying to achieve low costs Ferrari takes pride in making one-of- a-kind car parts for a high-cost. Customers realize the quality they will receive when purchasing a Ferrari automobile so they do not mind paying such a high price. They differentiate themselves in this way and realize the impossibility of manufacturing their products at a low cost.
As displayed with the Ferrari example, it is better to know what you are not capable of then to try and be something that you are not. This idea jumps in line with the fact that being a best-cost provider risks the ability to build a sustainable competitive advantage or a distinctive competitive position. It must be clear to your customers what type of provider you are or you will lose them to organizations that establish their competitive strategy in an unquestionable fashion.