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Strategy: Low Cost or Differentiation

M Dana Baldwin, Senior Consultant

Strategic Planning Expert

Strategic Planning Expert

When your organization does strategic planning, what strategies do you consider for each of your market segments?  It is likely that you may select different bases for competing in different segments, because your competitive atmosphere is different in each segment, and what you bring to the market is different in each segment.

The two approaches to strategies we are going to examine are: differentiation (specialty) and low cost strategies (commodity).  In a low cost strategy, the true winner is the company with the actual lowest cost in the market place.  For example, if two companies make essentially identical products that sell at the same price in the market place, the one with the lower costs has the advantage of a higher level of profit per sale.  By having this advantage, the low cost company is able to do a number of things to maintain or increase its market share.  It can invest more in marketing.  It can pay for better positions in retail stores relative to its higher cost competitor.  It can lower price, thus squeezing its competitor’s margins and profits.  It can invest more in research and development, allowing it to improve the performance of its product.  The bottom line here is that the higher cost competitor is allowed to stay in the market at the sole discretion of the lower cost competitor, because, if it so choses, the lower cost competitor could drop its price to the point where the higher cost competitor would have to sell at a loss in order to remain in the market.  Eventually, the higher cost competitor could be driven out of that business.  You need to understand what percentage of the market is buying solely on price.  This often happens with mature products.

In the low cost strategy, a company must have a thorough understanding of costs and how to continually reduce them.  The company must be willing to standardize its offerings in order to manage costs, which implies that exceptions requested by prospective customers must be limited or excluded in order to keep costs down.

The other approach we are examining is differentiation.  Differentiation involves being perceived by the market place as having a relatively higher value to the customer or user than the offerings of its competitors, and often at the same or even higher pricing levels.  These are different customers – not buying just on price.

In a differentiation strategy, the company must totally understand its customers’ needs and preferences.  It must be driven to innovate to continually address those wants and needs.  And, it must build its brand to maintain its position and visibility.

Years ago, Sony sold the Walkman radios and disc players at a higher price than any of its competitors, yet dominated the market place.  The reasons for this seemed to be that they provided the highest quality, most consistent performance and the best sound delivery in the market place.  The interesting thing here is that, due to both volume and to good design and engineering of the products, Sony also was, for a very long time, the low cost producer as well.  This gave Sony the distinct advantage of having sufficient resources available to effectively out-market its competitors, as well as having the resources to do more product development and refinement to keep Sony at the forefront.

The Sony example is actually a combination of low cost and differentiation strategies, which, done well, can be extremely effective in the market place.  To do this requires a high level of commitment to both approaches, but the benefits can be outstanding.  For years, Sony was by far the leader in personal musical devices, with the highest volume and profitability.  Eventually its position was overcome by advances in other technologies like the smart phone and MP3 players, and, most likely, Sony’s eventual loss of concentration on what got them to the top.

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M. Dana Baldwin is a Consultant with Center for Simplified Strategic Planning, Inc. He can be reached by email at: baldwin@cssp.com

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