Strategic Management deals with the process of translating an organization’s vision into long term goals which will enable it to compete with sustained competitive advantage in its business environment. Business Strategy is an important component of Strategic Management. It deals with how a firm competes along the three dimensions of its competitive space namely customers and markets, products and services, and technologies including skills and capabilities. A firm’s competitive advantage is determined by the breadth of its target market. The target market could be mass market which means it is attractive to a large number of customers spread across most income and occupation groups(demographic groups). On the other hand, the market could appeal to a narrower range of customers with specific requirements. Let us take a few examples. Internationally WalMart the giant U.S. retailer, Timex the leading watch brand, Gateway in P.C.s are good examples of firms with very large markets running into tens of millions of customers. What is it they have in common. They all have products that are extremely reasonably or even low priced which gives them a significant edge over their competitors. These they are able to provide because they are very efficient in their primary operations be they manufacturing in the case of Timex or Procurement in the case of WalMart and Gateway. To put it quite simply they are able to sell cheap because they produce/procure cheap. In other words they have Cost Leadership. In the Indian scene, Nirma who is the industry leader in the detergent industry, and T Series the Cassette Manufacturer are impressive in their ability to sell inexpensively vis. a vis. their competitors. This ability is driven by their extremely low cost of manufacture which also gives them cost leadership.
Let us look at Daimler Benz who produce and market the world famous Mercedes line of passenger automobiles, Maytag who manufacture and market a much sought after range of Washing machines and appliances, and Disney who have the most sought after entertainment parks on the planet. What is common between these companies’ business strategies? All of them market products which are priced significantly higher than the products of their competitors. Clearly there are enough customers who are willing to pay the price premiums charged by these companies on their products. This is because each of these products offers something of extra value to their respective customers. This is driving comfort, and style in the case of Mercedes, long lasting washing machines that offer extremely reliable trouble free service in the case of Maytag, and superb customer handling by friendly and helpful company staff at Disney theme parks. These companies clearly position their products as “a cut above the rest” and offer additional value which justifies the premium that they charge on their products. Their Business Strategy can be described as Differentiation. To provide an Indian example of differentiation, Titan Watches have made available to the Indian consumer products that have an international look, carry the image of premium quality and therefore are able to set their prices higher than their competitors in the Indian watch market.
The alternative strategies of Cost leadership and Differentiation owe their origin and widespread acceptance in Management Science to Professor Michael Porter who is acknowledged as one of the most influential management thinkers of our generation and whose contribution to Strategic management is substantial. According to Porter a firm should pursue one of either cost leadership of Differentiation failing which it risks being stuck in the middle. While this is generally true, there are some notable exceptions. Both Honda Motor Co. and Toyota Motors – leading players in the international auto industry-have low priced products and premium priced products in their portfolios and have been able to successfully market both types without difficulty. In the Indian Context let us examine the strategies of Titan and Maxima two leading firms in the Watch business. Titan followed a differentiation strategy for many years, but decided to launch a low priced watch range which they named Sonata. This backfired on Titan with the new range eating into the share of Titans own products( a phenomenon known as Cannibalization). On the other hand Maxima followed a cost leadership strategy while entering the watch market and having acquired considerable market share decided to follow a partial differentiation strategy. This is called “Focussed Differentiation” and it worked. We may conclude that it is easier for firms who have established a strong market position with a cost leadership strategy to move up the price ladder for some market segments than it is for Differentiated Strategy companies to move down the price ladder.
Source: Scribd.com (Strategic Management Notes)