Advantage and pifalls of each strategy Cost leadership strategy Differentiation strategy Focus Best-cost strategy Increases the potential of (not stipulated in the test (not stipulated in the test (not stipulated in the test an organisation to book) book) book) increase both its market share and its profitability; Customers who are familiar with the products and services of low-cost leaders are unlikely to switch to a competing unless the competing brand has something very different or unique to offer – customer loyalty is an advantage of a prolonged cost leadership strategy; One of the most important advantages that cost leaders have is their ability to keep new entrants from entering the market. Potential Sometimes organisations Uniqueness that is not The needs, Organisations that fail pitfalls run the risk of being valuable: market expectations and to create both overly aggressive with research and reliable characteristics of the competitive advantages their price cutting and information are critical to market may gradually simultaneously may ending up with lower the success of a shift towards attributes end up with neither and profitability; differentiation strategy; desired by the majority become stuck in the Value-creating activities Too much of buyers in the middle; that form the basis of differentiation; broader market, which Organisations may this strategy can often Charging too high a will decrease the profit underestimate the be imitated too easily; premium; potential of this challenges and A degree of A uniqueness that is segment; expenses associated differentiation is still easily imitated; Competitors may with providing low needed. Dilution of brand develop technologies prices and identification through or innovate products differentiating at the product-line extensions. that may redefine the same time; preferences of the Organisations may niche; miscalculate the The segment may sources of revenue become so attractive within the industry and that it is soon fail to achieve expected inundated with profitability. competitors, intensifying rivalry and eroding profits. TOPIC 7– STUDY UNIT 7.1 GRAND STRATEGIES –
Advantage and pifalls of each strategy Cost leadership strategy Differentiation strategy Focus Best-cost strategy Increases the potential of an organisation to increase both its market share and its profitability; Customers who are familiar with the products and services of low-cost leaders are unlikely to switch to a competing unless the competing brand has something very different or unique to offer – customer loyalty is an advantage of a prolonged cost leadership strategy; One of the most important advantages that cost leaders have is their ability to keep new entrants from entering the market. (not stipulated in the test book) (not stipulated in the test book) (not stipulated in the test book) Potential pitfalls Sometimes organisations run the risk of being overly aggressive with their price cutting and ending up with lower profitability; Value-creating activities that form the basis of this strategy can often be imitated too easily; A degree of differentiation is still needed. Uniqueness that is not valuable: market research and reliable information are critical to the success of a differentiation strategy; Too much differentiation; Charging too high a premium; A uniqueness that is easily imitated; Dilution of brand identification through product-line extensions. The needs, expectations and characteristics of the market may gradually shift towards attributes desired by the majority of buyers in the broader market, which will decrease the profit potential of this segment; Competitors may develop technologies or innovate products that may redefine the preferences of the niche; The segment may become so attractive that it is soon inundated with competitors, intensifying rivalry and eroding profits. Organisations that fail to create both competitive advantages simultaneously may end up with neither and become stuck in the middle; Organisations may underestimate the challenges and expenses associated with providing low prices and differentiating at the same time; Organisations may miscalculate the sources of revenue within the industry and fail to achieve expected profitability. TOPIC 7– STUDY UNIT 7.1 – GRAND STRATEGIES