Cost Leadership vs Differentiation Strategies
OAM 331 Session 14 - Feb 27th
WHERE ARE WE: AFI Framework - Implementation
Business Strategy: Differentiation, Cost Leadership and Blue Oceans
Gaining and Sustaining Competitive Advantage: understanding external/internal analysis, strategic leadership, and business strategies
Business-Level Strategy: How Tco Compete, How to win
Strategy: set of activities that create a sustainable competitive advantage
Competitive advantage is a function of BOTH industry and firm effects
→ Industry Effects = 5 forces model, complements & strategic groups
→ Firm Effects: value position & Cost position (relative to compeitiors) → buisneess strategy: Cost, difefrenation, & blue ocean
Strategic Positioning: Different activities from rivals
Strategy creates a unique & valuableposition
COST & VALUE (relative to competitors)
If there were a single ideal position, we wouldn't need strategy, but things are constantly evolving
With strategic positioning → you choose actobotoes different from rivals
→ Uniqueness: Customers know what you stand for
→ Strength: Competitors won’t try to copy → trouble doing so
Strategic Trade-Offs
Consideration: Choose between cost OR value position
There is tension b/w value creation & pressure to keep costs in check
Goal: Maximize economic value creation and profit margin
Generic Business Strategies
Differentiation:
Create higher value for consumers
→ In turn, increase willingness to pay (WTP) & Price
Example: Offer $12 value at $8 price
Cost Leadership:
Provide similar value at lower prices
→ Aim for lower costs to the firm
Example: Offer $10 value at $5 price with $3 cost
Strategic Position and Competitive Scope
Understanding market scope: Broad vs. Narrow.
Competive = Y Strategic Positions = X
Auto Industry Positioning
Broad Cost Positioning: Chevrolet
Narrow Differentiation: Cadillac
Airline Industry Positioning
Broad Cost Positioning: Southwest Airlines is competing against Frontier, Spirit, and Allegiant in the LOW-COST category
JetBlue → stuck between low-cost & differentiation
Straddling like this is difficult
Company Portfolios (cost vs differenattion)
Bottled water (least to most expensive)
Dasani, Glaceau, Smartwater (coke)
Aquafina, Soma, Lifewtrr (Pepsi)
Marriott Hotels Portfolio: Ranges from budget to luxury
Fairfield (family)
Residence in (extended stays → has a kitchen)
Marriot Courtyrad (business)
Marriot (full-service, conference)
Ritz Carlton (luxury)
Q: How to keep sister brands from competing with each other?
How to Differentiate?
Strategies for Differentiation:
Emphasize unique product features, superior customer service, and complementary products
Economies of Scale vs. Scope
Economies of Scale: Spread fixed costs over a larger number of units, decreasing the cost per unit
Economies of scale mean that as a business produces more, the cost per unit goes down.
→ This happens because fixed costs (like rent or machines) are spread over more product
Internal – Savings within a company, like buying in bulk or using better machines.
External – Savings from industry growth, like better suppliers or government support
ex: manufacturing plants with high fixed costs
Economies of Scope: Produce multiple outputs utilizing the same resources to achieve cost savings
ex: distilleries producing both spirits and hand sanitizer → alc
4 Primary Cost Drivers
1 - Cost of Inputs:
Airlines: Etihad, Qatar, Emirate
Cheaper inputs (labor, fuel, capital) increase economic value creation
2 - Economies of Scale:
Fixed costs remain constant regardless of volume
ex: rent, insurance, property tax
Marginal costs incurred with each additional unit
ex: raw materials, contract labor, commissions
Q: Why are movie thaters open during the weekdays despite being nearly empty?
3 - Learning Curve:
WW2 production of aircraft: production doubles, costs fall predictability → WHY?
Cumulative output with same technology over time (learning with experience)
90% learning curve → 10% per-unit decrease w/ each double in production
4- Experience Curve
Process innovation: improving how a product is made or delivered to make it faster, cheaper, or better. This can involve new technology, better workflows, or automation
enables firms to jump to a steeper learning curve
reduces per-unit costs
Key Takeaways
Strategic positioning requires pursuing different activities in comparison to rivals, focusing on difficult-to-imitate actions.
Differentiation: Raises WTP and often allows higher pricing
Cost Leadership: Involves lowering the cost structure for similar quality
Economies of Scale: lower per unit cost w/ volume (fixed costs distributes over time) and Scope: doing more things reducing costs
→ BOTH are crucial for decision-making
Cost structure matters: higher fixed costs (compared to MC) → more willing to reduce price
Learning Curve: learning by doing→ productivity increases every time production doubles
NO ideal strategy → just pros and cons of each
Narayana Health:
Narayana Health (NH), founded by Dr. Devi Shetty in India, is known for its low-cost, high-volume healthcare modH
Process innovation – Streamlined workflows, optimized resource utilization, and task specialization among medical staff.
How Narayana Health Benefits from Economies of Scale, Learning Curves & Economies of Scope
Economies of Scale – Lowering costs by increasing patient volume
Performs thousands of surgeries, reducing per-patient costs.
Buys medical supplies in bulk for cheaper rates.
Standardized processes improve efficiency and reduce waste.
Learning Curves – Improving efficiency through experience
Surgeons specialize, performing procedures faster and with better outcomes.
Data-driven decisions refine best practices and reduce errors.
Faster surgeries and recoveries free up resources for more patients.
Economies of Scope – Expanding services using existing resources
Adds new specialties (oncology, transplants) using the same infrastructure.
Uses telemedicine to reach rural patients without building new hospitals.
Runs training programs, reducing hiring costs and generating revenue