Assessing the suitability of an integrated cost and differentiation competitive strategy.

Louis Borgeois (1986) defines corporate strategy as “where a company seeks to compete” (domain selection) which determines competitive strategy, defined as “how a company seeks to compete” (domain navigation). The competitive strategy is typically enacted by the single business unit (SBU) under governance from the parent’s corporate strategy.

Porter (1985) states that organisations compete on cost and differentiation to gain sustainable competitive advantage. Simplistically, cost leadership is a commitment to efficiencies in cost reduction to compete on price and increase profitability. Differentiation is better developing or marketing products for a targeted segment so that the more premium products and services command a higher price.

Porter suggests each strategy is pursued broadly or narrowly depending on the scope of the target (e.g. entire market versus segment) as illustrated in Figure 1.

Figure 1 – The Generic Strategy Matrix – Porter (1985)

Porter argues that in order for an organisation to compete effectively, a whole-hearted commitment to either cost leadership or differentiation must be made to avoid being ‘stuck in the middle’. However, Hitt et al (2003) proposed a fifth strategy: integrated cost-leadership and differentiation as illustrated in Figure 2.

Figure 2 – Updated Porter’s competitive strategies, including the integration strategy – Hitt et al. (2004)

This integrated strategy combined the generic approaches and emerged “largely due to the increased sophistication of customers demanding differentiated products at low prices” and OU (2014, p.44) continues to describe the two forms of this strategy as:

  • Low-Cost Differentiation: Differentiated products are offered at a low price with focus on keeping costs low.
  • Differentiated Low Cost: Products from a low-cost process are differentiated e.g. used in new markets.

In order to evaluate the strategic choices, Johnson et al. (2011) propose the ‘SAFe criteria’ – suitability, acceptability and feasibility. OU (2014, p.49) highlights the four aspects of assessing the suitability of a strategy:

  • Fulfilling industry Key Success Factors (KSFs)
  • Addressing the strategic problem
  • Capitalising on Resources and Responsibilities
  • Fit with Organisation Objectives

Woolworths

The failing of UK retailer Woolworths could, in part, be attributed to its non-commitment to either cost leadership or differentiation as McDonald (2008) points out: “Woolworths’ price points are higher than Tesco’s, its ranging isn’t that good and it’s not that convenient.” The Woolworths brand was neither synonymous with discounted pricing nor variety despite its range of products (toys, clothes, electrical). Woolworths seemed to default into an integrated strategy with some cost control, typical of any business, and some differantiation; which ultimately diminished its brand prominence. This contrasts with the success of UK retailers such as Poundland that exhibited a strong commitment to cost leadership only as it only “resembles a more conventional grocery or supermarket” – McBain (2014).

Large-Scale Primary Producers

Producers of electricity or gas trade in commodity markets with homogeneous products. It doesn’t matter how gas is produced for the majority of price-sensitive end consumers so the organisations’ objectives are reducing costs by economies of scale and process efficiencies. It could be argued that an oil mining business equipped with capabilities (e.g. logistics, manufacturing, quality control) could differentiate and produce a higher quality fuel such as LPG due to increasing demand but this strategy would be a corporate strategy to diversify according to Ansoff’s growth vectors as cited in OU (2014, p.17) – not a competitive strategy enacted by an SBU.

Go Outdoors

Go Outdoors is UK retailer that targets consumer enthusiasts that enjoy outdoor leisure pursuits. This market is large and varies from fishing, camping, hiking to just about everyone who ‘goes outdoors’. Go Outdoors (n.d.) claim the “UK’s widest range at the lowest prices”, which is immediately indicative of an integrated strategy. As retailers emerged (Snow & Rock, Cotswold Leisure, Mountain Warehouse, Blacks), the market has become increasingly competitive.

As a privately owned enterprise, Go Outdoors retains sincerity to its mission facilitating entry to outdoor pursuits for a range of people. In order to compete in the current market, the company had to pursue cost focus for its diverse range of products. A KSF is maintaining variety because customers want equipment that suits them personally. By opening stores over the last two decades, Go Outdoors increased bargaining power with its supply chain and is able to compete effectively on price as well. The company mitigates the higher costs of differentiation by using a price match scheme to build consumer confidence in their competitive pricing.

The author’s experience of is that employees are knowledgeable about products and passionate about the company’s ethos so pursuing an integrated strategy enabled the company to leverage these capabilities at little cost.

Iveco

As a commercial vehicle manufacturer, Iveco operates in a highly competitive European market where competitive advantages are determined by technological innovations to meet the increasingly stringent demands of legislation on fuel emissions and road safety. Competing with over 10 other large commercial vehicle manufacturers, Iveco had to differentiate its product but keep costs low. This integrated strategy has led to its success across Europe with a trading profit of €490 million in 2011 – Fiat Industrial (2011).

The integrated strategy is a good example of ‘differentiated low cost’ because its established manufacturing plants produce a limited range of vehicle chassis. Panel vans are completed at the factory and then sent with little modification to customers whereas other vehicle types based on the same chassis have bodies fitted (tippers, side-loaders, fridges) according to customer orders.

The KSFs of the industry is producing a vehicle that reduces the customer’s total cost of ownership (TCO). The largest contributor to TCO is fuel efficiency so Iveco’s differentiation, such as investment in a unique Euro 6 Hi-SCR technology (Iveco, n.d.) meets the criteria for a successful delivery. Iveco was able to capitalise on its shared resources and capabilities of engineering, manufacture and logistics from the parent company, CNH Industrial, in order to differentiate its product range. The differentiation strategy is well suited to the company’s vision “To take the lead over the competition, offering value and quality for the success of our customers.”

Conclusion

The Hitt et al. (2003) illustrated revision of Porter’s (1985) competitive strategies model indicates five distinct categories of competitive strategies. Any organisation should strive for efficiencies that result in cost reduction to either return the maximum profit on investment or, for non-profits, spend funds as effectively as possible. This principle should inform all strategic decisions of organisations so remaining consideration is: Given the internal resources and capabilities of the business and any political, economic, social or technological (PEST) factors; what degree of differentiation would be most appropriate?

Competitive strategies do not neatly fit into distinct categories and an improved illustration of Porter’s competitive strategies model is shown in Figure 3.

Figure 3 – A further update to Porter’s competitive strategies to show graduation of non-distinct strategies

The revised model does not show distinct approaches but that companies (represented by the circles) can, and do, take an approach that is somewhere on a 2 dimensional scale between differentiation and cost leadership. Examples are:

  • Red: PepsiCo as cited in OU (2014, p.26) is able to deliver packaged goods to a market segment by focussing costs accordingly e.g. increased utilisation of logistics
  • Green: Honda as cited in OU (2014, p.41) follows a “differentiated strategy in terms of enhanced reliability and advanced engine…” and competes globally
  • Orange: McDonalds as cited in OU (2014, p.44) uses an integrated approach where “fast-food meals, appear to be the standardised low-price outputs of an overall cost-leadership strategy, but they are actively differentiated from the products of competitors through a variety of methods, such as branding”

The relative weaknesses or strengths of an integrated cost leadership and differentiation strategy are realised based on the sensitive context of the organisation – predominantly the KSFs of its markets. The pursuit of an integrated strategy enables some organisations, like Iveco, to compete effectively but could have a detrimental effect to other organisations such as Woolworths.

References

Bourgeois, L. J. (1986) Strategic Management: from Concept to Implementation, Fort Worth, TX, Dryden Press.

Fiat Industrial (2011) Annual Report [Online] Available at http://www.cnhindustrial.com/en-US/investor_relations/financial_information/FiatDocuments/FI_Relazione_finanziaria_annuale_2011_FINALE_NIS_ENG.pdf (Accessed: 03 February 2016)

Go Outdoors (n.d.) The GO Outdoors Story [Online]. Available at http://www.gooutdoors.co.uk/about-us (Accessed: 02 February 2016)

Hitt, M. A., Ireland, R. D. and Hoskisson, R. E. (2003) Strategic Management: Competitiveness and Globalisation, Mason, OH, Thomson-South Western.

Iveco (n.d.) Iveco HI-SCR. The most efficient Euro VI technology on the market. [Online] Available at http://www.iveco.com/uk/products/pages/iveco-scr.aspx (Accessed: 03 February 2016)

Johnson, G., Scholes, K. and Whittington, R. (2011) Exploring Corporate Strategy, 9th edn, Harlow, Financial Times/Prentice Hall.

McBain, S (2014) Quids in: how Poundland conquered the British high street. The New Statesman [Online] http://www.newstatesman.com/business/2014/05/quids-how-poundland-conquered-british-high-street (Accessed: 02 February 2016)

Porter,M.E.(1985) Competitive Advantage, New York, Free Press.

Leave a Reply