Cost Leadership

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Stockholm School of Economics Institute of International Business Course 2210, M.Sc. Thesis in International Business

Cost Leadership & Differentiation An investigation of the fundamental trade-off between Porter’s cost leadership and differentiation strategies

Abstract
This thesis examines the fundamental trade-off between low cost and differentiation strategy at a business strategy level. In 1980 Porter introduced a model of generic strategies that has influenced much of the current thinking in strategy formulation. Although Porter did not coin the terms, he was the first to discuss the importance of choosing and focusing on one of the three alternatives: 1.Cost leadership, 2.Differentiation, and 3.Focus. Any attempt to combine or reconcile strategies would result in firms becoming “stuck in the middle”, a poor strategic choice due to the existence of an inevitable trade-off. The dearth of recent research on the topic suggests that the initial debate has faded since the beginning of the 1990s, even though some discussions still take place in strategy textbooks and occasionally in the business press. IKEA, McDonalds, Southwest Airlines and Wal-Mart are examples of companies that are pointed out as having successfully reconciled both strategies. In order to investigate the question of an inevitable trade-off in general and the current state of art of the research topic in particular, a thorough literature review has been conducted. It is accompanied by a cross-check examination of contemporary practitioners’ position in the matter, that is, whether current practitioners principally believe that strategies are mutually exclusive, or, reconcilable. Even though the lack of a concise definition of the concept “mixed strategy” or “combination strategy” (or “combined strategy”) greatly hinders research on the topic, both theory and practice support the existence of a trade-off.

Presentation: March 16th 2007, 13.15-15 (room C512) Advisor: Author: Opponents: Patrick Regnér Martina Minarik (19238) Agnes von Arbin Ahlander (19417), Golnaz Hashemzadeh Bayegi (19545)

Index

1. Introduction...…………………………….………………………………………………… 1.1. Why is this topic of interest?…………………………………………………….. 1.2. Purpose…………………………………………………………………………… 1.3. Delimitations……………………………………………………………………... 1.4. Disposition.………………………………………………………………………. 2. Method……………………………………………………………………………………... 2.1. Research design………………………………………………………………….. 2.2. Data.……………………………………………………………………………… 2.3. Research quality.…………………………………………………………………. 3. Theoretical Framework...…………………...…………………………………………….... 3.1. What is strategy?………………..…...…………………………………………… 3.2. The concept of “Strategic groups”……………………………………………….. 3.3. Porter.…………………………………………………………………………….. 4. Literature Review...………………………………………………………………………… 4.1. Conceptualisation of competitive strategies.…………………………………….. 4.2. Competitive strategy and market share..…………………………………………. 4.3. Mixed strategy and performance.………………………………………………... 4.4. Summarizing Table.……………………………………………………………… 5. Interviews with Practitioners…...………………………………………………………….. 5.1. Mixed strategy and performance.………………………………………………... 5.2. Competitive strategy and market share.………………………………………….. 5.3. Trade-off………………..………………………...……………………………… 6. Analysis…………………………………………………………………………………….. 6.1. Interpreting findings on the trade-off issue..……………………………………... 6.2. Lacking a definition of “mixed strategy”…………………...……………………. 6.3. Strategy vs. Operational efficiency………………………………………………. 6.4. The author’s word on the topic…………………………………………………... 7. Conclusions………………………………………………………………………………… Appendix A………………………………………………………………………………… 8. Specification of sources & References……………………………………………………..

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1. Introduction

Cost leadership and differentiation strategies are popular research topics within the field of strategy and have been widely discussed, in particular since Michael Porter presented his model of generic strategies in 1980. Some rearchers, in fact,...
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