Table of Contents
A Critique of Porter’s Cost Leadership and Differentiation Strategies4 ABSTRACT4 Key Words4
COST LEADERSHIP STRATEGY5
Major Reliance on Modern Capital Equipment7
Relying on the Experience Curve to Underprice Competition Risky7 A Cost Leader Cannot Ignore Differentiation8 No Such Thing as a "Commodity": Everything Can Be Differentiated9 High Market Share a Prior Condition for Cost Leadership?10 Porter Identifies High Market Share with Cost Leadership Strategy10 Differentiation--Not Cost Leadership Alone--Behind GM’s and Whirlpool’s Success11 “Low-Cost” or “Low-Price” Strategy?12 Thompson and Strickland’s Low-cost Provider Strategy14
Internal Orientation of Cost Leadership Strategy14
Superiority of Differentiation over Cost Leadership Strategy16 Porter: Differentiation and High Market Share Incompatible17 Differentiation Compatible with High Market Share--and Low Cost18 Even higher quality may lead to lower cost18
High Market Share Contributes to Long-term Competitive Advantage20 Market Share Leadership Enhances Differentiation20 “PURE” COST LEADERSHIP STRATEGY VS. COST LEADERSHIP AS A RESULT OF DIFFERENTIATION STRATEGY20 Porter: “Pure” Cost Leadership Strategy Incompatible with Differentiation Strategy21 The Importance of Organizational Culture21
Need to Redefine Porter’s Narrow View of Differentiation22 A PROPOSED FRAMEWORK OF COMPETITION23 Differentiation the Cornerstone of Competitive Strategy23
Road to Market Share Leadership: Differentiation at Moderate Prices23 Need for Recognizing an Important Distinction: Segmentation vs. Differentiation24 “Premium Price” or “Price Premium”?24 The Importance of Positioning26
The Crucial Role of “Outpacing” Strategies27
Shift in Porter’s Thinking29
Suggestion for Future Research31
A Critique of Porter’s Cost Leadership and Differentiation Strategies
Here we offer a critique of Porter’s cost leadership and differentiation strategies, and a synthesis of the relevant literature.
Porter suggests a low-cost position often requires high market share. But how does a business get there first? Answer: market share leaders do it via a strategy of differentiation.
Porter lists GM as a successful practitioner of cost leadership strategy. However, the 1976-1982 quality-data shows that higher quality (differentiation) also played a key role in this success.
Mintzburg argues that Porter’s low-cost strategy is actually a differentiation strategy based on low price.
Contrary to Porter’s views, differentiation strategies are more profitable than cost leadership strategies, because market share leaders prefer to compete more on the basis of differentiation than low cost.
Finally, research shows that differentiation and cost leadership can co-exist. However, Porter insists that each generic strategy requires a different culture and a totally different philosophy. He says the “strategic logic of cost leadership usually demands that a firm be the cost leader.”
The flaw is not in Porter’s logic but in his basic premise that associates differentiation with uniqueness and premium prices: a situation generally incompatible with high market share.
So, we need to redefine Porter’s idea of differentiation. A vast majority of the best-selling brands are likely to be in the mid-price segment that offer better quality than the competition, and carry an above-average price tag. Then a business does not need to adopt the rigid culture and philosophy of Porter’s Cost Leadership strategy to achieve market share leadership.
Cost Leadership strategy
A scholarly work that has received widespread attention and recognition in the Strategic Management area--and beyond--is Porter’s (1980, 1985) typology of generic competitive strategies: Cost...
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