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It is a concept developed byÂ Michael Porter, this generic strategy here implies that the manufacturer in an industry produce products at the lowest cost for a given level of quality to establish competitive advantage. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share  . The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials, and other factors. AÂ cost leadership strategyÂ aims to exploit scale of production, well defined scope and other economies (e.g. a goodÂ purchasingÂ approach), producing highly standardized products, using high technology.  Â
Referring to table 1 above, it shows the relationship between cost leadership and differentiation strategy and that both serve a broad range of industry segments. According to Porter, achieving cost leadership and differentiation is usually conflicting because the internal resources and capabilities of a firm needed to support one are not compatible with the other. Differentiation is usually costly. To be distinctive and charge a price premium, a differentiator intentionally raises costs. On the contrary, cost leadership frequently requires a firm to forego some differentiation by standardizing its product, lowering marketing overhead, and etc  . Hence, in this case it seems that cost leadership is less relevant. Yet, firms still can employ this competitive strategy to attain above average performance and sustained competitive advantage.
Next section will be touching on some of the advices about costs that firms can adopt while pursuing differentiation strategy.
Reducing cost does not always involve giving up in differentiation on the other hand. There are ways to lower cost without hurting their differentiation and in fact help to actually raising it.
Deal directly with customers
One way in which a firm can reduce cost is by dealing directly with end customers. DELL, for instance, served its customers with high performance computers at relatively low price. Personal Computers were customized according to buyers' specifications, and assembly started only after Dell received the order. By reaching straight to the customers, it helps to reduce the costs for distribution channels in which PCs flow from manufacturers to customers via retail stores, distributors, resellers and direct distribution. Also, knowing what is the customer's wants and needs facilitate in building strong relationship between a firm and its customer, creating loyalty. This special service is a form of product differentiation. Though distribution channels are a form of product differentiation as well, I believe the benefits of serving the customers directly would outweigh the benefits gained through various distribution channels or at least equalized. Therefore, firm using distribution channels initially can try to switch to this approach to reduce costs.
On the flip side, not every firm can do the same way as good as Dell. Research has shown that firms that engaged in this approach ended up with lower profit margins as compared to before. If that is the case, then it is advisable not to carry on this method but to switch back.
Different locations have different prices of input and the most significant being differences in wage rates between countries. For example, in the automobile industry, labour costs in United States accounts for 30-45% of the vehicle's costs while only less than 10% in China (Source from Xinhua). And in India, the workforce is generally more educated, despite the low wages. As such, firm could actually relocate its manufacturing production from developed countries to developing nations such as China and India to take advantage of their low labour costs. In this case, firm's products are differentiated with lower costs.
However, there are a few considerations before making this decision, which is the relocation of production base to developing countries, could result in higher overall costs. This could be due to higher transportation costs if suppliers are in turn located further away from the production. Firm would then need to consider the tradeoffs between low wage rate and low transportation costs. Another factor is the quality of the products produced, in which products may turn defects. Regular quality control is required and thus resulting in higher costs.
Just-In-Time (JIT) Inventory Management
The firm produces goods to meet customer demand exactly, in time, quality and quantity, whether the `customer' is the final purchaser of the product or another process further along the production line  . By incorporating this JIT approach, it makes production operation more efficient and inventory turnover is faster and shorter production lines. Products are produced with minimum waste - time, resources as well as materials and fewer defects. Besides, holding no finished goods inventory can result in lower inventory holding costs, thus help in increasing the profit margin of the firm. A manufacturing firm'sÂ return on investment (ROI), efficiency, and quality can be improved if JIT is being put into practice correctly. The cost and burden of lodging and managing idle parts can also be alleviated. In that respect, company spokesman for Dell Venancio Figueroa, says "With our pull-to-order system, we've been able to eliminate warehouses in our factories and have improved factory output by double by adding production lines where warehouses used to be" (Songini, 2000). From the above statement, we can see that Dell has utilized the JIT management and is a success. Therefore, firm still can produce at a lower costs and yet not affecting production differentiation.
Unfortunately, JIT has limitations. "In just-in-time, everything is very interdependent. Everyone relies on everybody else" (Greenberg, 2002). Any JIT weaknesses could in turn cause a flaw in the supply chain, which can be very costly.Â For this reason, it is crucial in making the right decision.
If a firm can achieve cost leadership and differentiation simultaneously, the benefits are great because differentiation leads to premium prices, and at the same time that cost leadership implies lower costs. An example of a firm that has achieved success in both a cost advantage and differentiation is McDonald. Therefore, such firm is able to attain above average performance and sustainable competitive advantage as compared to other competitors who only engage in one generic strategy. However, one very important point to note is that if a firm is unable to balance the resources and capabilities well, more often than not the firm would get stuck in the middle position and has trouble competing with rivals, for instance JCPenney. Hence, it is best for the firm pursuing product differentiation strategy to minimize its costs yet compete against others using differentiation rather than both strategies.