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CHAPTER 5 • STRATEGIES IN ACTION 153

leadership strategy successfully, a firm must ensure that its total costs across its overall
value chain are lower than competitors’ total costs. There are two ways to accomplish this: 21
1. Perform value chain activities more efficiently than rivals and control the factors
that drive the costs of value chain activities. Such activities could include altering
the plant layout, mastering newly introduced technologies, using common parts
or components in different products, simplifying product design, finding ways
to operate close to full capacity year-round, and so on.
2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing
activities. Such activities could include securing new suppliers or distributors,
selling products online, relocating manufacturing facilities, avoiding the use of
union labor, and so on.

When employing a cost leadership strategy, a firm must be careful not to use such
aggressive price cuts that their own profits are low or nonexistent. Constantly be mindful
of cost-saving technological breakthroughs or any other value chain advancements that
could erode or destroy the firm’s competitive advantage. A Type 1 or Type 2 cost leader-
ship strategy can be especially effective under the following conditions: 22
1. When price competition among rival sellers is especially vigorous.
2. When the products of rival sellers are essentially identical and supplies are readily
available from any of several eager sellers.
3. When there are few ways to achieve product differentiation that have value to
buyers.
4. When most buyers use the product in the same ways.
5. When buyers incur low costs in switching their purchases from one seller to another.
6. When buyers are large and have significant power to bargain down prices.
7. When industry newcomers use introductory low prices to attract buyers and build
a customer base.
A successful cost leadership strategy usually permeates the entire firm, as evidenced
by high efficiency, low overhead, limited perks, intolerance of waste, intensive screening
of budget requests, wide spans of control, rewards linked to cost containment, and broad
employee participation in cost control efforts. Some risks of pursuing cost leadership are
that competitors may imitate the strategy, thus driving overall industry profits down; that
technological breakthroughs in the industry may make the strategy ineffective; or that
buyer interest may swing to other differentiating features besides price. Several example
firms that are well known for their low-cost leadership strategies are Wal-Mart, BIC,
McDonald’s, Black & Decker, Lincoln Electric, and Briggs & Stratton.

Differentiation Strategies (Type 3)
Different strategies offer different degrees of differentiation. Differentiation does not guar-
antee competitive advantage, especially if standard products sufficiently meet customer
needs or if rapid imitation by competitors is possible. Durable products protected by barri-
ers to quick copying by competitors are best. Successful differentiation can mean greater
product flexibility, greater compatibility, lower costs, improved service, less maintenance,
greater convenience, or more features. Product development is an example of a strategy
that offers the advantages of differentiation.
A differentiation strategy should be pursued only after a careful study of buyers’ needs
and preferences to determine the feasibility of incorporating one or more differentiating
features into a unique product that features the desired attributes. A successful differentia-
tion strategy allows a firm to charge a higher price for its product and to gain customer
loyalty because consumers may become strongly attached to the differentiation features.
Special features that differentiate one’s product can include superior service, spare parts
availability, engineering design, product performance, useful life, gas mileage, or ease
of use.
A risk of pursuing a differentiation strategy is that the unique product may not be
valued highly enough by customers to justify the higher price. When this happens, a cost