Strategy 2.0: Achieving both cost and differentiation advantage simultaneously.
Summary
TLDRThe video script explores the traditional business strategy of offering either low cost or differentiation to gain a competitive edge, as proposed by Michael Porter. However, it highlights a growing trend where companies like Uber, Amazon, and Waze are achieving both simultaneously, leading to higher returns on investment. The script attributes this shift to advancements in the digital economy, which impacts both supply and demand sides, allowing for cost reduction and enhanced customer experiences.
Takeaways
- 💰 Traditional business strategy involves offering the lowest price or a differentiated product to customers.
- 🔍 Achieving low cost requires understanding the supply chain and value-added chain to drive down costs through automation, proprietary processes, or low-cost locations.
- 💡 Differentiation is achieved by understanding customer needs and developing unique product features or customer experiences that increase their willingness to pay.
- 📚 Michael Porter suggests that cost leadership and differentiation are fundamentally different approaches to creating a competitive advantage.
- 🤔 Porter noted that it's rare for firms to deliver both differentiation and low cost, often requiring a strategic choice between the two.
- 📈 A study by Professor Roderick White found that 27% of 69 business units had a competitive advantage based on a combination of both low cost and differentiation.
- 🚗 Companies like Uber and Lyft have disrupted markets by offering both lower prices and a differentiated customer experience through technology.
- 🛒 Amazon's success in retail is attributed to offering both low prices and convenience in ordering and delivery compared to traditional stores.
- 🗺️ Google Maps outperforms competitors with a free service and superior features like real-time traffic-based route estimation.
- 🏠 Examples like Airbnb, Costco, eBay, Home Depot, Venmo, and Skype show businesses that defy simple categorization into cost or differentiation strategies.
- 🌐 The digital economy has enabled companies to compete on both price and differentiation through changes on the cost/supply side and the customer/demand side.
Q & A
What are the two traditional value propositions a company can offer to its customers?
-A company can offer its customers either the lowest price by having the lowest costs or a differentiated product that stands out from competitors.
How can a company achieve a low-cost advantage?
-A low-cost advantage can be achieved by deeply understanding the economics of the supply and value-added chain, driving down costs through automation, proprietary processes, lower-cost inputs, or moving to low-cost locations overseas.
What is the key to achieving differentiation in a product or service?
-Differentiation is best achieved by deeply understanding customer needs and then developing unique product features or a unique customer experience that increases the customers' willingness to pay.
According to Michael Porter, why is it usually difficult for a firm to deliver both differentiation and low cost simultaneously?
-Michael Porter suggests that differentiation is usually costly, and under normal conditions, a firm must choose between cost leadership and differentiation because trying to do both can lead to being stuck in the middle without a clear competitive advantage.
What did Professor Roderick White find in his study of 69 business units regarding the combination of low cost and differentiation?
-Professor Roderick White found that 27% of the 69 business units had a competitive advantage based on a combination of both low cost and differentiation, and those units had the highest return on investment.
Can you provide an example of a company that successfully combines low cost and differentiation?
-Uber is an example of a company that delivers car rides at a lower price than taxis and also provides a differentiated experience by allowing customers to summon their ride through the Uber app, knowing the price and type of vehicle beforehand.
How does Amazon succeed in retailing by combining both low cost and differentiation?
-Amazon succeeds by offering both low prices and convenience in ordering and delivery, which gives it a competitive edge over traditional brick-and-mortar retailers.
What is the significance of the Waze app in the context of the navigation and maps market?
-Waze beats competitors like Garmin, TomTom, and Magellan in the navigation and maps market by offering a free service with superior features such as estimating the time to complete a route based on current traffic.
What are two primary factors that have changed, allowing companies to compete on both price and differentiation simultaneously?
-The two primary factors are changes on the cost or supply side and the customer or demand side, both fundamentally resulting from the digital economy.
Why have traditional categorizations into a cost or differentiation strategy become less clear in the digital economy?
-The digital economy has enabled companies like Airbnb, Costco, eBay, Home Depot, Venmo, and Skype to blur traditional lines by offering both low cost and differentiation, making it harder to categorize them into a single strategy.
How does the digital economy impact a company's ability to offer both low cost and differentiation?
-The digital economy provides tools and platforms that can reduce costs through automation and efficient supply chain management while also allowing for the creation of unique digital experiences that differentiate products and services from competitors.
Outlines
💼 Winning Through Low Price and Differentiation
This paragraph discusses the traditional business strategy of choosing between a low-cost or differentiated value proposition. It explains how low cost is achieved through supply chain economics, automation, and cost reduction strategies, while differentiation is attained by understanding customer needs and offering unique product features or experiences. The script references Michael Porter's view that these strategies are fundamentally different and usually mutually exclusive, but acknowledges that some companies, like Uber and Amazon, have managed to combine both approaches successfully. The paragraph also introduces a study by Professor Roderick White, which found that 27% of business units had a competitive advantage based on a combination of low cost and differentiation, leading to the highest return on investment.
Mindmap
Keywords
💡Value Proposition
💡Low Cost
💡Differentiation
💡Competitive Advantage
💡Automation
💡Supply Chain
💡Customer Needs
💡Willingness to Pay
💡Digital Economy
💡Stuck in the Middle
💡Return on Investment (ROI)
Highlights
Traditional approach to value proposition is offering lowest price or differentiation.
Low cost achieved by understanding supply chain economics and driving down costs through various methods.
Differentiation is achieved by understanding customer needs and developing unique product features or experiences.
Michael Porter's view on cost and differentiation as fundamentally different strategies for competitive advantage.
Porter acknowledges rare conditions where firms can deliver both differentiation and low cost.
Roderick White's study shows 27% of business units had competitive advantage through both low cost and differentiation.
Business units combining low cost and differentiation had the highest return on investment.
Uber and Lyft's success by offering lower prices and a differentiated customer experience through their app.
Amazon's retail success through low prices and convenience in ordering and delivery.
Google Maps' superiority over competitors due to free service and advanced features like traffic-based time estimation.
Companies like Airbnb, Costco, eBay, Home Depot, Venmo, and Skype defy traditional cost or differentiation strategy categorization.
Emergence of two primary explanations for companies competing on both price and differentiation: cost/supply side and customer/demand side.
The digital economy as a fundamental driver behind the ability to compete on both price and differentiation.
Automation and proprietary processes as methods to achieve low cost.
Moving to low-cost locations overseas as a strategy for cost reduction.
Increasing customer willingness to pay through unique product features or customer experiences.
The dilemma of firms getting stuck in the middle without a clear cost or differentiation strategy.
The impact of the digital economy on the cost structure and customer expectations.
Transcripts
strategy 2.0 winning through both low
price and differentiation the
traditional approach to selecting a
value proposition is to offer customers
either the lowest price by having the
lowest costs or a differentiated product
low cost is achieved by deeply
understanding the economics of the
supply and value-added chain this allows
the company to drive down costs through
automation proprietary processes lower
cost inputs or by moving to low-cost
locations overseas in contrast
differentiation is best achieved by
deeply understanding customer needs and
then developing unique product features
or a unique customer experience that
increase at customers willingness to pay
according to Harvard professor Michael
Porter the generic business strategies
of cost and differentiation represent a
fundamentally different approach to
creating and sustaining a competitive
advantage because differentiation is
usually costly although Porter
acknowledged that under rare conditions
firms could deliver both differentiation
and low cost simultaneously he noted
that usually a firm must make a choice
between them or it will become stuck in
the middle increasingly however
companies are finding ways to deliver
both differentiation and low cost
simultaneously in the study of 69
business units
professor Roderick white found that 27%
of the 69 units had a competitive
advantage based on a combination of both
low cost and differentiation
moreover the business units that
successfully combined both low cost and
differentiation advantage had the
highest return on investment consider
the case of uber or lyft uber delivers
car rides at a lower price and taxis but
also delivers those rides in a
differentiated way by allowing customers
to summon their ride on the uber app and
know the price and type of vehicle
before it arrives customers avoid the
time and expense of paying the bill or
tip taxis have lost more than two-thirds
of the ride-sharing market because Ebor
offers both low price and a
differentiated offering in similar
fashion Amazon succeeds in retailing
because it offers both low price and
convenience in ordering and delivery
relative to traditional brick-and-mortar
retailers
go maps beats Garmin TomTom and Magellan
in navigation and maps because of low
price
nothing's cheaper than free and superior
features such as estimating the time to
compete a route based on current traffic
these companies and many others such as
Airbnb Costco eBay Home Depot venmo and
Skype define neat categorization into a
cost or differentiation strategy so what
has changed that allows companies to
increasingly compete on both price and
differentiation simultaneously two
primary explanations emerge one on the
cost or supply side and the other on the
customer or demand side but both are
fundamentally a result of the digital
economy
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