Strategy 2.0: Achieving both cost and differentiation advantage simultaneously.

Summary

The 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.