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.

Outlines

00:00

💼 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.

Keywords

💡Value Proposition

A value proposition is the promise of value to be delivered to customers in return for which they give something in return, such as money. In the context of the video, it refers to offering customers either the lowest price or a differentiated product, which is central to the theme of competing through low cost or differentiation.

💡Low Cost

Low cost strategy involves achieving the lowest possible costs in the supply and value-added chain, which allows a company to offer lower prices to customers. The video discusses how companies can achieve low cost through automation, proprietary processes, lower cost inputs, or by moving to low-cost locations overseas.

💡Differentiation

Differentiation refers to the process of making a product or service unique and attractive to customers, often by offering unique features or experiences. The video emphasizes that differentiation is achieved by understanding customer needs and increasing their willingness to pay for the unique offerings.

💡Competitive Advantage

A competitive advantage is an attribute that enables a company to outperform its competitors. The video discusses how offering both low cost and differentiation can create a sustainable competitive advantage, as seen in the case of Uber and Lyft.

💡Automation

Automation is the use of technology to perform tasks with minimal human intervention. The video mentions automation as a means to reduce costs, which is a key component of the low-cost strategy.

💡Supply Chain

The supply chain refers to the network of organizations, people, activities, information, and resources involved in producing and delivering a product or service. The video discusses how understanding the economics of the supply chain is crucial for achieving low costs.

💡Customer Needs

Understanding customer needs is essential for creating a product or service that meets their expectations and preferences. The video highlights the importance of this in achieving differentiation by developing unique product features or customer experiences.

💡Willingness to Pay

Willingness to pay is the maximum amount a customer is prepared to pay for a product or service. The video explains that differentiation can increase a customer's willingness to pay, which is a key factor in the differentiation strategy.

💡Digital Economy

The digital economy encompasses all economic activities that result from digital technologies and the internet. The video suggests that the digital economy has enabled companies to compete on both price and differentiation by changing the cost and customer demand dynamics.

💡Stuck in the Middle

Being 'stuck in the middle' refers to a situation where a company fails to effectively differentiate itself from competitors and does not offer the lowest price, leading to a lack of competitive advantage. The video discusses this as a risk if a firm does not choose between cost leadership and differentiation.

💡Return on Investment (ROI)

Return on investment is a financial metric used to evaluate the efficiency of an investment or compare the efficiency of different investments. The video cites a study where business units that combined both low cost and differentiation had the highest ROI, indicating the success of this dual strategy.

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