At its most basic level a company can differentiate its offering or compete on cost. Strategies that blend the two create earnings headwinds. Resources are channeled inefficiently. The productivity of the strategy is maximized when a company is solely a differentiator or a cost leader. This is referred to Michael Porter as competitive positioning.
The synchronization of the various value chain activities creates good strategy. These activities should be consistent and reinforce each other. The whole of the activities must be greater than the sum of the activities. A company’s resources, capabilities, and systems are the main factors along the value chain. Prashant Kale has provided comprehensive research on this topic. How these factors work together determines the effectiveness of a firm’s chosen competitive positioning.
For a company to lead with costing, the entire system of moving parts must be engineered to eliminate waste. Failure to do so will result in operating margin pressure. Walmart and Southwest are two good examples of cost leaders. Both offer low costing and make money because their entire ecosystem exists to reduce costs, inefficiencies, and poor throughput.
Differentiators create a unique solution to a consumer problem. Consumers recognize, appreciate, and expect the value-added elements and are willing to pay a premium price point. Tiffany’s and Apple are both examples. The products they offer are aesthetically and/or technologically advanced. Every step of the chain adds additional value and differentiation, from sourcing, marketing, retail operations, to customer service.
In conclusion, there are only two legitimate strategies. Starting a business from scratch provides the flexibility to choose the path. For existing businesses, swinging from differentiation to low cost is extremely difficult. Oftentimes, these companies need to strengthen their commitment to either model. Profit maximization occurs when a company executes one of the two strategies.