Differentiation Case
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LOW COST OR DIFFERENTIATION
Scenario: We are a team of managers of a major national clothing chain, and have been charged with finding a way to restore our organizations competitive advantage. Recently our organization has been experiencing increasing competition from two sources. First, discount stores such as Walmart and Target have been undercutting our prices because they buy their clothes from low-cost foreign manufacturers whereas we buy most of ours from high quality domestic suppliers. Discount stores have been attracting our customers who buy at the low end of the price range.
Second, small boutiques opening in malls provide high price designer clothing and are attracting our customers at the high end of the market. Our company has become stuck in the middle, and we have to decide what to do: Should we start to buy abroad so we can lower our prices and pursue a low-cost strategy? Should we focus on the high end of the market and become more of a differentiator? Or should we try to pursue both a low cost strategy and a differentiation strategy?
Using scenario planning, analyze the pros and cons of each alternative below:
1) Should we start to buy abroad so we can lower our prices and pursue a low-cost strategy?
A). Pros of Low-Cost Strategies: The basis of the low-cost leadership strategy is the relationship between high market share, and high profitability.
Ability to maintain high market share
Above-average industry profitability over extended periods of time.
Less risk of buyers switching to a competitive brand of the same or similar product.
Large economies of scale
Access to capital
Strong market presence to avoid price wars within our industry
Preference of customers to buy from companies that they can count to be around for the long term
The ability to create a barrier to entry and keep competitors out of the market
The ability to sustain price increases passed on by our suppliers
B). Cons of Low-Cost Strategies:
Must reduce production cost
Very large capital investments
The need to invest significantly in production assets and resources
The ability to act as a barrier of entry to our competitors
Need for expert and High level skills in production and designing
Use of a very low cost base
Not always profitable
Significant access to capital is required at all times
Inflexibility to switch from non-performing assets and products to successful ones.
Locked into what might be obsolete products and technology in the future
The cost reduction methods are easily imitated or copied by other companies.