So, in the last couple of videos we've looked at product differentiation -

horizontally and vertically. And one of the things I found most

fascinating about product differentiation is how the degree of product

differentiation interacts with the prices that we can

charge and with the price cost margins that we

can we can achieve. So, in essence, the more differentiated

you are, the higher price cost margins and, therefore, the higher profitability

is. And so in this video, we're going to look

at pricing and product decisions. And see how they interact.

And take these as starting points for what's called the generic strategies

by Michael Porter. At Harvard Business School, he identified

three generic strategies that can be used to create a defendable position and

outperform competitors in a specific industry.

Of course, these strategies will require different organizational arrangements.

They will require different control procedures, incentive systems and, of

course, you need different resources for them.

And we're going to dive a bit deeper into those to see what's actually needed and

why they can be successful. So, the first strategy we're going to look

at is the cost leadership strategy, and I guess the name sort of says it

already, but the idea is that, you're you're achieving low cost compared to

your competitors and that's the main thrust of this strategy.

There's central elements of this strategy that we can think of.

For example, you have to achieve a certain scale.

So, you have to achieve enough scale, or a high enough scale so that you're

efficient, that you achieve the minimum cost possible for producing this product.

You have to try to use the experience from producing the the good to lower

costs even further. So, rigorous cost reductions that arise

from experience. You want to avoid consumers that don't

make you money, or that don't make you a lot of money.

In other words, if there are consumers that are expensive to acquire and that

are not going to end up buying a lot of quantity from you,

you don't want them. Okay?

So, you avoid marginal consumer accounts. You want to minimize costs in areas that

basically contribute to overhead, and not to the main production of of the product.

So, areas like R & D, service, sales force, advertising are all things that

you can try to save money or that you would try to save money if you follow a

cost leadership strategy. And you combine this cost leadership

strategy with aggressive pricing, so you can actually achieve the market share to

get efficient scale of facilities, to acquire enough experience to reduce costs

even further, and so on. So, again we see that your product

strategy is closely related to the pricing strategy in the cost leadership

generic strategy. Almost a polar opposite of a cost

leadership strategy is the differentiation mode of

competition. So, here you're differentiating your

product or service and you offer something that consumers in the industry

perceives as unique in the industry. So, we can think of several different

forms of product differentiation or of a differentiation strategy.

Of course, that's something that we already saw in previous videos.

But, achieving or, or designing your product

in a special way, having a unique design,

having a very valuable brand is one way of differentiating your

product. Because that means you can also charge a

premium over and above your cost. Technology.

Simply having the highest or the high end technology.

Having the best technology around is another way of differentiating your

product to other competitors. Offering superior customer service, is

another way of differentiation. In other words, if your customers are

served, if they're taken care of much better than for competitors.

And they're willing to pay a premium for that too.

Having a widespread dealer network, or having a very efficient dealer network,

is another way of product differentiation here.

So,dealer networks basically mean reducing the transport cost.

So, if consumers will not have to travel very far, then

that's going to be something that they're willing to pay a premium for as well.

Of course, product differentiation often does not take place in just one

dimension. It takes place along multiple dimensions.

And it's often incompatible with charging low prices or, with achieving high

market shares. In other words, consumers might actually

place a value on the exclusivity that they have by buying one particular

product. Now our third strategy tries to combine

the best of these both worlds, the cost leadership and of differentiation.

And we call this the focus strategy. Here we focus on one particular buyer

group or segment or product line or geographic market, simply by focusing on

that one and ignoring the rest of the market.

Why, how can that be efficient? It can be efficient, if we serve that narrow

strategic group more effectively, more efficiently than,

other competitors. So, you're simply taking one part of the

market, you're going to say these are my consumers and these consumers are the

ones that I'm going to serve in the optimal way possible.

So, within that niche you can achieve lower costs or you can achieve more

differentiation with regard to that particular niche.

Okay? You're not trying to serve the entire

market. But just focus on one market segment.

And within that market segment, you can, again, choose either cost leadership or

product differentiation. So, in this video, we've looked at three

generic strategies. Cost leadership, differentiation, and

focus. And we saw that all three are strategies

for sustaining profitability for making profits and outperforming your

competitors. Of course, these were very generic

strategies and in the next video we're going to look at possibilities of

combining the two and and actually look at some more nuances of that.

So stay tuned.

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