STRATEGY ANALYSIS tries--the firm's breadth is often important to its cost advantage. The of cost advantage sources are varied and depend on the structure of the industry. They may include the pursuit of econo- mies of scale, proprietary technology, preferential access to raw materials, and other factors In TV sets, for example, cost leadership requires efficient size picture tube facilities, a lowcost design, automated assembly, and global scale over which to amortize R&D. In security guard services, cost advantage requires extremely low a plentiful source of low-cost
design, automated assembly, and global scale over which to amortize R&D. In security guard services, cost advantage requires extremely low overhead, a plentiful source of low-cost labor, and efficient training procedures because of high turnover. Low-cost producer status involves more than just going down the learning curve. A lowcost producer must find and exploit all sources of cost advantage. Lowcost producers typically sell a standard, or no-frills, product and place considerable emphasis on reaping scale or absoute cost advantages from all sources
If a firm can achieve and sustain overall cost leadership, then it will be an above-average performer in its industry provided it can command prices at or near the industry average. At equivalent or lower prices than its rivals, a cost leader's lowcost position translates into higher returns A cost leader, however, cannot ignore the bases of differentiation. If its product is not perceived as comparable or acceptable by buyers, a cost leader will be forced to discount prices well below competitors to gain sales. This may nullify the benefits of its favorable cost position. Texas In ments (in watches) and Airlines
(in air transportation) are two lowcost firms that fell into this trap. Texas Instruments could not overcome its disadvantage in differentiation and exited the watch industry. Northwest Airlines rec- ognized its problem in time, and has instituted efforts to improve marketing, passenger service, and service to travel agents to make its product more comparable to those of its competitors. A cost leader must achieve parity or proximity in the bases of differentiation relative to its competitors to be an above-average performer, even though it relies on cost leadership for its competitive advantage. Parity in the bases of dif ferentiation allows a cost leader to translate its
cost advantage directly into higher profits than competitors. Proximity in differentiation means that the price discount necessary to achieve an acceptable market share does not offset a cost leader's cost advantage and hence the cost leader earns above-average retums. The strategic logic of cost leadership usually requires that a firm be the cost leader, not one of several firms vying for this position. Many firms have made serious strategic errors by failing to recognize this. When there is more than one
aspiring cost leader. rivalry among them is usually fierce because every point of market share is viewed as crucial. Unless one firm can gain a cost lead and "persuade" others to abandon their strategies, the consequences for profitability and long-run industry structure) can be disastrous, as has been the case in a number of petrochemical industries. Thus cost leadership is a strategy particularly dependent on preemption, unless major technological change allows a firm to radically change its cost position
DIFFERENTIATION The second generic strategy is differentiation. In a differentiation strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its unique with a premium price.
The means for differentiation are peculiar to each industry. Differentiation. can be based on the product itself, the delivery system by which it is sold, the marketing approach, and a broad range of other factors. In construction equipment, for example, Caterpillar Tractor's differentiation is based on product durability, service, spare parts availability, and an excellent dealer network. In cosmetics, différentiation tends to be based more
on product image and the positioning of counters in the stores A firm that can achieve and sustain differentiation will be an aboveaverage performer in its industry if its price premium exceeds the extra costs incurred in being unique. A differentiator, therefore, must always seek ways of differentiating that lead to a price premium greater than the cost of differentiating. A differentiator cannot ignore its cost position, because its premium prices will be nullified by a markedly inferior cost position. A differentiator thus aims at cost parity or proximity relative to its competitors by reducing cost in all areas that do not affect differentiation
The logic of the differentiation strategy requires that a firm choose attributes in which to differentiate itself that are diferent from its rivals'. A firm must truly be unique at something or be perceived as unique if it is to expect a premium price. In contrast to cost leadership, however, there can be more than one successful differentiation strategy in an industry if there are a number of attributes that are widely valued by buyers
FOCUS
The third generic strategy is focus. This strategy is quite different from the others. because it rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others. By optimizing its strategy for the target segments, the focuser seeks to achieve a competi tive advantage in its target segments even though it does not possess a competitive advantage overall
The focus strategy has two variants. In cost focus a firm seeks a cost advantage in its target segment, while in diferentiation focus firm seeks differentiation in its target segment. Both variants of the focus strategy rest on diferences between a focuser's target segments and other segments in the industy. The target segments
must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behavior in some segments, while differentiation focus exploits the special needs of buyers in certin segments. Such differences imply that the segments are poorly served by broadlytargeted competitors who serve them at the same time as they serve others. The focuser can thus achieve competitive advantage by dedicating itself to the segments exclusively. Breadth of target is clearly a matter of degree, but the essence of focus is the exploitation of a narrow target's differences from the balance of the industry 2 Namow focus in and itself is not
sufficient for above-average performance A good example of a focuser who has ex- ploited differences in the production process that best serves different segments is Hammermill Paper. Hammermill has increasingly been moving toward relatively lowvolume, highquality specialty papers, where the larger paper companies with higher volume machines face a stiff cost penalty for short production runs. Hammermill's equipment, is more suited to shorter runs with frequent setups
A focuser takes advantage of suboptimization in either direction by broadlytargeted competitors. Competitors may be underperforming in meeting the needs of a particular segment, which opens the possibility for differentiation focus. Broadlytargeted competitors may also be overperforming in meeting the needs of a segment, which means that they are bearing higher than ssary cost in serving it. An opportunity for cost focus may be present in just meeting the needs of such a segment and no more. If n focuser's target segment is not different from other segments, then the focus strategy will