Same price or even a lower price than competitors

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Entrepreneurial Finance
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Chapter 10 / Exercise 016
Entrepreneurial Finance
Leach/Melicher
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same price or even a lower price than competitors, cost leadership provides above-industry-average returns and is a valuable strategy to follow. Example: Southwest Airlines , founded by Herb Kelleher and Rollin King , has consistently followed the cost leadership strategy since 1971. The airline uses only one type of aircraft, the Boeing 737, reducing maintenance costs, provides courteous but “no-frills” service, has done away with intermediaries, operates on select routes within the USA and has not attempted to go international, has the quickest turnaround time for aircraft (thus enabling more flights per aircraft), and offers some of the lowest fares in the industry. Yet, the airline has outperformed its rivals even during times of economic recession. Differentiation is the ability of a firm to provide unique features, characteristics, service, brand image, and exclusivity, all of which combine to enable the firm to charge a premium price and thus earn above- industry-average returns. The important aspect of differentiation is the perceived uniqueness of the product or service. Example: Apple in the computer and mobile phone industry; Mercedes Benz , BMW , and Tesla in automobiles; Rolex and Omega in watches; Givenchy in fashion and apparel; Four Seasons in hotels, and Mont Blanc in writing instruments. In subsequent work, Michael Porter has added a second dimension – the size of the target market large or small (focused or niche or micro market) yielding four strategy alternatives – cost leadership , differentiation (that address large markets), focused cost leadership and focused differentiation (that address small markets or a market segment or a part of a segment called a niche). Porter’s generic strategies are depicted graphically in the next slide. The horizontal axis shows the source of competitive advantage . The vertical axis shows the scope (market size) of competitive advantage . FOCUSED STRATEGY EXAMPLES Focused cost leadership: 1. Redbox rental DVD vending machines placed outside grocery stores.
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Entrepreneurial Finance
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Chapter 10 / Exercise 016
Entrepreneurial Finance
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Expert Verified
2. Papa Murphy’s inexpensive take-and-bake pizzas aimed at budget-conscious families. 3. Claire’s inexpensive jewelry aimed at young women. 4. Checkers Drive In that cuts costs by not offering indoor seating. Focused differentiation: 1. Build-a-Bear Workshop – premium pricing for the interactive process of designing and building a teddy bear. 2. Cinnabon’s pricey pastries. 3. Specialty stores that sell only organic, pesticide-free, chemical-free fruits, vegetables, nuts, and other farm products. 4. Kopi Luwak coffee beans that sell up to $300 per pound compared with $15 for ordinary coffee beans. HYBRID STRATEGY Some scholars have argued that cost leadership and differentiation are not mutually exclusive, and that they can be combined to yield a hybrid or best-cost-provider strategy.

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