Traditionally companies chose just one of two strategic options for their future. The focus would be on ‘differentiation’ (adding value to combinations of the product, support/service, distribution and brand) or the focus would be on ‘lower cost’ (reducing costs via process improvements and experience). Yet today, without question, companies have to be able to do both to gain and retain strategic advantages.
Yet, the sixty-four million dollar question must still be answered. Even though companies need to do both, the question of whether the current emphasis should be on ‘adding value’ or ‘reducing cost’ remains. Over time, the chosen emphasis needs to reflect customer preferences, which also change over time.
Are your target customers seeking to ‘value-add’ (i.e. a better quality and a better optioned product) or are they primarily seeking a lower priced product? Because investment in added value works in opposition to overall cost reduction, a strategic tradeoff exists between the two.
Ten years ago, adding unwanted and unnecessary features to a mobile phone poorly affected many mobile phone companies such as Nokia. At that time, customers started looking for a cheaper phone and a cheaper plan. Samsung understood Nokia’s customers better than Nokia. They capitalized on shifting customer preferences and provided lower cost entry-level phones. A few years later, Apple’s launch of the iPhone not only added more value, it redefined the market. iPhone prices were not cheap, however they were ultimately within reach for most customers. iPhone’s points of differentiation in terms of product, support, distribution and brand were significant game changers.
Offering a lower price may double one’s profits from $1M to $2M from the increased sales volume. If further cost reductions are achievable and match continuing customer preferences, then $2M can become $4M. Then, if there is a new technology or service innovation that meets an emerging and growing level of customer demand, one’s next five strategic iterations might all have an emphasis on differentiation rather than cost reduction. This could double returns with each iteration. If you get the choice between tradeoffs correct each year, $4M in profit can become $8M, and then $16M, and then $32M and finally $64M. Getting this choice wrong seven times in a row, halves your success each year. By the seventh year, $1M could dwindle down to a mere $15,000.
Not sure which way to go next with your strategy this year? Maybe we can help.