There are very few companies that are able to be both cost leaders and differentiators. Why? Can you think of a company that has been successful at both?

Answer 1

Cost leadership and differentiation strategies typically require a different set of core competencies and a different value chain structure. Cost leadership depends on the firm's ability to capture economies of scale, scope, and learning in its operations. These economies are complemented by efficient production, simpler design, lower input costs, and more efficient organizational structures. Together, these core competencies allow the firm to be the low cost producer in the market. On the other hand, differentiation tends to be expensive. Firms differentiate their products and services through superior quality, variety, service, delivery, timing, image, appearance, or reputation. Firms achieve this differentiation through investment in research and development, engineering, training, or marketing. Thus, it is the rare firm that can provide differentiated products at the lowest cost. Companies that attempt to implement both strategies often do neither well and as a result suffer in the marketplace. Differentiation exerts upward pressure on firm costs, while one of the easiest sources of cost reduction is reducing product or service complexity, which leads to less differentiation.
Home Depot, a lumber, hardware, and home improvement company, is one example of a company that has been successful as both a cost leader and a differentiator. Home Depot operates hardware and lumber superstores that focus on do-it-yourself home improvement. While they stock tens of thousands of top quality items in each store, advertise extensively, and provide expert advice and service for customers (by employing a highly-skilled and well-trained workforce that is knowledgeable about their products and home improvement), they are also able to provide low prices through aggressive purchasing and warehouse stores.