Advances in Computer Science Research (ACSR), volume 73

7th International Conference on Education, Management, Information and Computer Science (ICEMC 2017)

Explore the Integration of Cost Leadership Strategy

and Differentiation Strategy
An Geng1,and Lifen Chen2
1.2
.School of Economics and Management, Nanjing University of Science and Technology, Nanjing
210094,China
[email protected];[email protected]

Keywords: Differentiation Strategy; Low Cost Strategy; Integration

Abstract. Cost-leading strategies and differentiation strategies have their own characteristics and
scope of application. However, with the change of modern production management mode and the
development of information network technology in the information economy era, a single
competitive strategy can not get competitive advantage. In real life, in most industries, if an
enterprise can do both the effective difference, but also to maintain a low price, then it is possible to
become the market leader. This paper focuses on the strategy of cost leadership strategy and
differentiation strategy, and discusses the advantages and disadvantages of the two strategies.
Finally, it discusses the ways of integrating the two strategies, hoping to provide some
enlightenment for the two strategic management of the enterprise.

The Literature Review

Porter, a professor at Harvard Business School in the United States, puts forward three general
competitive strategies in his classic "Competitive Strategy", namely, cost leadership strategy,
differentiation strategy, and centralization strategy. He believes that low cost and differentiation are
incompatible. While the pursuit of low-cost advantages and differences advantages of enterprises
easily caught in the "caught in the middle" of the predicament, and only get less than the average
level of profits.A number of scholars' studies have also supported Porter's point of view, for
example. Thornhils et al. (2007) found that a single strategy is often better than a composite strategy
in some industries[1]. There are also some scholars who study the cost of leading strategies and
differentiated strategies which are better. Zhang's empirical study shows that, compared with the
low-cost strategy, the differentiation strategy has a more significant positive impact on the product
innovation[2]. The research by Bao (2014) shows that R & D investment under the differentiation
strategy can improve the performance of enterprises, and the R & D investment under the cost
leadership strategy is impaired[3].
With the external environment continues to change, more and more scholars began to focus on
strategic integration. The study of Philips et al (1983) found that the differentiation characteristics
of a product are positively correlated with market share, that is, the greater the degree of product
differentiation, the higher the market share. And the market share and the direct cost of negative
correlation, that is, the lower the cost of its product market share, but lower, so differentiation is the
way to achieve cost leadership[4]. This also proves that differentiation and low cost are not
antagonistic strategies. Beal and Yasai-Ardekani (2000) from the theoretical level demonstrated the
possibility of the integration of the two strategies. Domestic scholars have also begun to study the
two strategic integration[5]. Rui and Li (2007) argue that differentiation strategies and cost-leading
strategies are not mutually exclusive, and in some cases, there is internal consistency. Through the
cost-leading strategy to form a competitive advantage, in essence, is a differentiated strategy[6].
Zhou (2012) that the development of information technology, consumer centrality and the
integration of the value chain for the two strategic integration provides a node[7]. Wengi (2009)
proposed an all-environment interaction model, and test the advantages of strategic integration[8].
Xu et al. (2013) constructed a framework for integrating cost leadership and differentiation
strategies from the perspective of business outsourcing and e-marketing[9].

Copyright © 2017, the Authors. Published by Atlantis Press. 381

This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).
 Advances in Computer Science Research (ACSR), volume 73

To sum up, the current research on the cost leadership strategy and differentiation strategy can be
implemented in parallel there is no uniform conclusion. Even in the study that the cost strategy and
the differentiation strategy can be fused, the two strategic integration perspectives are also different.
This paper first describes the importance of strategic integration, and then analyze the two strategies
in parallel implementation environment, and further elaborate two strategies in parallel specific
ways.

The Meaning of Integration

Companies that adopt differentiation strategies typically offer personalized products and services to
customers, so the prices are generally higher; companies that implement cost-leading strategies
have a price advantage but are unable to meet the increasing demands of consumers. Differentiated
strategies are likely to get higher profits than low-cost strategies, and cost-leading strategies are
more likely to increase market share. Regardless of cost leadership strategy or differentiation
strategy has its shortcomings, if the enterprise alone to adopt a strategy can not get a clear
competitive advantage in the modern competitive environment. And the effective integration of the
two strategies can bring great advantages for the enterprise. According to Porter's five-force
competition as the model, the author elaborates the significance of the integration strategy.
For Suppliers. The enterprise has both large orders that are difficult to resist by suppliers and
higher margins. Simply implement the total cost of leading companies trying to squeeze the profit
margins of suppliers to achieve their own low-cost, and the use of portfolio strategy enterprises can
be more flexible choice of bargaining chips, such as the appropriate increase in the purchase price at
the same time require other services.
For Buyers. Inexpensive will continue to attract consumers. While consumers have
differentiated brand loyalty, companies can maximize consumer surplus through lower prices,
resulting in higher reputation and loyalty. In addition, the lower prices will also expand the group of
buyers, effectively reducing the risk of interest in the transfer of interest in the target market.
For the Current Competitors. At the same time have a cost advantage and differentiation
advantages of the enterprise will compete with the opponent to occupy a favorable position. Its
mutually supportive cost strategy and differentiation strategy enable companies to have a strong
competitive weapon. Enterprise products are of good quality compared to other products at the
same price, with lower prices than other products of the same quality. Enterprises do not have to
take the initiative to launch a price war will be able to occupy the high share of the market, while no
fear of price war.
For Alternatives. As a result of the characteristics, but also won the trust of customers, while
competing with alternative products have a price advantage, companies will be able to greatly
extend the life cycle of existing products, is conducive to enterprises to recover pre-costs, and
provide sufficient time and financial support for the upgrading of enterprise products.
For Potential Entrants. Cost advantages and customer loyalty to the enterprise (or product)
form a strong double entry barriers, and potential entrants to enter the industry will face greater
difficulties. Through the above discussion, we can see the success of the cost leadership and
differentiation of the strategic combination will bring lasting and unique core competitiveness of
enterprises.

The Feasibility Analysis of the Strategic Integration

The application of information technology can simultaneously achieve cost leadership and
differentiation strategies. The application of information technology can strengthen the
characteristics of products or services, and more and more enterprises began to continue to use
information technology to provide differentiated services to meet the needs of different users
personalized. while a variety of modern information systems reduce the operating costs. In
particular, information technology to improve the internal and external synergies between
enterprises, reducing the internal and external transaction costs. Enterprises through the use of
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appropriate information technology to optimize the allocation of resources and capabilities, to

achieve cost leadership and differentiation of both.
Modern forms of organization can simultaneously achieve cost leadership and differentiation
strategies. The successful implementation of each competitive strategy should be organized to adapt
and support. The cost leadership strategy requires that the organizational structure be characterized
by specialization, centralization and standardization, The differentiation strategy requires the
decentralization of functions and the flattening of organizational structure and the flexibility of the
system. These two different organizations require that they can not be achieved at the same time in
traditional organizational design. However, with the expansion of management and the wide
application of information technology, organizations that can meet these two characteristics at the
same time come into being, for example, Learning organization, borderless organization and team
organization. These new organizational structure meet the requirements of the integration of
competitive strategy implementation. In addition, business department system has also contributed
to the organization to achieve cost leadership and differentiation at the same time. Since the
competitive strategies of the different divisions are independent, the cost leadership strategy can be
implemented in one division, and the differentiation strategy is implemented in the other business
units.
Diversification of customer needs. Integration of the competitive strategy of the face of the
customer is not only price-sensitive customers and value-sensitive customers two types. On the
contrary, with the development of commodity economy and the improvement of living standards,
more and more customers not only want to get low prices of products, and hope that products meet
their diverse and personalized needs. Even in the same level of customer groups, enterprises are
facing a variety of market segments, and only two levels of high and low to divide the target market
is difficult to achieve the purpose of corporate information transmission. In other words, the needs
of customers in real life are extremely diverse, and the degree of differentiation and price can be
combined in a variety of combinations. "This is the traditional competitive strategy Porter theory
ignores the market gap, but also the integration of competitive strategy established customer base".
Mass customization technology and management models can integrate cost leadership strategy
and differentiation strategy of product characteristics and technology requirements. Cost leadership
strategy of standardized products need to reduce costs through large-scale production,
differentiation strategy of non-standardized products is to meet the individual needs of customers.
In the industrialized period, it is almost impossible to combine the advantages of these two
strategies, but the development of information network technology has led to the emergence of
mass customization. Mass customization is usually combined with the "direct sales" model, which
reduces the cost of the channel network and inventory of the enterprise, and can provide
differentiated services, finally realize the integration of the cost advantage and the differentiation
advantage. However, it is important to note that mass customization is required to cooperate with
enterprise information technology and agile manufacturing systems. If the enterprise does not have
a sound information technology platform and a highly effective flexible manufacturing process,
mass customization is difficult to implement.

The Practice of Strategic Integration

Mass Customization. Mass customization is a common way to achieve cost leadership and
differentiation requirements. On the one hand, enterprises achieve economies of scale and reduce
costs through modular production and reduce costs. On the other hand, according to the individual
needs of different customers, the enterprise achieves the different needs of customers through
different combinations of different modules.
Scissors Poor Management Model. Enterprises can be divided into two management systems,
that is, a manufacturing system, the other for the R & D and sales system. In the first system,
enterprises take cost leadership strategy to strictly control the cost, in the second system, the
enterprise uses the differentiation strategy to meet the individual needs of consumers. Of course,
there is integration and link between the strategies of the two systems. In addition, the incentive
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mechanism for the two systems is also different. For example, in a manufacturing system, the
company should reward employees who provide innovative methods to reduce costs, and develop a
more personalized product as as a reward standard in the R & D system. Therefore, the scissors
difference management model effectively avoid the contradiction between the two strategies to
promote the integration of low cost and differentiation.
Information Network Technology. With the development of information network technology,
more and more enterprises began to use information technology to provide differentiated services to
meet the individual needs of different users, while enterprises can rely on a variety of modern
information systems to reduce operating costs, so that enterprises both provide differentiated
services, but also make the cost ahead of the competitors, to achieve the balance of cost leadership
and differentiation. Enterprises that implement the converged competitive strategy should make full
use of modern information technology, fundamentally transform and reorganize business processes,
and rebuild flexible manufacturing systems that can support fast response, small batch and variety,
and realize the effective integration of low cost advantage, speed advantage and differentiated
product advantages.
Strategic Alliances. Different enterprises in the same industry may be based on their own
resources, ability, organizational structure, and culture to develop a different competitive strategy. If
building strategic alliances among different enterprises with different competitive strategies in the
same industry, by using the organizational flexibility, the ambiguity of the boundary, the loosening
of the relationship, the operation efficiency and the the advantages combination of the strategic
alliance, the enterprise can make use of the simple alliance to make up the shortage of the resource
ability, and effectively use the strategic alliance to achieve the complementary advantages and
resource sharing between enterprises[10]. These ultimately contribute to the cost advantage and the
difference between the advantages of integration.
Total Quality Management. Total quality management has formed a complete set of
methodologies that are popularized in many enterprises. Existing studies have shown that total
quality management has a positive impact on the competitive advantage[11] Effective
implementation of total quality management can bring the following advantages to the enterprise:
improve product quality and meet customer demand for availability and reliability of product;
increase product and price attractiveness to reduce customer turnover rate; by reducing the defective
occurrence rate and rework rate to reduce the need for maintenance services and the product costs.
It can be seen that total quality management is an effective means of taking into account cost
leadership and differentiation.

Conclusion
Based on the idea that differentiation strategy and cost leadership strategy can be integrated, this
paper elaborates the necessity of strategic integration and the feasibility of integration theory, and
further explores the current practice of strategic integration. However, this paper only elaborates
from the theoretical point of view, and the future research direction should be from the simple
integration of strategic feasibility research to the establishment of strategic integration model and
specific guidance on how to implement the integration of these two strategies.

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