Cost Leadership and Differentiation-: An investigation of the fundamental trade-off between Porter’s cost leadership and differentiation strategies

Abstract: This thesis examines the fundamental trade-off between low cost and differentiation strategy at a business strategy level. In 1980 Porter introduced a model of generic strategies that has influenced much of the current thinking in strategy formulation. Although Porter did not coin the terms, he was the first to discuss the importance of choosing and focusing on one of the three alternatives: 1.Cost leadership, 2.Differentiation, and 3.Focus. Any attempt to combine or reconcile strategies would result in firms becoming “stuck in the middle”, a poor strategic choice due to the existence of an inevitable trade-off. The dearth of recent research on the topic suggests that the initial debate has faded since the beginning of the 1990s, even though some discussions still take place in strategy textbooks and occasionally in the business press. IKEA, McDonalds, Southwest Airlines and Wal-Mart are examples of companies that are pointed out as having successfully reconciled both strategies. In order to investigate the question of an inevitable trade-off in general and the current state of art of the research topic in particular, a thorough literature review has been conducted. It is accompanied by a cross-check examination of contemporary practitioners’ position in the matter, that is, whether current practitioners principally believe that strategies are mutually exclusive, or, reconcilable. Even though the lack of a concise definition of the concept “mixed strategy” or “combination strategy” (or “combined strategy”) greatly hinders research on the topic, both theory and practice support the existence of a trade-off.