Low Cost Differentiation Preemptive Strength Brand Identity

Low Cost

Differentiation

Preemptive

Strength

Brand identity

Differentiate from other low cost providers to increase volume

Brand identity commands a premium price, increasing margin

Brand identity becomes identifiable with a specific niche

Build brand identity quickly to reduce the threat of new entrants

Weakness

Lack of diversification

Diversify into many products to promote volume sales

Brand extensions

Diversification is not part of this strategy.

Diversification is key to opening new market opportunities.

Opportunity

Geographic expansion

Increase volume

Increase volume

Increase volume

Increase opportunities

Threat

High substitutability

Inherent in the strategy -- low cost defends against this

Differentiation seeks to neutralize this threat

Product uniqueness defends against this threat

There should not be substitutability; if there is another innovation is needed

Sources: Porter, M. / QuickMBA.com (2007)

Brand Identity

Brand identity is one of the major strengths of Kraft, and its brands are household names within its distribution area. While brand identity is not normally associated with a low cost strategy, in some industries most firms compete on low cost and still must use brand identity to help differentiate themselves. Consider the quick service restaurant industry -- all firms seek to compete on price leadership, but the stronger brands (McDonalds, Subway) use their brand recognition to attract more customers and a higher caliber of franchise owners.

The ability of brand to increase prices paid by customers is constrained by the nature of the industry and the intensity of competition, but brand is still used to generate the volume required to make a low cost strategy successful.

Brand identity is more closely associate with the differentiation strategy, since brand is major source of differentiation. Brand in this situation is not used to increase volume, but to increase margin. The brand is associated with higher standards of quality for which consumers are willing to pay a premium. The focus strategy works in a similar manner with brand identity. When a firm seeks to dominate a niche, the brand is an important element of that because the brand is what identifies the product to the consumer; ideally it will identify the niche as well, signifying market dominance and a close link between brand and product. In a pre-emptive strategy, brand is important because branding can help to lock in first mover advantage -- all subsequent entrants are inherently viewed as inferior. Even when the product moves beyond niche status, the brand's strength if developed correctly during the first-mover years can be maintained seemingly in perpetuity. Coca-Cola, Q-Tips and Starbucks are all examples of first movers whose brand strength continues to contribute to dominant market share even in the face of intense competition.

Lack of Diversification

A challenge for any business is to diversify away from its core business without sacrificing returns. Kraft remains primarily a grocery company, and therefore remains vulnerable to demand conditions (the overall health of the economy) and supply conditions (agricultural commodity prices). A low cost provider answers the diversification question by adding different products and services. Since low cost implies high volume, diversifying provides an opportunity for greater volume. Wal-Mart is expert at this, for example adding food and pharmaceuticals to its core offering to increase volume. Diversification for a differentiated provider is a challenge. The best strategy to address the need for diversification is to leverage one's strengths in other areas to enter new businesses. A good example is Apple entering smartphones, or any other brand extension that capitalizes on the differentiated name in one product area to diversify into other product spaces.

Diversification is not a part of the focus strategy, by definition, so lack of diversification is not a weakness for companies with a focus strategy. Indeed, diversification is a weakness because it distracts the company from the pursuit of singular excellence. For firms pursuing a preemptive strategy, diversification lies at the key of identifying new opportunities so the company must constantly address any lack of diversification within the product/service line.

Geographic Expansion

The simple benefit to geographic expansion for most types of business is to increase volume. For low cost providers, volume is an essential component of the business model so geographic expansion is critical to improving one's bargaining power with suppliers. Geographic expansion policies at Wal-Mart and Target have differed significantly, and there is little doubt that Wal-Mart has been the beneficiary of its approach, as it has better bargaining power and much higher volume. For firms with a differentiated approach, that differentiation is strengthened by entering into and succeeding in more markets. Focused firms often have low volume, and thereby rely in entry into many markets to build economies of scale, rather than increasing sales in a single market. Only in preemptive strategies does geographic expansion serve a different purpose - to increase opportunities for new products and for getting ahead of the competition. Whether a country drinks more Pepsi or Coke depends a lot on which one entered the market first.

High Substitutability

Kraft's products face competition from substitutes, either knock-offs or alternatives. In a low cost business, substitutability is inherent because of the low level of differentiation between products; having the lowest cost is the only real defense against substitutability. With a differentiated strategy, the differentiation seeks to create differences to the consumer -- even if these differences are a mirage -- that reduces their tendency to substitute. Kraft's macaroni & cheese isn't much different than any other brand, but it is differentiated by the brand and the marketing to convince consumers to choose it, and pay a premium.