BUSI 690 Week 2 DB Forum Example

Discussion Board Forum: Thread and Replies

BUSI 690 Policy and Strategy in Global Competition, Discussion Board Forum (thread and two replies)

Thread by [Student Name]

The forum prompt and the classmates are composites standing in for the course's own topic; the company examples are real and described from public information, and every study cited is real and checkable; the requirements follow Liberty's public course guide for BUSI 690.

The prompt asks whether a firm can pursue cost leadership and differentiation at the same time. Rothaermel (2015) explains that a cost leader seeks the lowest cost of producing acceptable value, a differentiator seeks a higher perceived value that customers will pay for, and a firm that pursues both without achieving either is stuck in the middle. My answer is yes, a hybrid can work, but only when the same activities that lower cost also raise value.

In-N-Out Burger shows how. Its core menu has barely changed in decades: hamburgers, cheeseburgers, the Double-Double, fries, shakes and drinks. A short menu cuts cost directly, because each restaurant buys fewer ingredients, trains workers on fewer tasks and wastes less food. The same short menu is also what makes the chain distinctive, because it allows fresh beef, potatoes cut in the store and no microwaves or freezers, quality that a sixty-item menu could not sustain at that price. The company also builds its restaurants within reach of its own patty-making and distribution facilities, which controls freshness and logistics costs at once. The result is a burger priced near fast-food rivals with a reputation closer to a sit-down restaurant. The chain has also never franchised, so every store follows the same recipe and the same procedures, and the long lines at its drive-throughs spread fixed costs over a very high volume of orders. Even its well-known "secret menu" is mostly the same few ingredients rearranged, which gives customers a sense of choice without adding anything to the supply chain. Rothaermel (2015) notes that a differentiator must keep costs close enough to rivals that the premium is not consumed by expense; In-N-Out goes further, because its costs per order may actually be lower than those of rivals with sprawling menus.

The research does not settle the question. Thornhill and White (2007) studied 2,351 businesses across manufacturing, construction, retail and business services and found that strategic purity paid: pure strategies never performed worse than hybrids and often performed better. Pertusa-Ortega et al. (2009), studying 164 Spanish firms, reached a different conclusion; many firms used hybrid strategies, and those emphasizing more strategic dimensions, especially innovation-based differentiation, performed better. I read the two as compatible. A hybrid that simply tries harder at everything will usually lose to a focused rival, which is Thornhill and White's warning. A hybrid succeeds only when a single choice, such as a short menu, does double duty. In-N-Out's menu is that kind of choice, which is why imitators have trouble copying it; a rival would have to give up most of its menu to match the quality.

There is a biblical lesson in this discipline. Proverbs contrasts two kinds of worker: the one who thinks ahead is led toward plenty, while the one who hurries is led toward lack (English Standard Version Bible, 2001/2016, Proverbs 21:5). A firm that wants every customer and every product often acts in that kind of haste, adding items, limited-time offers and delivery partnerships without counting what each does to the kitchen. In-N-Out's diligence lies in refusing growth that would weaken the system that makes it both efficient and excellent. For an MBA student, the lesson is to look for the activity that serves both cost and value before choosing a generic strategy, and then to protect that activity when growth tempts the firm to abandon it. In-N-Out has grown into new states slowly for that reason, opening only where its supply system can follow.

Reply to Marcus

Marcus, you argued that Walmart proves a pure cost leadership strategy is the safest choice, and your point about its distribution network and purchasing scale is well made. Rothaermel (2015) lists economies of scale and learning-curve effects among the main cost drivers, and few firms have exploited them as thoroughly as Walmart. I also agree with your use of Thornhill and White (2007), whose large multi-industry sample is hard to dismiss.

I would add one complication from Banker et al. (2014). Working with 12,849 firm-year observations covering 1989 to 2003, they saw each strategy lift profitability in the year it was measured, yet the firms leaning toward differentiation held on to their gains in later years better than the firms leaning toward low cost. Cost advantages, in other words, tend to be competed away as rivals learn to match them, while value advantages last longer, though at the price of greater risk and more volatile results. That finding fits Walmart's recent history. Its cost advantage remains enormous, but the company has spent heavily on e-commerce, pickup and delivery and a broader range of store brands, moves that add convenience and perceived value. It seems to be drifting toward a hybrid exactly because pure cost leadership was being matched by Amazon and discount grocers.

Barney (1991) offers a way to judge whether that drift is wise. An advantage is sustained only if it rests on resources that rivals cannot easily imitate or substitute. Walmart's distribution network is costly to imitate, but its low prices alone are not, because any rival with comparable scale or lower overhead can approach them. The parts of Walmart's strategy most likely to last may therefore be those that combine its logistics with services customers value, such as same-day pickup in thousands of stores, which use the cost-driven network to deliver something rivals cannot easily offer.

There is a second point worth making about smaller firms. Rothaermel (2015) explains that cost leadership usually requires the largest market share in an industry, because scale is what drives unit costs down. By definition only one firm can hold that position, so for most retailers a pure cost strategy means competing for second or third place on price against a rival with structurally lower costs. That is a weak position, and it suggests that the advice to stay pure applies mainly to the firm that is already the cost leader. Everyone else needs a reason for customers to choose them that does not depend on being cheapest.

Scripture warns against relying on one strength as if it guaranteed the future. Proverbs tells the reader not to brag about tomorrow, since no one knows what a single day will produce (English Standard Version Bible, 2001/2016, Proverbs 27:1). Walmart's leaders seem to have taken that warning seriously by investing beyond price before price stopped being enough. A pure strategy is safer only as long as the conditions that created it last.

Given the Banker et al. findings, would you still recommend pure cost leadership to a smaller retailer without Walmart's scale, or would such a firm need a source of value from the start?

Reply to Rachel

Rachel, your thread used Apple as proof that a pure differentiation strategy wins, and you described well how design, the ecosystem of devices and services, and brand loyalty let Apple charge prices far above rivals. Rothaermel (2015) would classify those as value drivers, and I agree that Apple's primary position is differentiation.

Yet Apple may be a stronger example of a hybrid than of a pure strategy. Its scale gives it purchasing power with component suppliers and assembly partners that few rivals can match, and its narrow product line, a handful of phone models instead of dozens, lowers design, inventory and support costs. Salavou (2015), reviewing fifteen studies of competitive strategy and performance published since 2000, concluded that the era in which combining strategies meant being stuck in the middle has passed and that hybrid strategies may offer the most attractive choices in some circumstances. Apple seems to fit that description: it differentiates first, but it also runs a cost discipline that protects its margins.

Pertusa-Ortega et al. (2009) found that hybrid strategies emphasizing innovation-based differentiation were associated with the highest performance among the firms they studied. Apple's innovation is the source of its premium, but its supply chain is the reason the premium turns into profit. A pure differentiator with Apple's design but a costly, fragmented production system would earn far less. This suggests that the right question is not which generic strategy to choose but which one leads, with the other kept within reach.

Your own evidence supports this reading. You pointed out that Apple's services revenue, from the App Store, iCloud and subscriptions, has grown into a major profit source. Those services are differentiated, because they work smoothly only inside Apple's ecosystem, but they also carry low incremental costs once the platform exists, since each additional subscriber costs very little to serve. That is a hybrid inside a single business line: the same platform both raises the value of the devices and lowers the cost of each additional dollar of revenue. Thornhill and White (2007) found pure strategies never did worse than hybrids across their large sample, but Apple's services business looks like the kind of exception their sector-level averages could not capture.

There is a caution here as well. Differentiation depends on customers continuing to value what makes the product different, and that value can fade. Jesus told His hearers not to pile up earthly treasure that moths and corrosion eat away and thieves carry off (English Standard Version Bible, 2001/2016, Matthew 6:19), a reminder that no earthly advantage is permanent. A brand's appeal is especially vulnerable to changing tastes, so a differentiator that also controls its costs has a margin of safety when the premium narrows.

A useful test is to imagine the reverse of your scenario. If a rival matched Apple's design and features at a lower price, Apple's scale would let it cut prices for a time without losing money, a defense a pure differentiator with high costs would not have. If Apple's premium over Android phones narrowed sharply, do you think its cost position would let it remain highly profitable, or does its strategy depend on the premium lasting?

References

Banker, R. D., Mashruwala, R., & Tripathy, A. (2014). Does a differentiation strategy lead to more sustainable financial performance than a cost leadership strategy? Management Decision, 52(5), 872-896. https://doi.org/10.1108/MD-05-2013-0282

Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120. https://doi.org/10.1177/014920639101700108

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Pertusa-Ortega, E. M., Molina-Azorín, J. F., & Claver-Cortés, E. (2009). Competitive strategies and firm performance: A comparative analysis of pure, hybrid and 'stuck-in-the-middle' strategies in Spanish firms. British Journal of Management, 20(4), 508-523. https://doi.org/10.1111/j.1467-8551.2008.00597.x

Rothaermel, F. T. (2015). Strategic management: Concepts and cases (2nd ed.). McGraw-Hill Education.

Salavou, H. E. (2015). Competitive strategies and their shift to the future. European Business Review, 27(1), 80-99. https://doi.org/10.1108/EBR-04-2013-0073

Thornhill, S., & White, R. E. (2007). Strategic purity: A multi-industry evaluation of pure vs. hybrid business strategies. Strategic Management Journal, 28(5), 553-561. https://doi.org/10.1002/smj.606