So, cost leadership, again, it's very important to understand what's driving your costs, so that you can pass that along in the form of prices. Now the reason it's so important to understand this, because this is very intuitive. It's not that complex of a, framework is that a lot of related strategies are naturally following from choosing one of these approaches. Let me give you an example. If your a company that charges lower prices and you are consistently and constantly focused on keeping your costs down. How do you, what type of margins do you think you might have? And when I say margins, I mean profit margins. Do you make a lot of money on each product sold? Or a little bit of money, compared to a differentiating company? I think if you do the analysis across most industries, most cost leaders are not making very much on each product. What they're doing instead is selling a lot of the product and just making a little bit on each one. So the strategy is naturally to achieve some scale by having a very high volume of sales. So when you think of a company like the retailer Walmart. They don't make very much money on each product sold, in fact in US dollars it's in pennies, but they sell a lot of their products and so that scale allows them to have a very high dollar amount of total profit, because they're selling a lot of items. Let's think about the automobile industry for a minute. Are there companies that attempt to make very inexpensive cars that are acceptable. They get you from point A to B but don't necessarily have leather seats or air conditioning or automatic transmission or the newest stereo system, or a sun roof, or a camera to help you back up? Yes, there are. For example, in places where some of you are watching in China or India, there are major manufacturers of automobiles, such as Chery, which attempt to make very inexpensive cars by focusing on costs. Inexpensive parts. Not necessarily a lot of extras that are differentiated. And they plan on selling a lot of them. In terms of US based companies, if you think, for example, of Ford, Ford makes a vehicle called the Focus. Which in the US market is an entry level product. It's a cost leader. It's a car that a lot of people buy because it's affordable, and it doesn't have, necessarily, all the extras but because they sell a lot of them, they are able to achieve total profit level which is acceptable to their shareholders. You compare that to a company like Rolls Royce or Bentley, and those are extreme examples of differentiated vehicles. The customer that Rolls Royce, or Bentley, or Ferrari or Lamborghini is seeking to please is one that is not as concerned about price. And so, internally, the company, although not seeking to pay more than they need to, is seeking higher quality inputs or products. Perhaps they spend more on labor to make a very customized car of the highest quality and have lots and lots of extras in the engine, in the interior of the car, the way it looks on the exterior, etc. And so does Rolls Royce sell as many units or as many vehicles as Ford was with its Focus model? Of course not. Rolls Royce probably produces in the thousands of vehicles each year, they also make other things like engines for airplanes. But, in terms of their vehicles, they don't produce as many, but they make a lot of money per vehicle. The profit margin, the percentage that they make on each vehicle is much higher than Ford makes on each of its Focus cars. So differentiation strategy is very different. It's not seeking necessarily to be the highest volume seller of products. So, in any industry or any sector, you can find companies seeking to undertake these strategies. And the argument again for Michael Porter, Dr. Porter, is that you should chose one or the other. And it's not necessarily the case that only one of these strategies will work. Some companies will succeed undertaking the differentiation. Others can undertake cost leadership. Just don't try to do both is his major argument. Some of us as consumers might appreciate or demand in some cases a more differentiated product. And in other cases are not as concerned about extra uniqueness or differentiation. And are willing to accept a basic product level. For example, think of yourself and if you eat ketchup or catsup as it's pronounced in some places there's probably a lot of other ways to pronounce it. When you go to the store do you go to a specific brand? And do you pay a little bit extra for a brand that is perceived to be unique or differentiated in some way? Perhaps ingredients or quality. Freshness, or do you buy the least expensive bottle of ketchup because it just doesn't matter to you? The taste is pretty much the same, and it's just not worth it to you to pay extra. There are a lot of products like that. Petroleum or gasoline in some markets in the world, not in all Some companies try to differentiate petroleum by saying that they have a better quality and they have better additives. They're trying to appeal to the segment of the market that is willing to pay extra for better performance from their petroleum. Others are looking constantly for the least expensive. And so, there are customers for all of these products. And so the model is trying to help you understand that if you look across any industry, you'll find multiple companies, if competition is allowed, undertaking different versions of these strategies. And what's valuable to a company that's trying to make money, turn a profit is that hopefully you develop some unique way of providing lower cost that competitors can't imitate. Or you have successfully developed a way like Rolls Royce for example to make vehicles that are perceived as extra high quality. It's difficult for imitators to suddenly come into the market and imitate what you're doing or take market share from you. So your competitive advantage is related or connected to whatever it is that you're doing that's allowing you to differentiate. In the case of Papa John's Pizza, is it special relationships with farms, or fresher ingredients? With Walmart, is it's connection to its Its suppliers that allow Walmart to buy in volume. And you could do the same analysis, again, across any industry, or any sector, that might exist in your local country. Again, he argues, don't try to do both. You'll get stuck in the middle and companies that differentiate will look better than you, or companies that are true cost leaders will do it better than you. And you'll end up with a very small share of the market and may not be able to achieve that success that you need.
