Why Tesla Follows a Product Differentiation Strategy and Aldi one of Cost Leadership-And not the Other Way Around!
Professor Aya Chacar ?? ?? ??? ?????
Global Strategy Expert. Chaired Professor. Founder, Facebook Global Business Strategy Group. Past Board Member AOM-IM.
Recently blogs are creeping up on the web on Tesla having a cost leadership strategy or Aldi following a differentiation strategy confusing strategy tyros and professionals alike.
Let me tell you with great assurance: TESLA's automotive business does not follow a cost leadership strategy and ALDI's stores do not follow a differentiation strategy. Those who say otherwise are confused as to what these strategies are.
Businesses that follow a cost leadership strategy aim to achieve the lowest cost of operation in their industry. This is the official definition of this strategy according to Michael Porter, the Professor who coined the term. On the other hand, firms that follow a differentiation strategy sell products or provide services that have unique features for which consumers are willing to pay extra.
Cost leadership can be achieved in many ways, such as by creating and improving economies of scale or learning, and through strategic innovation. Aldi is able to offer lower prices than most other food stores due to its focus on driving its costs to the lowest level possible. It does so by following a number of policies that aim to achieve lower costs. For example, it sells a lot of generic products, offers a limited number of items in its stores, and provides a no frill shopping experience. These policies, combined with its global and national scale, give Aldi huge economies in purchasing, logistics, and distribution among other things, and a lower cost of sales in its stores. In turns, Aldi can offer lower prices to its customers.
Differentiation can also be achieved in many ways, such as by providing unique product design, outstanding service, or technological supremacy. Buyers seek Tesla’s products for the cutting edge built-in technology, unique design and image, and a relatively hassle-free buying and owning experience. Tesla’s website emphasizes its cars' acceleration, their safety, and them having the highest range possible. The cars also have the largest screen ever put in cars and were the first to offer semi-autonomous driving. Car sales are dealer-free and cars use software extensively which allows for painless and automatic updates and upgrades over the air. Branding efforts are led by the larger than life co-founder, CEO and Product Architect, Elon Musk who communicates directly with customers and is known to respond with immediate product redesigns following their requests! Musk also constantly emphasizes buyers’ contribution to the development of a better and less polluted world and the mass electric car market. And he thanks customers for it. Buyers of Tesla cars are in turn willing to pay extra to get the ‘add-ons’ these cars provide.
So how can Tesla Motor’s strategy, or that of a de facto differentiator, be confused as cost leadership? And how can Aldi’s strategy, or that of the de facto cost leader, be called differentiation? The confusion starts when data that show an attempt to lower costs within Tesla and the total ownership cost, or in the case of Aldi provide a distinctive product mix, are seen as signs of a changing strategy but they are not!
Tesla taking actions to lower costs and ultimately perhaps total ownership costs are not tantamount to following a cost leadership strategy. The litmus test for cost leadership is still: Does this company strive to be the cost leader in its industry? You can review the numerous interviews Elon Musk has given over the years. He always emphasizes the company’s aim is “to accelerate the advent of electric cars” or “sustainable transport”. He describes the ‘mass’ Model 3 as “amazing”, “very fast”, “attractive”, “high performance”, “great handling”, “very safe”, and having “most roominess of a car this size”. He never describes Tesla’s car as the lowest priced or its technology and production as the lowest cost. The next generation Roadster, in fact, has a starting price of $200,000, which is not exactly rolling back the price from the prior model’s $100,000 sale price. The closest I have seen Elon Musk talk about cost leadership is in an interview with the BBC where he is pushed to reconcile the price tag with the mass-market description. He sheepishly tried to argue that if one were to include the cost of gas/petrol, the Model 3 would be ‘competitive’. Lowering total ownership cost is not a cost leadership strategy, not even in the grander Musk vision of cars plugged into a driverless car rental network generating revenues when not being used by owners. The Model 3 may be aimed at a larger target market than the Model S but it is still not the Mitsubishi’s iMiev, which was the lowest priced electric car in the U.S. and had its price decrease over time.
Similarly, the change in Aldi’s product line-up does not mean that the company is following a differentiation strategy. Even if Aldi has introduced a greater number of natural, organic, and gluten and antibiotic -free products, the test for differentiation still is: are the buyers willing to pay more for Aldi’s products because of something distinctive they offer? Although consumers are willing to pay extra money for Aldi’s organic and gluten-free products, compared to regular products, they primarily chose Aldi because the prices of the goods they are purchasing are lower than local competitors’. In fact, when Walmart teamed up with suppliers last year to lower prices of a typical grocery basket in 11 test markets in the U.S., it succeeded at bringing customers back. And in areas where Lidl, the newest low-cost supermarket chain entrant in the U.S., operates, Aldi prices are set at a whopping 19% lower than in areas where it does not according to a study by Professor Katrijn Gielens. Aldi is simply changing its product mix to offer what buyers want. Think of this differently: do Burlington Coat Factory and TJ Maxx become differentiators just because they are now selling discounted Gucci and Dolce & Gabbana products?
So let’s call Tesla’s generic strategy differentiation and Aldi’s generic strategy cost leadership. Please! Por Favor! ??! S’il vous plait! ?????? ??
N.B.: Some may be tempted to describe both companies’ strategies as ‘Integrated Cost Leadership/Differentiation Strategy’. To do so, their strategies would have to meet BOTH tests of cost leadership and differentiation and they clearly do not. Note however that Michael Porter described those following this strategy as ‘Stuck in the Middle’ for a good reason. It is still very hard if not near impossible most times to pull-off successfully at the same time differentiation and cost leadership. These strategies require significant and intensive effort in two different directions at the same time. Companies like Debonair, a European airline, that tried to do both, more often than not fail because cutting costs often entails cutting added features or services and differentiating often increases the cost of a product or service making it less cost competitive.
Do you want to learn more about strategy? The Shortest Strategy Textbook is one place you could start.
References:
Much of this article is based on endless reading about these companies over the years so I give credit to all the great websites that have written accurate facts about the companies mentioned here. I also used today information from these sources:
https://cleantechnica.com/2015/02/18/many-awards-tesla-won-infographic-tells-us/
https://www.tesla.com/blog/master-plan-part-deux
https://www.businessinsider.com/tesla-the-origin-story-2014-10
As fantastic as ever, professor.
Senior Consultant, Strategy & Execution
6 年Excellent points. On Tesla, it seems differentiation with focus. Thank you for the thought-provoking article.
thank you, prof.
But what if Aldi's launches a box of generic canned goods into space? Would that be a change in strategy? Or if Telsa requires its customers to bag their own cars?