Cost Leadership and Differentiation Strategies
Conventionally, companies seek profits. C'est ses raisons d'être! A senior executive would confidently assert. True, profit is one cardinal goal every business should pursue, a goal which can be achieved by cost leadership. The dilemma, however, every business faces – particularly an expanding one – is how to deliver quality services and/or products at competitive prices. The standard strategies businesses must adopt appear to be either / or. That is, in pursuing a superior quality, cost is driven up inevitably. Conversely, in cutting back on costs and offering competitive market costs quality goes down, inevitably. This dilemma has been conceptualized by Porter's "stuck-in-middle" assumption (Cronshaw, Davis & Kay, 2005; Murray, 1988).
This strategy focus has been critiqued, however, and frameworks are suggested to as emphasize possibility of achieving cost leadership and service / product differentiation (Murray; Hill, 1988). Moreover, increasing examples of companies which have managed to achieve cost leadership and service and/or quality differentiation are emerging in different industries. Sainsbury's (Cronshaw, Davis & Kay) and Singapore Airlines (SIA) (Heracleous & Wirtz, 2010) represent examples in different industries of how both strategies of cost leadership and differentiation can be pursued simultaneously.
For current purposes, one service company, i.e. airbnb, is discussed for her presumed success in adopting a dual strategy combining cost leadership and service differentiation. More specifically, given airbnb's unique business model as a sharing economy enterprise applying a cost-leadership-differentiation dual strategy ("dual strategy" afterwards) acquires particular emphasis. This is justified by a rise in business practice ecosystem of differentiating-by-customer concept. That is, if conventional business models required intensive R&D investments to offer services and/or products for customers, more recent practice shifts burden of service and/or product specification on customers. Further, by adopting an agile business model by which cost calculation is not based on service and/or product valuation per se but on access to service and/or product, businesses are, in fact, cutting back on costs considerably. Thus, in applying a dual strategy a company can achieve market competitiveness. To understand how such dual strategy can be adopted successfully, airbnb's example is proposed for analysis. This presentation aims, hence, to discuss airbnb's success in achieving cost leadership and service differentiation.
Peer-to-peer (PTP), sharing economy businesses as airbnb share a common, characteristic feature namely, mediating interactions between customers. Put differently, in lieu of crafting full-fledged cost calculation and service differentiation strategies – separately or combined – PTP companies offer access to services delivered by customers. Thus, customers ("peers") communicate over a platform – usually online and now increasingly cloud-based – and negotiate service options. The PTP companies, moreover, facilitates interaction between customers by offering up service applications and options. To drive point clearer, consider airbnb's example.
According to company's stated mission, airbnb is
a trusted community marketplace [emphasis added] for people to list, discover, and book unique accommodations around the world — online or from a mobile phone or tablet.
Airbnb connects [emphasis added] people to unique travel experiences, at any price point, in more than 34,000 cities and 190 countries. And with world-class customer service [emphasis added] and a growing community of users [emphasis added], Airbnb is the easiest way for people to monetize their extra space and showcase it to an audience of millions. ("About Us," n.d.)
Notably, airbnb business model is centered on information crowsourcing in a "marketplace" in which "a growing community of users" "connect" supported by superior customer service. By offering an online platform for owners and renters, airbnb only mediates interactions between users. This is facilitated by a host of applications and features including, for example, identity authentication (e.g. profile information), feedback system (e.g. property reviews), messaging boards, networking ("Airbnb Groups") and a referral program ("Invite Friends"). Thus, by "outsourcing" marketing and communication functions, for example, to customers – i.e. by offering platforms for interaction and moderating service access – airbnb is, in fact, cutting back on costs based on a strategy and business dynamic model which impacts on financial (less core functions) and non-financial (less operational considerations) performance (Gilley & Rasheed, 2000).
Indeed, airbnb is disrupting conventional models of established hospitality incumbents (Zervas, Proserpio & Byers, 2015). Through outsourcing core business functions to customers, airbnb provides an example of cost leadership by reengineering business processes as to change conventional operational model. Further, airbnb is differentiating her services by introducing offerings which make accommodation experience more convenient. For example, emphasizing a safety message is enacted by offering an Emergency Safety Card (ESC). Therefore, instead of conventional safety precautions established hospitality incumbents include in listing information, airbnb is differentiating her offering by personalizing emergency safety. Notwithstanding a cost incurred by airbnb, choosing to offer ESC enhances company's image and increases her brand value in longer run as a business which ensures customers' safety.
Leading cost in short rental accommodation niche market, airbnb is enacting a set of features and programs as to minimize cost to an optimum baseline. In expanding her existing and potential customer base, airbnb offers Airbnb Groups. The feature is aimed to connect hosts of similar background as to exchange experiences. Thus, by outsourcing – again – networking and customer approach functions airbnb is not only growing her customer base indirectly but also converts referred users and enhances brand image social networking.
In a more direct cost leadership example, airbnb offers an "Invite Friends" feature. By inviting a friend or referring a potential customer, an airbnb existing customer is eligible for USD 100 credit. Thus, airbnb has managed to craft a growth strategy based on a very simple concept of crowsourcing and word of mouth, a strategy which has helped airbnb hit a USD 13 billion valuation (Patel, 2015). In a highly competitive industry as hospitality's, word spreading can make all difference in enhancing a brand's image. This is particularly significant in emerging, more concentrated markets in which cost and differentiation are crucial in sustaining business in highly competitive marketplaces (B. Li & J. L., 2008). Further, airbnb has a powerful leverage in servicing customers. More specifically, being an online platform offering access to – as opposed to direct rental service offered by conventional brick-and-mortar established businesses – a broad range of hosting options, airbnb reach is far broader and less costly compared to established online market players as TripAdvisor and booking.com whose space offerings are still limited by conventional room-reservation and apartment-rental model. As well, airbnb incentivizes hosts and renters by offering an access service which is unavailable in different platforms or are offered at comparatively expensive costs.
As noted, SIA represents a successful example of dual strategy. By maintaining standardized services, focusing relentlessly on staff development and investing in fleet purchase, SIA has managed to achieve market leadership in cost as well as offering quality services world-renowned (Heracleous & Wirtz). Based on similar principles adopted by SIA – namely, harnessing staff and organizational culture's power, putting innovations and technologies into good use, effective utilization of business ecosystems and making investment decisions strategically – airbnb has managed to create a platform for community users noted for collaboration and correct and effective feedback system; to introduce features and functionalizes (e.g. "Invite Friends") as to enhance collaboration and networking between community members; to develop a positive ecosystem of exchanging information and experiences; and to plan strategically not based on financial returns alone by pursuing a culture of excellence at cost-effective service charges.
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