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Total Rewards: Lowest-cost strategy and Differentiation strategy Ikea vs Lush

Updated on October 17, 2016

Read the following Shapiro Library article: Linking Compensation to Business Strategy.

Identify two companies, one that you believe pursues a lowest-cost strategy and another that pursues a differentiation strategy. Relying on personal knowledge or articles in newspapers or business periodicals, discuss these companies’ competitive strategies.

There are two main competitive strategies that most companies utilize for their business: lowest-cost strategy and differentiation strategy. The lowest-cost strategy, also known as the cost of leadership strategy, focuses on gaining a competitive advantage through being the lowest-cost producer of either a product or of a service (Martocchio, 2014).This strategy calls for the company to sell the product or service at a price advantage relative to the industry average. The lowest-cost strategy requires a company to pursue cost minimizations in their operations, human resources department, and in marketing. When I consider companies that employ the lowest-cost strategy the first company that I think of is Ikea. Ikea is a Swedish furniture retailer that creates stylish furniture at a low cost to the company. Ikea is able to product their furniture at a low price through sourcing their products in low-wage countries. Ikea also pursues cost minimizations in their operations and in marketing by only offering basic services. For instance Ikea does not assemble or deliver furniture to their customers; they only sell it to them. This allows Ikea to avoid paying for extra employees to assemble and deliver furniture while being able to sell their furniture at a price advantage. Due to Ikea’s lowest-cost strategy the company has a value of $11.8 billion with only 11 thousand employees (Forbes, 2015).

The differentiation strategy focuses on the creation of products or services that are unique from the products or services that other companies offer; this strategy can involve design, brand image, technology, features, customer service, and price (Martocchio, 2014).The differentiation strategy offer a company a competitive advantage that comes from the company building brand loyalty amongst their consumers because customers that are loyal to a brand are less sensitive to price escalations. This allows the company to have more funds to invest in research and development to further differentiate themselves from their competitors through unique products and services. An example of a company that uses a differentiation strategy would be Lush. Lush is a cosmetic bath and body company that has made themselves unique in the eyes of their customers. The company has set themselves apart from their competitors through not only selling unique products, but through their views and their practices. For instance the Lush company supports ethical buying, the purity of handmade products, social and corporate responsibility, and environmental protection. The company sells these values to their consumers in each one of their handmade products. The company has also created a unique environment in their stores through offering in-store trials of all of their products as well as free samples of their products to allow their customers to try any of their products with no risk. The main aspect of Lush that differentiates them from their competitors is the fact that they are selling the viewpoint of all natural beauty products. This viewpoint works to build brand loyalty and make their customers less sensitive to price increases as the customers are loyal to the Lush brand because they feel like they are making a difference through buying from Lush instead of a competitor. Lush’s differentiation strategy has contributed to the company’s net worth value of about $75 million (CompanyCheck, 2016).

References

CompanyCheck. (2016). Lush Cosmetics. Retrieved February 11, 2016, from https://www.companycheck.co.uk/company/04162033/LUSH-COSMETICS-LIMITED/summary

Forbes. (2015, May). Retrieved February 11, 2016, from http://www.forbes.com/companies/ikea/

Martocchio, J. (2014). Strategic compensation: A human resource management approach (8th ed.). Upper Saddle River, NJ: Prentice Hall.

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