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As both kinds of firms seek to reduce costs to survive and reduce prices to attract more cost-conscious customers, cost leaders have the advantage because they are structured for such an approach. This is the lesson of the Great Recession for strategists: cost leaders have a head start. In fact, we found that changing strategy did not increase firm chances of surviving the recession, nor did it improve the firm’s revenues or its finances.
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We found that when differentiators moved toward a cost leadership strategy such efforts did not help them. However, our data do not support changing strategies to become a cost leader during a recession.
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Especially in an environment as unpredictable as we had in 2008 (or as we have now), cutting costs becomes a central focus of most businesses’ efforts. Businesses seek to reduce their expenses to weather the storm. Consumers reduce their spending and look for cheaper suppliers. After all, moving from differentiation toward cost leadership makes a certain sense everyone tightens their belts in a recession, particularly a severe one. In light of this, a thoughtful strategist might think it wise to change strategies by moving toward cost leadership. But in our analysis, differentiators were significantly more likely to suffer reduced revenues than cost leaders in the Great Recession and were significantly more likely to go out of business. Porter says either strategy will be successful, as long as the strategic orientation is pure. Cost leaders, on the other hand, focus their strategy on reducing costs thus enabling them to offer the product for the lowest possible price. Differentiators compete based on a variety of factors, such as quality or service, rather than prioritizing low prices. We looked at data from the period right before the 2008 recession addressing how 5,278 publicly-traded firms fared based on their generic strategy of being either pure differentiators or pure cost leaders, according to Michael Porter’s theories. With so much uncertainty, what should a strategist do? If that is the case, then this supply shock will turn into a demand crisis much like the Great Recession of 2008, and recovery will be much slower. On the other hand, according to a report from the Becker Friedman Institute of the University of Chicago, 42 percent of the jobs lost so far in this crisis could be permanent losses. If this is purely a supply shock, then our economy should recover quickly once restrictions on economic activity are lifted. The unemployment rate has hit a record high, and the International Monetary Fund is predicting a drop in our GDP of nearly 6 percent this year. We are currently in the midst of the most severe economic crisis since the Great Depression. To get all of HBR’s content delivered to your inbox, sign up for the Daily Alert newsletter.
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