The new source of competitive advantage
Porter's two primary sources of competitive advantage are cost and differentiation.
Companies set out to become either the cheapest in the industry/market or the most unique.
Naturally, the cheapest ones engage in price wars to win or die.
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Differentiation champions tend to become most valuable to their customers. They do so not by being the most affordable but by uniquely positioning themselves to meet the specific demands of their refined clientele.
Apparently, just like any other bipolar model, this one oversimplifies reality. The third force has always been there, or it emerged with evolution.
The definition and main attributes of cost innovation
Cost innovation assumes the provision of high-end disruptive technologies and niche products to the mass market at affordable prices.
It breaks the barriers of uniqueness established by differentiators.
Suddenly, wine chillers don't just belong to connoisseurs - they become natural to every household. Electric vehicles populate the roads and become generally affordable.
On the other hand, cost innovators don't pursue the cheapest options. They make expensive technologies available for the masses. For that, they rely on lower-cost R&D from developing markets (especially China.)
Cost innovation executives maintain long-term composure on their strategic goals. Just like Huawei, who took all the time they needed to gradually build their technological capabilities and develop R&D muscles to eventually become the world-leading technological power.
Segmentation by cost and innovation.
Why would cost innovation become important? Because it delivers the outspoken value-for-money.
It also gives us the missing dimension to convert the flat Earth into a realistic 3D model.
In Industry 4.0, innovation becomes increasingly important to segment suppliers, products, industries, markets, and more.
Cost and innovation become axis in this segmentation model, as the business requires both leanness and agility.
With this segmentation, you may differentiate your suppliers by the cost and innovation capabilities. Naturally, each quadrant requires a tailored supplier relationship model and an adequate negotiation strategy.
Cost leaders have already ensured price competitiveness, so you need to concentrate on quality and risk management. They will increasingly rely on lean methodology as the times of cheap workforce elapsed even in Asia.
Differentiators aren't likely to provide any significant cost savings. Some of them would even weigh onboarding your company as a client since their production and service capacity could be limited. You need to manage them carefully as your bottleneck suppliers. Usually, differentiators are the beacons of agility.
Cost innovators can be the best source of value optimization. Yet, they require constant control and development, which can be a hefty resource investment from your side. They know how to effectively marry lean and agile methodologies.
Once again, this segmentation isn't meant to replace traditional ones by Kraljic and others. It shows some new dimensions to consider in the world of Industry 4.0, where physical and virtual properties (e.g., cost and innovation) bind together.
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