Differentiation and Lean

Pursuing benefit leadership through differentiated products and services is one way to competitive advantage (the other is cost leadership). Differentiated producers are often confronted with the dilemma of offering variety in their product or service, and this variety can drive up costs.

The classic example of differentiation as a strategic pathway to competitive advantage is, of course, General Motors. When Henry Ford was offering his classic Model T at a far lower price than anyone else was charging, he offered a single standardized product (“any colour but black”). Alfred Sloan at General Motors challenged this strategy by offering a range of car types, differentiated by quality and price. Chevrolets were basic cars that directly challenged the Model T, Buicks were bigger and more expensive, all the way up to the top of the line Cadillacs. And every line was available in a range of colours.

General Motors was able to offset the higher costs of differentiated production with economies of scale – producing in large volumes lower average total costs and allowed the producer to spread fixed costs over a large production volume.

Many firms striving to offer differentiated products and services cannot easily achieve economies of scale. For example, a firm operating in a monopolistically competitive market may have to settle for lower production volumes which may even be below Minimum Efficient Scale (MES). In these cases, Lean production can help.

Lean can allow a firm to achieve lower average total costs and support profitable smaller-quantity, higher-variety production. Lean methods can allow a firm to leverage the economic benefits that come from diversity – for some products and services, consumers value this diversity and are willing to pay a price premium to obtain it. The price premium, together with efficient Lean production technologies, allow the producer to earn higher returns and build a competitive advantage.

A word of caution – it is the differentiation which is important, not Lean. Lean production methods should serve the differentiation. Firms should always strategize their differentiation to rationalize the use of Lean methods.

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