Abstract
In this paper we use a simple linear demand structure to analyze firms' and alliances' strategic positioning with regard to cost reduction and product differentiation. In particular, we compare investment decisions under competition and in alliances and analyze comparative static properties concerning changes in market size. In contrast to Porter (1980), this model explicitly allows firms to allocate their budget between the two strategies. The analysis reveals that the optimal allocation of resources for strategic positioning changes markedly when a firm enters an alliance: the general investment level decreases with a shift towards more cost reduction and less product differentiation. Another finding is that alliances (as well as independent firms) in larger markets invest more in both strategies and investment is driven towards product differentiation. These results are in line with Klepper's (1996) findings as they show that the attractiveness of following cost leadership or differentiation strategies changes through industry evolution.
| Original language | English |
|---|---|
| Pages (from-to) | 135-149 |
| Number of pages | 15 |
| Journal | International Journal of the Economics of Business |
| Volume | 14 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 1 Feb 2007 |
| Externally published | Yes |
Funding
We are grateful to two anonymous referees and the editor Eleanor Morgan, as well as Dorothea Herreiner and Patrick Schmitz for helpful comments and suggestions. The paper also benefited from seminar participants at the Universities of Bonn, Berliu, Munich, and Kellogg Graduate School of Management. We gratefully acknowledge financial support of the German Marshall Fund and of the DFG through SFB 303. Of course, the usual disclaimer applies.
Keywords
- Alliance
- Competitive strategy
- Cost reduction
- Game theory
- Innovation
- Product differentiation
- Strategic positioning