If the cost-leader role is vacant or if it may be wrested from the present cost leader, the firm’s best competitive strategy may be to assume that role, even in markets for experience and credence goods. As discussed in Chapters 10 and 11, “experience” goods are those containing mainly attributes that the consumer can only evaluate after pur-
chase, such as the taste of food or the musical quality of a concert. After experiencing the quality of the product, the buyer will store this information in memory and will use it as the basis for the purchasing decision the next time. “Credence” goods contain mainly attributes that are imperfectly evaluated even after purchase, so that the credibility of the seller, the brand name, and the firm’s public image and reputation become important elements in the consumer’s purchasing decision. 6
If all rival firms are pursuing a differentiation strategy, their products will tend to be spread out over attribute space, and the firm may foresee considerable difficulty in competing on the basis of experience or credence attributes. It may take years for the firm’s brand name to acquire the intangible qualities held by rival firms’ brand names. The best retail locations, such as in high-class shopping areas, may all be taken. The better taste of a certain food product may be due to an ingredient or a recipe that is unavailable to the other firms. (Note that Kentucky Fried Chicken and Coca-Cola each claim their “secret recipes” are responsible for their “better taste.”)
Faced with these impediments to effective product differentiation, the firm should consider a cost-leadership strategy. If it can achieve significantly lower cost levels, the firm may then choose either to follow another firm’s price leadership and quietly enjoy superior profitability or to assume the role of price leader itself. Because learning effects, economies of plant size, and pecuniary economies are related to increased sales volumes, it will typically serve the low-cost firm’s objective to be one of the lower-priced firms if not the price leader.
Porter cautions that attempting to usurp the cost-leadership role is fraught with danger, since it may culminate in vigorous price competition with the established cost leader(s). Particularly in the markets for experience and credence products, which may be expected to exhibit less elastic demand responses to price reductions, an attempt to displace the cost leader may cause prices to fall well below the profit-maximizing level, and thus profit will be less than anticipated. Essentially, the firm should be cautious about attempting to be the cost leader, unless there is currently no relatively-low-cost firm, or unless the existing cost leader is in a vulnerable position, assuming in both cases that cost-reduction opportunities exist. The current cost leader may be vulnerable, for example, if it has not incorporated a major new cost-saving device and is prevented from doing so by its financial limitations.