Competitive strategy is essential to a company’s profitability and survival. Competitors are both a blessing and a curse. Seeing them only as a curse runs the risk of eroding not only a firm’s competitive advantage but also the structure of the industry as a whole. Companies can find competitive advantage based on cost, differentiation or focus.
Competitive advantage rests upon how well the strategy you choose to execute generates value. Companies can choose among three generic strategies to produce competitive advantage:
Cost Leadership: To become the low-cost competitor, a firm must understand and use the cost advantages that matter most in its particular industry. If a firm can achieve the industry’s lowest costs and still charge average prices, it will perform better than the norm. However, it cannot pursue cost exclusively. Differentiation still matters. Customers must regard its products as being at least as good as those of its competitors. Otherwise, they will force further price cuts. Pursuing cost leadership is harder if your competition is striving for the same advantage. Cost warfare risks damaging a firm’s profitability and an industry’s structure.
Differentiation: A company may seek to distinguish itself from its rivals by offering superior value, and particular service or product attributes. Differentiation costs money. To out-perform the industry average, a company that is trying to be different must be able to charge a premium price. The premium can’t just compensate for higher costs; it also has to achieve higher margins. This means that the differentiator’s total cost should be relatively close to its competitors’ total costs. The firm must cut expenses in areas that do not impair its differentiating traits, such as the way it does something that customers value but that its competitors are not doing.
Focus: A focused strategy targets specific industry segments, ignoring all others. The buyers in these segments must have individualistic requirements so that the focus area becomes a genuine competitive advantage. The strategy of focusing works best when your competitors are not meeting a segment’s needs.
While competitors can surely be threats, the right competitors can strengthen rather than weaken a firm’s competitive position.
Cost and Competitiveness:
Ten factors drive cost:
1. Scale – Scale can cost money, (i.e., by driving up the cost of materials) or it may save money by lowering the costs per unit.
2. Learning – As firms learn new and better ways to work, costs may drop.
3. Capacity – How your company uses its available skills, budgets, materials, workforce, logistical support and energies will increase or decrease costs.
4. Value chain linkages – Some activities may affect the cost of other activities.
5. Relationships – Relationships with other businesses or business units (such as shared service centers) affect costs.
6. Integration – Vertical integration, on one hand, or outsourcing, on the other, offer opportunities for cost reduction.
7. Timing – First movers may have a cost advantage in learning and in branding; late movers may benefit from the first mover’s R&D or may develop better technology.
8. Policies – Firms make policy decisions about services, delivery, target customers, human resources and many other areas. These decisions affect cost.
9. Site – A firm may choose to locate its production, administration or other activities in an area with taxation, real estate, labor or material cost advantages.
10. Institutions – Regulations, unions, taxes and other institutional factors drive costs.
The Differentiation Advantage
To differentiate, a firm must produce some unique value other than lower prices. Firms may drive differentiation through:
1. Policy – Corporate decisions about services, technology, materials, quality, products, human resources, information and other factors can create differentiation.
2. Value chain linkages – Activities at one point in the value chain can affect the performance of other activities, for example, you can make fast deliveries only if you process orders quickly.
3. Timing – The first-mover and late-mover advantages also apply to differentiation.
4. Site – The location of retail outlets or other activity centers may create customer value.
5. Relationships – Business units may share a service department or a sales force to meet a broad spectrum of customer needs.
6. Scale – Scale means different things to customers in different industries. The ability to rent or return a Hertz car anywhere in the U.S. is an advantage of scale. However, in some industries, the massive scale may make it difficult to serve niche markets.
7. Institutions – Unions and other institutions may affect a firm’s ability to differentiate.