March 24, 2016

Competitive Advantage and Competitive Strategy

The Five Generic Competitive Strategies - Which One To Employ?

Business organizations need to have customer satisfaction strategy and also competition withstanding strategy to carve out a space for themselves in customer - competition space.

                                         Differentiated Products
Customer Dimension
                                          Low Cost Products
                                                                                  Broad Market                    Narrow Market

                                                                                                 Competitor Dimension

Only when the product of an organization has customer acceptance, the competitor dimension comes into picture. Customer says your product is acceptable on an absolute basis but not the preferred one on a relative basis. Whenever, the company's market researchers tell that statement, the company has to turn its attention to competitive strategy.  The company's product strategy and competitive strategy are based on its assessment of its resources and that of competition.

A competitive strategy concerns the specifics of management's game plan for competing successfully and achieving a competitive edge over rivals. Porter defined competitive advantage in terms of profit margin. A firm that has competitive advantage will have higher profit margin compared to its rivals.

Early in the process of crafting a strategy, company managers have to decide which of the five basic competitive strategies to employ—overall low-cost, broad differentiation, best-cost, focused low-cost, or focused differentiation. The five categories come out of a two by two matrix on the dimensions of target market, focus of product development and design.
                                                                            Product and Process
                                                                  Low Cost         -          Differentiation
                                Broad                        Low Cost                     Broad Dfferentiation
Target   Market                                                           Best cost
                                 Niche                        Focused Low Cost      Focused Differentiation

Low Cost Provider

A low-cost provider's strategic target is meaningfully lower cost products than rivals in strategic group that offers a big market share. It is not necessarily the lowest cost and price product. The lowest cost and price product may be acceptable only to a very small percentage of the market.

In employing a low-cost provider strategy, a company must do a better job than rivals of cost-effectively managing value chain activities and/or it must find innovative ways to eliminate or bypass cost-producing activities. Low-cost provider strategies work particularly well when the products of rival sellers are virtually identical or very weakly differentiated and supplies are readily available from eager sellers, when there are not many ways to differentiate product and related services that have value to buyers, when many buyers are price sensitive and shop the market for the lowest price, and when buyer switching costs are low.

The low cost advantage can be used either to reduce prices and have greater revenue and more profits or maintain prices and make more profit. The choice depends upon the time available for building market share. If competitors are very active, then gaining immediate market is the appropriate objective and prices are reduced immediately.

Two ways of developing cost advantage:

1. Increase the efficiency of current value chain activities and decrease cost (incremental improvement) by understanding cost drivers.
2. Reengineer the value chain activities. to gain cost reduction (New design).

Cost Drivers of Value Chain Activities

1. Economies or diseconomies of scale.
2. Learning curve effect
3. Cost of inputs (bought out materials, components, and services)
4. Linkages between activities in the value chain
5. Shared facilities
6. Level of vertical integration - Its increase or decrease based on current opportunities
7. First mover advantage
8. Percentage of capacity utilization
9. Other policy choices made by the company: features of the product, product variety,  delivery times offered, number of distributors/channels used etc.

Reengineering Oppotunities

They generally appear whenever a new technology is developed inhouse or outside. The current examples are

Internet of Things (IoT)
Direct to end user sales (ECommerce)
3D Printing (Computer Aided Design and Computer Integrated Manufacturing)
Frugal Innovation or Engineering

Broad Differentiation

Broad differentiation strategies seek to produce a competitive edge by incorporating attributes and features that set a company's product/service offering apart from rivals in ways that buyers consider valuable and worth paying for. Successful differentiation allows a firm to (1) command a premium price for its product, (2) increase unit sales (because additional buyers are won over by the differentiating features), and/or (3) gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products). Differentiation strategies work best in markets with diverse buyer preferences where there are big windows of opportunity to strongly differentiate a company's product offering from those of rival brands, in situations where few other rivals are pursuing a similar differentiation approach, and in circumstances where companies are racing to bring out the most appealing next-generation product. A differentiation strategy is doomed when competitors are able to quickly copy most or all of the appealing product attributes a company comes up with, when a company's differentiation efforts meet with a ho-hum or so what market reception, or when a company erodes profitability by overspending on efforts to differentiate its product offering.

Best Cost Provider

Best-cost provider strategies combine a strategic emphasis on low cost with a strategic emphasis on more than minimal quality, service, features, or performance. The aim is to create competitive advantage by giving buyers more value for the money—an approach that entails matching close rivals on key quality/service/features/performance attributes and beating them on the costs of incorporating such attributes into the product or service. A best-cost provider strategy works best in markets where buyer diversity makes product differentiation the norm and where many buyers are also sensitive to price and value.

Focused Low-Cost Strategy

A focus strategy delivers competitive advantage either by achieving lower costs than rivals in serving buyers comprising the target market niche or by developing specialized ability to offer niche buyers an appealingly differentiated offering than meets their needs better than rival brands. A focused strategy based on either low cost or differentiation becomes increasingly attractive when the target market niche is big enough to be profitable and offers good growth potential, when it is costly or difficult for multisegment competitors to put capabilities in place to meet the specialized needs of the target market niche and at the same time satisfy the expectations of their mainstream customers, when there are one or more niches that present a good match with a focuser's resource strengths and capabilities, and when few other rivals are attempting to specialize in the same target segment.

Focused Differentiation

Deciding which generic strategy to employ is perhaps the most important strategic commitment a company makes—it tends to drive the rest of the strategic actions a company decides to undertake and it sets the whole tone for the pursuit of a competitive advantage over rivals.
Powerpoint Presentation

Updated 24 March 2016,  25 May 2013

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