Strategy and competitive advantage

You operate in a well competitive market, so how will you be able to be

successful and make profit in that market? Every organization have a clear strategy
for that, but how to decide which strategy is best for the organization? Should the
company offer a unique product or service? Or offers the cheapest price for its product
or services? Should the company focus on a niche market instead of a broad one?

Porter generic strategies model helps company to make the best choice for the
company. Porter have identified 3 strategies for achieving competitive edge and these
are:

 Cost leadership strategy- increasing profits by reducing operating costs and

charging lower prices to customers. To implement this strategy, the company
should invest in new technology, achieving economies of scale etc. So, the
company should try to beat their rivals be charging lower prices to its customers.
 Differentiation strategy- focus on making the firm product attractive and unique in
comparison to rivals. Provide unique features or services. Be creative and
innovative.
 Focus strategy- developing product and services for niche market. Have to
decide whether to achieve cost leadership or differentiation in the focus strategy.

Generic Competitive Strategies

Generic competitive strategies, also known as Porter’s Generic Strategies, are

fundamental strategic approaches that organizations can use to gain a competitive
advantage and position themselves effectively in the market. It is composed of three
generic strategies: cost leadership, differentiation and focus.

And these strategies can then divided into the following:

 Low Cost Provider Strategies

 Differentiation Strategies
  Best-Cost Provider Strategies

 Focused Low cost Strategies

 Focused Differentiation Strategies

Cost leadership
Companies pursing a cost leadership strategy aims to become the low-cost producer
within the industry. They seek to offer products and services at the lowest possible cost
while maintaining acceptable quality. This strategy often involves achieving economies
of scale, efficient production processes, and tight cost control. The goal is to gain a
competitive edge by offering lower prices than competitors, which can attract price-
sensitive customers and lead to market share growth.

Walmart is known for its cost leadership strategy. The company's efficient supply chain,
bulk purchasing, and cost control measures allow it to offer products at lower prices
than many competitors.

How to achieve low cost strategy?

 Scrutinize each cost creating activity and determine what drives costs
 Manage costs downward
 Restructure value chain
 Create cost conscious corporate culture- employee participation in cost
improvement efforts and limited perks for executives
  Small corporate staff to keep admin costs low
 Benchmark costs against best in class performers
When to go for Low Cost Leadership?
 Price competition is a dominant competitive force
 Product is standardized, commodity type available from a variety of sellers
 There are few ways to achieve product differentiation
 Most buyers use the product in the same ways – price and not features becomes
the dominant competitive force
 Low switching costs from one seller to another
 Buyers have significant power to bargain prices

Potential drawback
 Rival firms may find it easy or inexpensive to imitate leader’s low cost methods
 Too focused on driving down costs that fails to pick up on significant market
changes- changing buyer preference, for added quality or service, shifts in how
buyers use the product, declining buyer sensitivity to price.

Differentiation
 Organization pursing a differentiation strategy focus on creating unique and
distinctive products or services that are valued by customers. The aim is to stand
out in the market by offering features, quality, design or customers experiences
that competitors do not provide. This strategy allows companies to charge
premium prices, which can result in higher profit margins. Effective marketing
and branding are often integral to differentiation strategies. It selects one or more
attributes that many buyers in an industry perceive as important, and uniquely
positions itself to meet those needs. It is rewarded for its uniqueness with a
premium price. Example, Apple follows a differentiation strategy by producing
innovative and aesthetically pleasing products that command premium prices in
the market.
Approaches to a differentiating strategy:

 Taste
 Special Features
 Superior Service
 After sales service
 Prestige and Distinctiveness
 Reliability
 Technological leadership
Differentiation strategies work best where:

 There are many ways to differentiate the product or service and many buyers
perceive these differences as having value
 Buyer needs and uses are diverse
 Few rival firms are following a similar differentiation approach
Technological change is fast paced and competition revolves around rapidly evolving
product features

Pitfalls in pursuing differentiating strategy include:

 Trying to differentiate on the basis of something that does not enhance buyers’
well-being as perceived by the buyer
 Over-differentiate so that the product quality or service exceeds buyers’ needs
 Try to charge too high a price premium
 Tiny differences between rivals’ products offerings may not be visible or
important enough to buyers
 A low cost strategy can defeat a differentiation strategy when buyers are satisfied
with a basic product and don’t think extras are worth a higher price
Best cost provider strategy
The best cost provider strategy is where a company aims to offer products or services
that provide a balance between low cost and differentiation. In other words, the goal is
to provide customers with better value by offering quality products with attractive
features at competitive prices. This strategy combines elements of both cost leadership
and differentiation.

The company strives to offer competitive pricing, which may not necessarily be the
lowest in the market but is attractive in relation to the overall value provided.
Competitive pricing helps the company appeal to a broad customer base.

Toyota in the automobile industry and Samsung in the electronics industry. These
companies are known for offering products that are competitively priced while delivering
quality and a balance of features that appeal to a broad range of customers.

Drawback of this approach

 Company may be squeezed between the strategies of firms using low cost and
differentiation strategies
 High end differentiators can steal customers with appeal of better products
attributes – must achieve significantly lower costs in providing upscale features
 Low cost leaders may steal away customers with appeal of a lower price – must
provide significantly better product attributes to justify price above low price
leaders
Focused Low-Cost Strategy
Companies pursuing a cost focus strategy concentrate their efforts on serving a specific
niche or market segment. While aiming to be a low-cost producer, they tailor their
products or services to meet the unique needs and preferences of their target
customers. This focus allows them to avoid direct competition with larger, broad-based
competitors and can lead to customer loyalty within the chosen niche. Southwest
Airlines follows a cost focus strategy by concentrating on serving budget-conscious
travelers in specific regions.
Focused Differentiation Strategy
Similar to the cost focus strategy, organizations following a differentiation focus strategy
also target a specific niche or market segment. However, their emphasis is on delivering
unique and specialized products or services tailored to the preferences of their target
customers. This approach allows them to charge premium prices within their chosen
niche. Tesla focuses on electric vehicles and caters to consumers looking for
innovative, high-performance electric cars, differentiating itself from traditional
automakers.

Successful use of a focused differentiation strategy depends on:

 Existence of buyer segment that is looking for special product attributes or seller
capabilities
 Firm’s ability to stand apart from rivals competing in the same target market
niche

These Five Generic Competitive Strategies provide a framework for businesses to

determine their competitive positioning and guide their strategic decisions. The choice
of strategy depends on factors such as the industry's competitive environment,
customer preferences, available resources, and a company's core competencies.

When is a Focused Low-Cost or Focused Differentiation Strategy Attractive?

A focused strategy based either on low cost or differentiation becomes attractive when
the following conditions are met:

 The target market niche is big enough to be profitable and offers good growth
potential
 Industry leaders do not see that being present in the niche is crucial to their
success
 It is costly or difficult to meet the specialised needs of the niche and mainstream
customers at the same time
 The industry has many different niches and segments – less competition
Focusing also carries risks:

 Competitors may come up with ways to serve the niche market better than the
focuser with more appealing offerings or by developing capabilities that offset the
focuser’s strength
 There is potential for the preferences and needs of the niche members to shift
over time toward the product attributes desired by the majority of buyers
 Erosion of differences over buyer segments lowers the barriers to entry into the
focuser’s niche and rivals in adjacent segments can start to compete for the
focuser’s customers
 The segment can be so attractive that it is flooded with competitors, intensifying
rivalry and diminishing segment profits