Competitive strategy

Determining a competitive strategy for a product or SBU is a key aspect of strategic choice, the second stage in the strategic planning process.

This page looks at different approaches to answering the question, "how should we compete?"

Porter's generic strategies

Professor Michael Porter identified three generic strategies through which an organisation could achieve competitive advantage.

Cost leadership

Set out to be the lowest cost producer in an industry. By producing at the lowest possible cost the manufacturer can compete on price with every other producer in the industry and earn the highest unit profits.

How does one become a cost leader?

• Decide whom you are competing against (e.g. Tesco, M&S or Harrods food hall)?
• Perform value analysis to determine why customers value the product - what are key features that have to be matched and which product attributes could be dropped or reduced?
• Understand your own costs and cost drivers.
• Try to make a product of comparable quality for a lower cost - this may involve a full analysis of the value chain.

Advantages

• Better margins through lower costs.
• Ability to undercut competitors on price, thus reducing competitive rivalry.
• Low costs act as a barrier to entry deterring new entrants.
• Low prices make substitutes less attractive.
• Better margins give more scope to absorb pressure from powerful buyers/suppliers.
• Low costs give a platform for expansion - both gaining market share and moving into new markets.

Drawbacks of such a strategy

• In industries that only require a low critical mass of production output to achieve economies of scale, cost leadership would be difficult to achieve, because many other firms would be able to match the costs. It is only when the critical mass of production is high that a cost leadership strategy is likely to be effective.

Other drawbacks

• Only room for one cost leader - no fallback position if the cost advantage is eroded.
• Cost advantage may be lost because of inflation, movements in exchange rates, competitors using more modern manufacturing technology or cheap overseas labour, etc.
• Customers may prefer to pay extra for a better product.

Differentiation

Here the firm creates a product that is perceived to be unique in the market. Customers would be willing to pay a premium for additional perceived quality.

Ways of achieving differentiation

• Quality differentiation - This has to do with the features of the product that make it better - not fundamentally different but just better.
• Design differentiation - Differentiate on the basis of design and offer the customer something that is truly different as it breaks away from the dominant design if there is one.
• Image differentiation - Marketing is used to feign differentiation where it otherwise does not exist, i.e. an image is created for the product. This can also include cosmetic differences to a product that do not enhance its performance in any serious way (e.g. packaging).
• Support differentiation - More substantial but still has no effect on the product itself, is to differentiate on the basis of something that goes along side the product, some basis of support, such as after-sales service.

Rewards of a differentiation strategy

• better margins through being able to charge higher prices
• higher quality offsets competitive rivalry
• product uniqueness reduces customer power
• quality acts as a barrier to entry
• quality reduces the attractiveness of substitutes.

Risks of such a strategy:

• cheap copies
• being out-differentiated
• customers unwilling to pay the extra (e.g. in a recession)
• differentiating factors no longer valued by customers (e.g. due to changes in fashion).

Focus

Position oneself to uniquely serve one particular niche in the market. A focus strategy is based on fragmenting the market and focusing on particular market segments. The firm will not market its products industry-wide but will concentrate on a particular type of buyer or geographical area.

Cost focus

This involves selecting a particular niche in the market and focusing on providing products for that niche. By concentrating on a limited range of products or a small geographical area the costs can be kept low.

Differentiation focus

Select a particular niche and concentrate on competing in that niche on the basis of differentiation.

Reward

You become an expert in your field and understand the marketplace more.

Risks

The segment is not sustainable enough to provide the firm with a profitable basis for its operations.

The strategy clock

An alternative way of identifying strategies that might lead to competitive advantage is to look at 'market facing' generic strategies.

• This approach is based on the assumption that competitive advantage is achieved if a firm supplies what customers want better or more effectively than its competitors.
• Better could mean a more suitable product or service, or could mean a cheaper one of adequate quality.
• In effect, customers are looking for what they perceive as best 'value for money'.

Price-based strategies

Routes 1 and 2 are price-based strategies.

• 1 = no frills

  Commodity-like products and services. Very price-sensitive customers. Simple products and services where innovation is quickly imitated - price is a key competitive weapon. Costs are kept low because the product/service is very basic.

• 2 = low price

  Aim for a low price without sacrificing perceived quality or benefits. In the long-run, the low price strategy must be supported by a low cost base.

• 3 = hybrid strategy

  Achieves differentiation, but also keeps prices down. This implies high volumes or some other way in which costs can be kept low despite the inherent costs of differentiation.

Differentiation strategies

Routes 4 and 5 are differentiation strategies.

• 4 = differentiation

  Offering better products and services at higher selling prices. Products and services need to be targeted carefully if customers are going to be willing to pay a premium price.

• 5 = focused differentiation

  Offering high perceived benefits at high prices. Often this approach relies on powerful branding. New ventures often start with focused strategies, but then become less focused as they grow and need to address new markets.

Failure

• 6, 7, 8 = failure strategies

  Ordinary products and services being sold at high prices. Can only work if there is a protected monopoly. Some organisations try option 8 by sneakily reducing benefits while maintaining prices.

SBUs

Note that an organisation can have identified several strategic business units (SBUs).

A SBU is a part of an organisation for which there is a distinct external market. Different strategies can be adopted for different SBUs.

For example, Toyota and Lexus (part of Toyota) operate as separate SBUs with different strategies. Some fashion businesses successfully separate their exclusive ranges of clothing from their diffusion lines.

Further examples of competitive strategies

Cost Efficiency

Managing costs needs both resources and competences.

For example, modern, flexible machinery can cut production time and costs; having the competence to organise an efficient just-in-time inventory system will save inventory costs.

Differentiation through innovation

Innovation is increasingly seen as important for strategic success. The reasons are:

• increased rate of technical advances
• increased competition
• increased customer expectations.

In all functions that serve to produce goods and services, achieving superior innovativeness, relative to that of competitors, can help the firm to acquire new customers. Superior innovation gives a company something unique, something that its competitors lack until they are able to imitate the innovation. By the time competitors succeed in imitating the innovator, the innovating company has already built up such brand loyalty that its imitating competitors will find it difficult to attack their position.

Innovation can apply to:

• the nature of the product or service being supplied
• how the product or service is produced and delivered
• operating the firm in a new or novel way.

Total Quality Management (TQM)

Proponents of TQM argue that a programme to enhance quality (aiding differentiation) can end up reducing costs as well, thus aiding cost leadership.

Differentiation through knowledge management

Knowledge management involves the processes of:

• uncovering, or discovering, knowledge
• capturing knowledge
• sharing knowledge
• distributing knowledge
• levering knowledge
• maintaining knowledge

Knowledge management has become an important part of gaining and maintaining competitive advantage. Reasons for this are as follows.

• Both business and not-for-profit organisations are more complex so there is more knowledge to manage. For example, there are many more government regulations that have to be followed for health and safety. The government sets many more targets to monitor the performance of hospitals and schools.
• The environment, technology, competitors and markets are changing rapidly. Look at the pace of change in the broadcast/internet industry.
• The move from manufacturing to service industries means that a greater proportion of an organisation's knowledge is likely to be tacit. It is relatively easy to formally specify a product, but harder to specify everything that should happen in the successful delivery of a service.
• Greater job mobility means that, unless captured and recorded, valuable knowledge can be lost as staff move on.

Hyper-competition

Introduction

Hyper-competition is where the frequency, audacity, innovation and aggressiveness of competitors creates an environment of constant movement and change.

Examples are seen in:

• the impact of the internet on the music business
• technological developments in telephony
• bio-engineering/pharmaceuticals.

Hyper-competition means that sustaining competitive advantage through adopting a stable price-based strategy or differentiation-based strategy becomes more difficult as products and markets change quickly and radically.

Strategies for hyper-competitive environments

• Repositioning on the strategy clock

  For example, an organisation that was a differentiator could cut prices so that its former, relatively exclusive products, have price cuts and the products are perceived as being 'no-frills'.

• Competing successfully

  Do not be satisfied with current products; be unpredictable and radical; be a leader not a follower. It is, of course, difficult for an organisation to make the case for abandoning a currently successful formula so as to keep ahead of competition.

• Fight and overcome competitors' strategies

  For example, act to prevent lock-in by fighting a competitors' plan to gain market dominance with a new product. Imitate competitors and go one better.

• Barriers to entry may be easier to overcome in hyper-competition. If technology is changing, the competitors one-time safe, dominant position can become tenuous.

Sustaining competitive advantage

Once a competitive advantage is achieved it will be important that it is sustained. The capabilities needed to sustain competitive advantage are.

• Value of strategic capabilities. The strategic capability must be one that is of value to the customer. A distinctive capability is not enough: the strategic capability must be able to generate what customers value in terms of products or services.
• Rarity of strategic capabilities. Competitive advantage will not be attained if competitors have identical strategic capabilities. Unique or rare resources or competences are needed to allow the organisation to outperform its rivals.
• Robustness of strategic capabilities. Capabilities for competitive advantage should be robust, meaning that they are hard to imitate. Therefore, competitive advantage is not so often sustained through physical/tangible resources as these can be copied/acquired over time. More important is the way in which the resources are organised and deployed as these competences are, in general, more difficult to identify and imitate.

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