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  • Strategy And Competitive Advantage

    STUDENT: Hi, Teacher. I’ll start with this Module myself, and I’ll do it by making a statement of my own about competitive advantage: "You have got to come up with a plan. You can't wish things will get better."

    TEACHER: A very clever statement indeed. An action plan is needed, not just wishful thinking. Congratulations, Student!

    STUDENT: Thanks, but I must confess that I was quoting John F. Welch, the famous ex CEO of General Electric!

    TEACHER: OK, you fooled me. I should have guessed that you weren’t as clever as that! Anyway, let me tell you something about winning business strategies; they are grounded in sustainable competitive advantage. Now, show me again how clever you are, and tell me what competitive advantage means, please.
    STUDENT: Gladly. A company has competitive advantage whenever it has an edge over rivals in attracting customers and defending against competitive forces.

    TEACHER: Not too bad. Let me add that there are many sources of competitive advantage:

    * having the best-made product on the market,
    * delivering superior customer service,
    * achieving lower costs than rivals,
    * being in a more convenient geographic location,
    * proprietary technology,
    * features and styling with more buyer appeal,
    * shorter lead times in developing and testing new products,
    * a well-known brand name and reputation,
    * and providing buyers more value for the money (a combination of good quality, good service, and acceptable price).

    Essentially, though, to succeed in building a competitive advantage, a company's strategy must aim at providing buyers with what they perceive as superior value -a good product at a lower price or a better product that is worth paying more for.

    This Module focuses on how a company can achieve or defend a competitive advantage.

    The definitive work on this subject is Michael E. Porter, Competitive Advantage (New York: Free Press, 1985). This Module draws heavily on Porter's pioneering contribution.

    A company's competitive strategy consists of the business approaches and initiatives it takes to attract customers, withstand competitive pressures, and strengthen its market position.

    STUDENT: You mean that the objective, quite simply, is to knock the socks off rival companies!

    TEACHER: Sure, but of course, it must be done ethically and honorably!

    STUDENT: Mmm... No comment!

    TEACHER: As you wish. Let’s continue. A company's strategy for competing typically contains both offensive and defensive actions, with emphasis shifting from one to the other as market conditions warrant. And it includes short-lived tactical maneuvers designed to deal with immediate conditions, as well as, actions calculated to have lasting impact on the firm's long-term competitive capabilities and market position.

    STUDENT: What is the difference between Business Strategy, which we discussed before, and Competitive Strategy?

    TEACHER: Competitive strategy has a narrower scope than business strategy. Business strategy not only concerns the issue of how to compete but also embraces functional area strategies, how management plans to respond to changing industry conditions of all kinds (not just those that are competition-related), and how management intends to address the full range of strategic issues confronting the business.

    On the other hand, competitive strategy deals exclusively with management's action plan for competing successfully and providing superior value to customers.

    In practice there are as many competitive strategies as there are competitors. However, five categories of competitive strategy approaches stand out:

    1 . A low-cost leadership strategy -Striving to be the overall low-cost provider of a product or service that appeals to a broad range of customers.

    2. A broad differentiation strategy -Seeking to differentiate the company's product offering from rivals' in ways that will appeal to a broad range of buyers.

    3. A best-cost provider strategy -Giving customers more value for the money by combining an emphasis on low cost with an emphasis on upscale differentiation; the target is to have the best (lowest) costs and prices relative to producers of products with comparable quality and features.

    4a. A focused or market niche strategy based on lower cost -Concentrating on a narrow buyer segment and outcompeting rivals on the basis of lower cost.

    4b. A focused or market niche strategy based on differentiation -Offering niche members a product or service customized to their tastes and requirements.

    1. Low-Cost Provider Strategies

    Striving to be the industry's overall low-cost provider is a powerful competitive approach in markets where many buyers are price-sensitive. The aim is to open up a sustainable cost advantage over competitors and then use the company's lower-cost edge as a basis for either underpricing competitors and gaining market share at their expense or earning a higher profit margin selling at the going market price.

    A cost advantage generates superior profitability unless it is used up in aggressive price cutting efforts to win sales from rivals.

    STUDENT: I can think of a good example in the airline industry; no-frills Southwest Airlines gained a lot of market share and achieved high profitability by being the low cost alternative to the traditional airlines.

    TEACHER: Excellent example. Achieving low-cost leadership typically means making low cost relative to competitors the theme of the firm's entire business strategy -though low cost cannot be pursued so zealously that a firm's offering ends up being too spartan and frills-free to generate buyer appeal.

    Opening Up a Cost Advantage

    To achieve a cost advantage, a firm's cumulative costs across its value chain must be lower than competitors' cumulative costs.

    There are two ways to accomplish this:

    * Do a better job than rivals of performing internal value chain activities efficiently and of managing the factors that drive the costs of value chain activities.
    * Revamp the firm's value chain to bypass some cost-producing activities altogether.

    Now, since you mentioned Southwest Airlines, which of these way did they use?

    STUDENT: Both. They achieved lower costs in the value chain mainly by lowering labor costs. And they bypassed some cost-producing activities like serving food and beverages to passengers.

    TEACHER: Exactly.

    2. Differentiation Strategies

    Differentiation strategies become an attractive competitive approach whenever buyers' needs and preferences are too diverse to be fully satisfied by a standardized product. To be successful with a differentiation strategy, a company has to study buyers' needs and behavior carefully to learn what buyers consider important, what they think has value, and what they are willing to pay for. Then the company has to incorporate one, or maybe several, attributes and features with buyer appeal into its product/service offering -enough to set its offering visibly and distinctively apart.

    Competitive advantage results once a sufficient number of buyers become strongly attached to the differentiated attributes and features. The stronger the buyer appeal of the differentiated features, the stronger the company's competitive advantage.

    Successful differentiation allows a firm to:

    * Command a premium price for its product, and/or
    * Increase unit sales (because additional buyers are won over by the differentiating features), and/or
    * Gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features).

    Differentiation enhances profitability whenever the extra price the product commands outweighs the added costs of achieving the differentiation. Company differentiation strategies fail when buyers don't value the brand's uniqueness enough to buy it instead of rivals' brands and/or when a company's approach to differentiation is easily copied or matched by its rivals.

    STUDENT: I noticed that the continuing success of differentiation depends very much on the level of income of the target group. As income falls, people start to care less for differentiation and care more for lower costs of similar products. And vice-versa, of course.

    TEACHER: Very true. Now let’s talk about...

    Types of Differentiation Themes

    Companies can pursue differentiation from many angles:

    * a different taste (Dr Pepper and Listerine),
    * special features (Jenn Air's indoor-cooking tops with a vented built-in grill for barbecuing),
    * superior service (Federal Express in overnight package delivery),
    * spare parts availability (Caterpillar guarantees 48-hour spare parts delivery to any customer anywhere in the world or the part is furnished free),
    * more for the money (McDonald's and Wal-Mart),
    * engineering design and performance (Mercedes in automobiles), prestige and distinctiveness (Rolex in watches),
    * product reliability (Johnson & Johnson in baby products),
    * quality manufacture (Honda in automobiles),
    * technological leadership (3M Corporation in bonding and coating products),
    * a full range of services (Merrill Lynch),
    * a complete line of products (Campbell’s soups),
    * and top-of the-line image and reputation (Brooks Brothers and Ralph Lauren in menswear, Kitchen Aid in dishwashers, and Cross in writing instruments).

    3. The Strategy Of Being A Best-Cost Provider

    This strategy aims at giving customers more value for the money. It combines a strategic emphasis on low cost with a strategic emphasis on more than minimally acceptable quality, service, features, and performance. The idea is to create superior value by meeting or exceeding buyers' expectations on quality-service-features-performance attributes and by beating their expectations on price.

    The strategic objective is to become the low-cost provider of a product or service with good-to-excellent attributes, then use the cost advantage to underprice brands with comparable attributes. Such a competitive approach is termed a best-cost provider strategy because the producer has the best (lowest) cost relative to producers whose brands are comparably positioned on the quality-service-features-performance scale.

    The competitive advantage of a best-cost provider comes from matching close rivals on key quality-service-features-performance dimensions and beating them on cost. To become a best-cost provider, a company must match quality at a lower cost than rivals, match features at a lower cost than rivals, match product performance at a lower cost than rivals, and so on. What distinguishes a successful best-cost provider is expertise in incorporating upscale product or service attributes at a low cost, or, to put it a bit differently, an ability to contain the costs of providing customers with a better product.

    The most successful best-cost producers have the skills to simultaneously manage unit costs down and product caliber up.

    A best-cost provider strategy has great appeal from the standpoint of competitive positioning. It produces superior customer value by balancing a strategic emphasis on low cost against a strategic emphasis on differentiation. In effect, it is a hybrid strategy that allows a company to combine the competitive advantage of both low cost and differentiation to arrive at superior buyer value. In markets where buyer diversity makes product differentiation the norm and many buyers are price and value sensitive, a best-cost producer strategy can be more advantageous than either a pure low-cost producer strategy or a pure differentiation strategy keyed to product superiority. This is because a best-cost provider can position itself near the middle of the market with either a medium-quality product at a below-average price or a very good product at a medium price. Often the majority of buyers prefer a mid-range product rather than the cheap, basic product of a low-cost producer or the expensive product of a top-of-the-line differentiator.

    4. Focused Or Market Niche Strategies

    What sets focused strategies apart from low-cost or differentiation strategies is concentrated attention on a narrow piece of the total market. The target segment or niche can be defined by geographic uniqueness, by specialized requirements in using the product, or by special product attributes that appeal only to niche members. The objective is to do a better job of serving buyers in the target market niche than rival competitors. A focuser's basis for competitive advantage is either

    1. lower costs than competitors in serving the market niche or
    2. an ability to offer niche members something different from other competitors.

    * A focused strategy based on low cost depends on there being a buyer segment whose requirements are less :costly to satisfy compared to the rest of the market.
    * A focused strategy based on differentiation depends on there being a buyer segment that demands unique product attributes.

    Using a focused strategy to compete on the basis of low cost is a fairly common business approach. Producers of private-label goods have lowered their marketing distribution, and advertising costs by concentrating on direct sales to retailers and chain discounters who stock a no-frills house brand to sell at discount to name brand merchandise. Discount stock brokerage houses have lowered costs by focusing on customers who are willing to forgo the investment research, advice, and financial service offered by full-service firms like Merrill Lynch in return for 30 percent or more com mission savings on their buy-sell transactions. Pursuing a cost advantage via focusing works well when a firm can find ways to lower costs significantly by limiting its customer base to a well-defined buyer segment.

    At the other end of the market spectrum, companies like Ritz-Carlton, Tiffany's Porsche, and Haagen-Dazs crafted successful differentiation-based focused strategies targeted at upscale buyers wanting products/services with world-class attributes.

    STUDENT: They go for "the cream of the cream", right?TEACHER: Correct. Indeed, most markets contain a buyer segment willing to pay a big price premium for the very finest items available, thus opening the strategic window for some competitors to employ differentiation-based focused strategies aimed at the very top of the market pyramid.

    And that’s all, Student. Bye!


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