Competitive Advantage - Definition
A competitive advantage is an
advantage over competitors gained by offering consumers greater value, either
by means of lower prices or by providing greater benefits and service that justifies
higher prices.
Competitive Strategies
Following on from his work analysing
the competitive forces in an industry, Michael Porter suggested four "generic" business
strategies that could be adopted in order to gain competitive advantage. The
four strategies relate to the extent to which the scope of a businesses'
activities are narrow versus broad and the extent to which a business seeks to
differentiate its products.
The four strategies are summarised
in the figure below:
The differentiation and cost
leadership strategies seek competitive advantage in a broad range of market
or industry segments. By contrast, the differentiation focus and cost
focus strategies are adopted in a narrow market or industry.
Strategy - Differentiation
This strategy involves selecting one
or more criteria used by buyers in a market - and then positioning the business
uniquely to meet those criteria. This strategy is usually associated with charging
a premium price for the product - often to reflect the higher production
costs and extra value-added features provided for the consumer. Differentiation
is about charging a premium price that more than covers the additional
production costs, and about giving customers clear reasons to prefer the
product over other, less differentiated products.
Examples of Differentiation
Strategy: Apple iPhone, Ferrari Cars
Strategy - Cost Leadership
With this strategy, the objective is
to become the lowest-cost producer in the industry. Many (perhaps all) market
segments in the industry are supplied with the emphasis placed minimising
costs. If the achieved selling price can at least equal (or near)the average
for the market, then the lowest-cost producer will (in theory) enjoy the best
profits. This strategy is usually associated with large-scale businesses
offering "standard" products with relatively little differentiation
that are perfectly acceptable to the majority of customers. Occasionally, a
low-cost leader will also discount its product to maximise sales, particularly
if it has a significant cost advantage over the competition and, in doing so, it
can further increase its market share.
Examples of Cost Leadership: Walmart/ASDA, Nissan
Strategy - Differentiation Focus
In the differentiation focus
strategy, a business aims to differentiate within just one or a small number of
target market segments. The special customer needs of the segment mean that
there are opportunities to provide products that are clearly different from
competitors who may be targeting a broader group of customers. The important
issue for any business adopting this strategy is to ensure that customers
really do have different needs and wants - in other words that there is a valid
basis for differentiation - and that existing competitor products are not
meeting those needs and wants.
Examples of Differentiation Focus: Sky 3D, Alienware
Strategy - Cost Focus
Here a business seeks a lower-cost
advantage in just on or a small number of market segments. The product will be
basic - perhaps a similar product to the higher-priced and featured market
leader, but acceptable to sufficient consumers. Such products are often called
"me-too's".
Examples of Cost Focus: Many smaller
retailers featuring own-label or discounted label products.
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