Harvard professor Michael E. Porter of the Harvard Business School introduced the concept of strategic thought and planning in the business world. Managers evaluate and choose strategies they think fits the profile of their company to find success via a competitive advantage. The two sources that yield the highest competitive advantage are in the businesses cost structure, and its ability to differentiate its business from their competitors.Also, a business that chooses to implement strategies based upon one or both of these strategies usually experience above-average profits, compared to a business that does not create choose to create competitive advantages with cost or differentiation that usually experience below-average profitability (Pearson J.
A. & Robinson R. B. , 2011, p. 215). However, to support a sustained competitive advantage, a firm must possess some specific capabilities.
The purpose of this paper is to discuss the required make or break capabilities in detail.Low-Cost Leadership Strategies A low-cost strategy is to gain a sustainable cost advantage over competitors by either underpricing them to increase market shares, or earning a higher profit by selling at the industry average. Low-cost leadership means low overall costs, not just manufacturing or production costs. To sustain a low-cost leadership strategy a business should have access to capital, skill and expertise in designing products, and a low cost base and/or other methods to drive costs below the competitors.The capital is required to invest significantly in production assets to act as a barrier of entry to the competitor.
The skill and expertise is so the business can do a better job than their rivals at performing the value chain activities efficiently and cost effectively. This may be possible by eliminating some cost-producing activities, or revamping the value chain. Improving value-chain activities could utilize Lean and Six Sigma to evaluate methods to continuously improve and reduce costs.Other methods could be to capture learning curves, manage costs and resource inputs, explore opportunities with other businesses as partners, explore capacity utilization, or other strategic choices related to operations. The skill and expertise is to revamp the value chain through examination.
Analyze the product design to see if there are ways to utilize lower cost materials. Eliminate the middleman if possible to reduce costs. Reengineer core business processes to eliminate steps or introduce computer technology to cut costs.The low-cost base is to decrease distribution costs through supplier costs or agreements, or obtaining an advantage that the competitor does not have.
A low-cost strategy involves the entire corporation culture/attitude. Involve employees in cost-control efforts to encourage ownership. Continuously document the efforts by benchmarking and scrutinizing cost-increase requests. Implement programs that promote continuous cost improvements such as Lean and Six Sigma. Successful low-cost producers wisely and aggressively invest in cost-saving strategies, but champion frugality.The competitive advantage is achieved through low-cost leadership by improving the company’s position over rivalries to compete on price, and to provide some protection from the bargaining leverage of powerful buyers and suppliers.
The lower cost acts as a barrier of entry of new competitors and improves the company’s position to protect against potential imitations. This type of strategy works best when competition is strong and the product is standardized or readily available from several suppliers. Most buyers use the product in the same way and thus incur low switching costs.This generally means buyers purchase large quantities and have significant bargaining power.
However if a business is overly aggressive in cutting price without increasing sales, profits will decrease. Low cost methods are easily imitated so it is important to remain focused upon additional features that may add value. Also monitor the buyer’s sensitivity to the price and how the product is used to ensure they have not changed. Continually evaluate how technological breakthrough may allow competitors to reduce costs.
Differentiation StrategiesA differentiation strategy incorporates features into the product or service that customers prefer over the competitors. This difference needs to create value for buyers, and is not easily matched, copied, or imitated by rivalries. This must be accomplished in a way that does not exceed the premium price the buyer is willing to pay. A powerful differentiation strategy is achieved when the uniqueness can be achieved in a way that buyers perceive as valuable, rivals find difficult to match, and can be incorporated at a cost well below the premium price that buyers are willing to pay.
To support a differentiation strategy a firm needs good research, development, and innovation that include a highly skilled and creative product development team. The corporate sales team must communicate the unique attributes that are perceived as better or different, and valued by the buyer. Also the company must have a reputation for quality and innovation. These capabilities allow a firm that successfully implements a differentiation strategy to command a premium price and/or increase unit sales and/or build brand loyalty that equals competitive advantage.The strongest differentiation competitive advantage is achieved when buyers find the product or service most appealing, and it is most difficult for the competitor to match or imitate.
To increase profitability over time, continually look for new product innovation, technical superiority, improve product quality and reliability and improve customer service. Differentiation attributes can be identified through purchasing and procurement activities, R&D in product, manufacturing and production, distribution and marketing areas, and sales and customer service areas.A differentiation based advantage can be achieved by incorporating features that lower the buyer’s overall cost of using the product, features that increase the buyers performance, features that enhance the buyer satisfaction in other ways, or simply by competing on the basis of superior capabilities. The product or service must signal value as well as deliver value. Buyers will not pay for something that is not perceived.
Buyers generally develop a loyalty to a brand they like. Differentiation puts a company in a better position to endure efforts of suppliers to raise prices.The buyer’s loyalty acts as a barrier to entry of competitors and helps to fend off substitutes that do not have comparable features. A differentiation strategy works best when it is unique, meaning other companies are not doing something similar. Buyers needs and technology continually change so the market and must be continually monitored. Trying to capitalize on features that buyers do not perceive as valuable will lead to failure.
The product must not exceed the buyer’s needs and cause the buyer to perceive the price is too high.It is important to signal value and to maintain the focus upon what buyers want, and not on the wrong attributes that are not valuable to the buyer. Combining Cost and Differentiation Strategies A low-cost strategy will overpower a differentiation strategy if and when buyers do not perceive the higher cost is worth the differentiation benefits. Ideally a combined emphasis of low-cost with a strategic emphasis on differentiation could produce an upscale product at a lower cost to give customers more value for their money.
Creating superior value by meeting or exceeding the buyers price expectations, and then using the cost advantage to underprice comparable brands, creates competitive advantage by matching close rivals on key product attributes and matching them on price. To be successful the company must provide attractive performance and features at a lower cost. This best cost producer can often out compete both the low-cost and differentiation strategy. Remember a successful strategy is only appealing if it significantly strengthens a firm’s competitive position.
