Competitive Strategies: Cost Leadership, Differentiation, Focus
Competitive Strategies for Business Success
Competitive strategy involves offensive or defensive actions to establish a defensible position within an industry. The goal is to effectively manage the five competitive forces and achieve a strong return on investment.
Overall Cost Leadership
Overall cost leadership requires aggressively building efficient facilities, pursuing cost reductions through experience, strictly controlling variable and fixed costs, preventing juvenile client accounts, and minimizing costs in areas like research and development, sales, and advertising. Achieving these objectives requires careful attention to cost control from leadership.
Differentiation
Differentiation generates higher profit margins, confronts the power of suppliers, and reduces the power of buyers by offering unique options that make them less price-sensitive. A company that differentiates itself to win customer loyalty is better positioned against substitute products.
Focus or Concentration
Focus or concentration aims to provide excellent service to a specific market by designing functional strategies with that market in mind. This strategy assumes that the company can better serve its segment than companies competing in broader markets. The difference lies in more satisfactorily meeting the needs of the target market, either at a lower price or by achieving both goals.
Stalemate
A company may face a stalemate if its organizational culture is poorly defined and its system of structures and motivation is contradictory.
Risks of Generic Strategies
The primary risks of generic strategies are failing to achieve or maintain them, and the possibility that the value of the advantage gained from the strategy erodes as the industry evolves.
Risks of Global Cost Leadership
- Technological change can negate prior learning or investments.
- New companies or rivals may achieve low-cost learning through imitation or investment in modern equipment.
- Inability to adapt to necessary changes in product or marketing due to a focus on costs.
- Cost inflation can reduce the company’s ability to maintain a price differential, making it vulnerable to competitors with strong brand images or differentiation strategies.
Risk of Differentiation
- The cost differential between low-cost competitors and the differentiating company grows, eroding brand loyalty. Customers may sacrifice features or services for significant savings.
- The need for the differentiating factor diminishes among buyers as they become more sophisticated.
- Imitation reduces perceived differentiation, a common phenomenon in mature industries.
Risks of Focus or Concentration Strategy
- The cost differential between general line competitors and the focused company increases, eliminating the cost advantages achieved by serving a small market or negating the differentiation achieved.
- The difference in desired products or services between the strategic market and the general market decreases.
- Competitors find submarkets within the strategic market, leading to a more focused approach.
The Need for Competitive Intelligence
An intelligence system on competition can draw from many sources, including public reports, executive speeches, trade press, sales force, customers, suppliers, rival product inspections, engineering staff estimates, and information from former employees of rival firms.