The task of crafting and executing strategy is a core leadership function. It is the starting point to maximize opportunities created by change and transform your organization. A firm’s strategy is the leadership’s game plan for achieving its vision, mission, and goals. It defines how you attract and please customers, grow the business, compete, and operate the company.
You have competitive advantage when your firm has an edge in attracting customers and in defending your market against rivals. To gain advantage you must persuade buyers your service offers superior value as compared to rivals.
Your value proposition is your promise to your customer. It is your firm’s unique mix of price and service. Your choice is to offer, by contrast to rivals, a low level of service and price or a superior level of service at a premium price.
Five Competitive Strategies
The choice of strategies, according to Michel Porter, is differentiated by four elements: lower cost, differentiation, mass, or niche market appeal. The combination of these elements provides five strategies (see Figure).
How do I choose a strategy? Start by asking “Do I want my firm to be a mass or niche market player? Do I want to serve an entire market or a distinct small portion of a market?” For example, Air Canada and American Airlines are mass market players. They offer various levels of service to domestic and international travellers. By contrast, Porter Air and SkyWest focus on offering service within a distinct region.
Your next question is “Does my firm pursue a low-cost or differentiated model?” Low cost should not be confused with low price. You may be low cost but not offer lower prices than your rivals. Your firm may pursue a low cost option to discipline rivals or dominate a market segment. For example, firms such as UPS and Ryan Air are constantly seeking ways to drive down operating costs to maintain an advantage over rivals. By contrast, to differentiate your firm focus on service elements. Apple, for example, differentiates itself by offering sleek products with unique applications unmatched by rivals.
Low-cost Provider Strategy
Success in this strategy requires you focus on lower cost. Strive to achieve a difficult to copy cost advantage. Your value proposition may include only the bare essential service features. Your goal is to be the low-cost leader, not to be one of many low-cost providers. For example, Southwest Airlines is the sector’s unmatched low-cost provider. Rivals have unsuccessfully attempted to copy its low-cost strategy.
A firm’s low-cost advantage may permit you to price below rivals and attract sufficient price-sensitive buyers to increase total profits. The reduction should be less than the firm’s cost advantage. Alternatively, you may maintain pricing and market share but use the cost advantage to earn higher margins and better returns on capital. Thus, low cost does not mean low price.
Firms whose strategy is to be the low-cost provider must: achieve and maintain a lower cost structure than rivals; emphasize cost reduction and control; stress market share. Market share may be pursued at the cost of profitability and lower margins. Some mass-market auto insurers are in this category.
A low-cost strategy works best when there is: vigorous price competition; the service is a commodity available from many vendors; it is difficult to achieve differentiation; the service application is standardized; switching cost is low; buyers have bargaining power; new entrants use low cost to build customer base. The risks are: the strategy can easily be copied; you become fixed on price, ignoring customer needs; technology opens cost reduction opportunities to rivals.
Differentiation incorporates a differentiating service that buyers prefer over a rival’s service. You must differentiate your service and create value which is not easily matched. You must not increase your cost above the premium you can charge to achieve differentiation. The benefits of a differentiation strategy are: it commands a premium price; increases sales; builds brand loyalty.
This strategy works best when: service differentiation is based on value to the customer; few rivals have a similar approach; change in technology and product innovation are fast-paced; there is a wide range of buyer needs and applications.
The pitfalls to this strategy occur when: customers do not see the value of your service or its unique features; the service has more features than customers need; the premium charged is perceived to be too high; your service difference with that of rivals is not perceptible; service features are easily copied.
Best-Cost Provider Strategy
This strategy emphasizes low cost coupled with differentiation. The idea is to provide a high-end product at a lower cost than rivals and deliver a value proposition that exceeds customer expectations. You must be a low-cost provider whose price undercuts rivals and exceeds service expectations.
This strategy’s competitive advantage consists in matching rivals on service but at a lower price. It can be a winner when the service features of rivals do not meet buyer needs or when they are value sensitive. The risk is you get squeezed from the bottom by a rival’s low-cost strategy and from the top by a differentiation strategy.
In a niche strategy you can be a low-cost or differentiated provider. In these strategies your enterprise is riveted around a narrow market. The objective is to serve the niche better than rivals. You choose a market where buyers have distinctive preferences, special and unique needs. Your firm develops unique capabilities to serve these needs.
To be successful with a niche strategy choose a market large enough to be profitable and with strong growth potential. You need the resources and capabilities to serve the niche. It must be difficult for multi-segmented competitors to meet buyer’s needs. Few if any rivals serve the niche. Your know-how serves as a defense from rivals.
This strategy has three risks. Rivals may match the niche provider’s ability to serve the niche. Niche customer preferences may shift and become similar to mass market preferences. They may shift allegiance to a mass-market rival who offers a superior value proposition. The niche may become attractive to rivals placing downward pressure on price and upward pressure on service.
Which Competitive Strategy?
Each of the above strategies positions your firm differently in the market. It defines how you will compete and creates market boundaries. Each strategy defines where the firm will focus. Will it emphasize cost control, its value chain, R&D, and/or marketing?
Your strategy choice is tied to your business model. The business model defines how the firm will generate revenue and a cost structure that yields attractive earnings. The business model supports the strategy. For example, a low-cost, mass-market strategy necessitates having a business model that emphasizes low cost. By contrast, a differentiation strategy requires that the business model’s value chain deliver a differentiated product at a price acceptable to buyers. In sum, the chosen strategy defines the business model.
Your strategy should not be based on choosing the middle ground, splitting the difference, or compromising. This rarely produces competitive advantage or a distinctive strategy. Compromise strategies are a sure way to end up in the middle of the pack, with a firm that has average cost, little by way of product differentiation, an average brand, and no prospects for becoming the industry leader. Having a competitive edge over your rivals is the primary contributor to above average earnings. To achieve sustainable competitive advantage you must make an unwavering commitment to one of the five strategies and firmly commit to its execution.
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