Competitive advantage - Marketing Strategy

The notions of competitive advantage and marketing strategy are intrinsically linked. Competitive advantage is the process of identifying a fundamental and sustainable basis from which to compete. Ultimately, marketing strategy aims to deliver this advantage in the market place. Porter (1980) identifies three generic strategies – fundamental sources of competitive advantage. These are: cost leadership, differentiation and focus. Arguably,these provide a basis for all strategic activity and underpin the large number of marketing strategies available to the organization. Additionally, management needs to define the competitive scope of the business – targeting a broad or narrow range of industries/customers (see Figure below),
essentially either operating industry-wide or targeting specific market segments.Each generic strategy is examined in turn.

The formulation of strategy

The formulation of strategy

Competitive advantage

Competitive advantage

Cost leadership :

One potential source of competitive advantage is to seek an overall cost leadership position within an industry, or industry sector. Here the focus of strategic activity is to maintain a low cost structure. The desired structure is achievable via the aggressive pursuit of policies such as controlling overhead cost, economies of scale, cost minimization in areas such as marketing and R&D, global sourcing of materials and experience effects. Additionally, the application of new technology to traditional activities offers significant opportunity for cost reduction.

Difficulties can exist in maintaining cost leadership. Success can attract larger, better resource competitors. If market share falls, economies of scale become harder to achieve and fixed costs, such as overheads, are difficult to adjust in the short-to-medium term. Additionally, cost leadership and high volume strategy are likely to involve high initial investment cost sand are often associated with ‘commodity’ type products where price discounting and price wars are common. Remember, low cost does not need to equate automatically to low price. Products provided at average, or above average, industry price (while maintaining cost leadership) can generate higher than average margins.

The basic drivers of cost leadership include:

  • Economy of scale :This is perhaps the single biggest influence on unit cost. Correctly managed, volume can drive efficiency and enhance purchasing leverage. Additionally, given large-scale operations, learning and experience effects (see later) can be a source of cost reduction.
  • Linkages and relationships :Being able to link activities together and form relationships can generate cost savings. For example, a ‘just-in-time’manufacturing system could reduce stockholding costs and enhance quality. Forging relationships with external organizations is also vital. If industry partners were to share development and distribution costs, or activities were‘outsourced’ to specialist operators, a substantial reduction in overheads is possible.
  • Infrastructure :Factors such as location, availability of skills and governmental support greatly affect the firm’s cost base. Given the development of information technology and the global economy it is possible to have a worldwide infrastructure and selectively place activities in low-cost areas.

Differentiation :

Here the product offered is distinct and differentiated from the competition. The source of differentiation must be on a basis of value to the customer. The product offering should be perceived as unique and ideally offer the opportunity to command a price premium. Will customers pay more for factors such as design, quality, branding and service levels? The skills base for a differentiation strategy is somewhat different from a cost leadership strategy and will focus on creating reasons for purchase, innovation and flexibility. Remember, often it is the perception of performance as opposed to actual performance that generates differentiation. There are several ‘downsides’ to this type of strategy. Firstly, it can be costly with associated costs outweighing the benefits. Secondly, innovation and other initiatives can be duplicated by competitors. Thirdly, customer needs change with time and the basis of differentiation can become less important as customers focus on other attributes.For example, in the car market, safety may now be seen as more important than fuel economy.

Common sources of differentiation include:

  • Product performance :Does product performance enhance its value to the customer? Factors such as quality, durability and capability all offer potential points of differentiation. Performance is evaluated relative to competitors’ products and gives customers a reason to prefer one product over another.
  • Product perception :Often the perception of a product is more important than actual performance. Hopefully, the product has an enduring emotional appeal generating brand loyalty. This is commonly achieved via marketing communications (advertising, branding, endorsement, etc.) and direct experience of customer groups.
  • Product augmentation :We can differentiate by augmenting the production a way that adds value. For example, high levels of service, after-sales support, affordable finance and competitive pricing all serve to enhance the basic product offering. It is common for distributors, such as retailers, to provide the added-value augmentation. Product augmentation is dealt with in later.

Focus :

The organization concentrates on a narrower range of business activities.The aim is to specialize in a specific market segment and derive detailed customer knowledge. This focus, or niche, strategy can also generate the benefits of cost leadership or differentiation within a defined market segment(see Figure below). For example, it may be possible to obtain cost leadership within a chosen segment or that segment may regard your product offering as differentiated. Success within a specialist niche can attract competitors – perhaps much better resource. Additionally, the narrow business base means more susceptibility to downturns in demand from key customer groups.

A focus strategy is based on factors such as:

  • Geographic area :Using geographic segmentation allows product to be tailored to local needs. The local association may offer the potential to differentiate the offering (e.g. Champagne comes from a specific French region) and protect the market from larger predators. Another rationale for such segmentation is to serve markets too small or isolated to be viable on a large scale (e.g. rural communities).
  • End-user focus :It is possible to focus on a specific type of user as opposed to the entire market. Specialization offers the opportunity to get ‘close’ to customers and have a better understanding of their needs (e.g. specialist hi-fi manufacturer). Additionally, within a narrow segment the focused organization may be able to offer the choice, service and economy-of-scale not available to more broadly based competitors. This strategy often works by selecting specific points on the price/quality spectrum within a given market (e.g. discount food retailer).
  • Product/product line specialist :The organization focuses on a single product type or product line. Value is derived from the specialization in terms of skills, volume and range (e.g. industrial power supplies).

Consistency and the alternative view :

The Porter (1980) view of generic strategy supports the need for consistency of approach. The organization needs to adopt a definite generic strategy. Attempting to mix the above strategies, within a defined marketplace, may result in failing to achieve the potential benefits and result in the organization being ‘stuck in the middle’ of either low cost, differentiated or focused strategies. Figure below illustrates this.

Porter’s concept of competitive advantage advocates pursuing one generic strategy and thus avoiding a low profit ‘stuck-in-the-middle’ position. However, alternative views exist. The adoption of common production, quality,marketing and management philosophies by industry competitors may mean that effective differentiation or absolute cost leadership is rarely achieved. Additionally,what managers are not concerned with controlling costs? Therefore differentiation strategies need a cost focus. It is also possible to follow‘hybrid strategies’ aiming to offer added value and lower cost.

Inconsistent strategy

Inconsistent strategy

Indeed, Fulmerand Goodwin (1988) point out that the two strategies (cost leadership and differentiation) are not mutually exclusive. For instance, total quality management have resulted in superior quality and cost reductions. The reality of modern business is that many successful organizations are ‘stuck in the middle’ within their competitive environments. This is not to decry the importance of establishing competitive advantage and consistency of approach.It merely serves to illustrate the competitive nature of modern business and the importance of uncovering and optimizing all available sources of competitive advantage. It is a question of how best to add value within the context of the strategic business environment.

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