Building competitive advantage; Three stages - Strategic Management

Competitive advantage is the edge you enjoy over other businesses; the reason why people choose to do business with you rather than your competitors. Without some distinct competitive advantages you're unlikely to remain in business for long. Your task therefore is constantly to search for ways to improve, develop, enhance your existing competitive advantages or discover new competitive advantages that will make doing business with you more attractive and compelling than with other businesses. It is all very well talking about the advantages of competitive advantage," you might say, "but how do I actually go about building competitive advantage for my business?" The three strategies that most businesses consider are:

  1. Cost leadership
    This means that your competitive advantage lies in being the cheapest (for example, discount warehouses, cheap clothing outlets or the large supermarkets).
  2. Focus
    This means servicing a particular market better than anyone else (a dairy for locals, a specialist business such as technical equipment repairs, etc). This can be an effective technique for the small business struggling to compete against larger businesses. For example, a small hardware store might find it impossible to compete with the pricing of power tools and hardware supplies on the shelves of a discount warehouse or large chain of stores. So there is no room for cost leadership. But by focusing on offering a wider range (in a narrower field) of tools and equipment and more in-depth knowledge of the hardware it sells, the small hardware store builds a competitive edge. The store can capitalize on the fact that the average sales person in a large chain store will have very little knowledge of the many thousands of stocked items on the shelves. It can therefore promote the specialist knowledge of its staff and hold demonstration days to help people get the maximum out of power tools and equipment, etc. Building on this, it can offer better after-sales service, delivery and back up, all value-added options that chain stores are not really interested in providing.
  3. Differentiation
    This involves being different from the others. You might have the same product or service as others, but you make it different. Notice that you do not have to have a unique product in order to use differentiation. You can start out with exactly the same product, service or raw materials commonly available in the marketplace, but add features that differentiate it from the rest. For example, KFC have taken a standard food product, chicken, and made it different. They have done this by preparing chicken pieces with special recipes and then packaging, branding and promoting the resulting product to differentiate it from all other businesses that sell chicken-based food products. In the same way, McDonald's has taken the humble hamburger, an item simple enough for just about anyone to produce, and added value to it in a way that sharply differentiates it from the rest. Some would argue that it is comparatively easy to produce a better tasting hamburger than McDonald's, but this does not stop McDonald's from selling many millions of hamburgers every day.

Two strategies together
Note that you can often have two strategies working together.
As we've seen, Focus and Differentiation are the most common small business strategies because large business can usually get bulk deals and compete on price. The chances that you can be the cheapest and survive are not good, because you will usually be competing against companies with far more financial muscle than you have. In addition, a focus on price will erode your profitability so it is a strategy you should avoid until you have exhausted other options.

So most small businesses either concentrate on a particular market (focus) or try to make their product or service so different from the competition that people perceive this difference.

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Strategic Management Topics