Success is achieved by choosing a generic strategy and following it. Below-average performance is associated with failure to achieve any of these generic strategies. The result is no competitive advantage, a stuck-in-the-middle position that results in lower performance.
Firms need to understand the genetic basis of their success and resist temptations to blur their strategies by making inconsistent moves. No frills cost leader should be wary of the pitfalls of moving to a higher cost base. A focus strategy involves limiting sales volume (since the target market is limited).
Once domination of a particular target segment has been achieved by the company that has adopted the focus strategy, there may be a temptation to move into other segments in order to achieve growth with the same competitive advantage. This can be a mistake if the new segments do not value the firm’s competitive advantage in the same way.
In most situations, strategies of differentiation and cost leadership are incompatible because resources have to be expended for differentiating a company’s offerings. But there are circumstances when both can be achieved simultaneously. A differentiation strategy may lead to market share domination which lowers cost through economies of scale and learning effects. Or a highly differentiated firm can pioneer a major process innovation that significantly reduces manufacturing costs leading to a cost leadership position. When differentiation and cost leadership coincide, performance is exceptional, since a premium price can be charged for a low-cost product.
Sources of Competitive Strategy
- Superior skills are distinctive capabilities of key personnel that set them apart from personnel of competing firms. For instance, superior selling skills may result in closer relationships with customers than what competing firms con achieve. Superior quality assurance skills can result in higher and more consistent product quality.
- Superior resources are tangible requirements that enable a firm to exercise its skills. Superior resources may be the number of salespeople, expenditure on advertising and sales promotion, number of retailers who stock the product (distribution coverage), expenditure on R&D, scale and type of production facilities and financial resources, brand equity, etc.
- Core competencies: The distinctive nature of these skills and resources add to a company’s core competencies.
- The value chain is a useful method for locating superior skills and resources. All firms consist of a set of activities that are conducted to design, manufacture, market, distribute and service its products. The value chain categorizes these into primary and support activities. This enables the sources of costs and differentiation to be understood and located. Primary activities include inbound physical distribution (warehousing, inventory control), operational (manufacturing), outbound physical distribution (delivery, order processing), marketing and services (installation, repair).
Support activities are found within all these primary functions and consist of purchasing, technology, human resource management, and the firm’s infrastructure. They are not defined within a given primary activity because they can be found in all of them. By examining each value-creating activity, the management can look for skills and resources that may form the basis for low cost or differentiated strategy. The linkage between value-creating activities should also be examined.
For instance, greater coordination between operations and in-bound physical distribution may give reduced costs through lower inventory levels. Value chain analysis can extend to the value chains of suppliers and customers. For instance, JIT can lower inventory costs. By looking at the linkages between a firm’s value chain and those of the suppliers and customers, improvement in performance can result that can lower costs or contribute to the creation of the differential position.
The value chain provides an understanding of the nature and location of skills and resources that provide the basis for competitive advantage. Cost analysis can also be done. Operating costs and assets are assigned to value activities and improvements can be made and cost advantage defended. If a firm discovers that its cost advantage is based on superior production facilities, it should be vigilant in upgrading those facilities to maintain its position against competitors.
If differentiation is based upon skills in product design, superiority in this function should be maintained. The identification of specific sources of advantage can lead to their exploitation in new markets where customers place a similarly high value on these resultant outcomes.
For a differential advantage to be realized, the firm not only needs to provide customer value, but the value should also be superior to that of competition. Besides an effective marketing mix, companies need to create fast reaction times to changes in marketing trends. Using advanced telecommunications, companies receive sales information from around the world 24 hours a day, every day of the year and react promptly to them.