What are the strategies for competitive advantage?

A firm's relative position within its industry determines whether a firm's profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus.

1. Cost Leadership

In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average.

2. Differentiation

In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price.

3. Focus

The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.

The focus strategy has two variants.

(a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments.

References

• Porter, Michael E., "Competitive Advantage". 1985, Ch. 1, pp 11-15. The Free Press. New York.

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A competitive advantage is something that you offer or have that the competitor does not. There must be some compelling reasons for people to do business with you rather than with other businesses.

The need to identify your point of difference is important. The more similar your business is to many others, the greater your need to develop competitive advantages.

Identifying your advantage

A competitive advantage is what you are better at doing than anyone else. The smarter you can be about developing and promoting your competitive advantage, the better placed your business will be to succeed. Think about how you can differentiate yourself:

• Low pricing – you’re able to supply the cheapest product.
• Specialization – you service a specific niche market better than anyone else.
• Differentiation – you have the same product or service as others, but you make it different.

Specialization and differentiation are the most common small business strategies because larger business can usually get bulk deals and compete on price. Being the cheapest is the easiest tactic to implement (just reduce all your prices), but this is really the last thing to compete on, as it is often a losing strategy. 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.

Having the biggest margins is your ultimate goal. You can position yourself away from the cheap end of the market if you develop other competitive advantages, such as excellent, friendly service, good after sales service, a more specialized range of products, more knowledgeable staff, and so on.

10 ideas for building your competitive advantage

1. Awesome staff

One of your best (or worst) competitive advantages will be your staff. The advantage of having friendly, knowledgeable, proactive staff must never be underestimated. The key is to make sure that your staff are motivated, trained and perform well. Do this by:

• Establishing clear performance standards.
• Mystery shopping the standards.
• Starting incentive schemes.
• Sending them on training courses.
• Encouraging them to develop their product/service knowledge.
• Holding yearly selling courses.

2. Location, location, location

This advantage is most critical for retailers. If you don’t have a good location can you move or get the business out to the customers with business-to-business accounts, free pick-up and delivery, drop-off points or wholesaling through businesses with better locations?

3. Unique or exclusive products

You have an advantage if you can source product or deliver services that the competition cannot. If you’re competing against larger or similar businesses, can you establish a reputation for unique products people can’t find anywhere else?

4. A great website

A website that is more attractive or easier to navigate than competitors can be a distinct advantage. Can you create a better, easier, online shopping experience? More competitive shipping options, online discounts?

5. Become a star

Your own image can be a competitive advantage. No one else has quite your mix of skills, and you can build a ‘character owner’ image by having your name on as much material as possible, including:

• A signed mission statement in view of the public.
• Signing your name at the end of all newsletters and correspondence.
• Offering personal guarantees.
• Becoming prominent in your community.
• Becoming an authority in your field and a spokesperson for the industry.

6. Brush up on your technical knowledge

If you can’t compete on price, then offer superior knowledge to the other businesses around you. Consequently, you should make sure staff are well trained. You could ask your suppliers to provide training.

7. Get to know your suppliers

Being on good terms with your suppliers and their sales representatives is an often-overlooked competitive advantage over other businesses that haven’t bothered to develop this closeness. A good relationship will provide:

• Better service and support. You might get promotional material, displays and signs, plus training for your staff.
• Better supply and faster delivery.
• Better return policy and customer support.
• Early notification of specials or discounts.

Being linked to a large, well-known supplier is a definite competitive advantage. You might find that they do most of the market research, develop new products, conduct customer analysis and provide nation-wide branding and advertising that enhances your credibility. An independent will find it more difficult to compete with you.

8. Display your other services

To gain an advantage, offer things that the competitors don’t, especially if they cost very little. Sometimes this may simply involve displaying a list of what you already do for customers, but the majority may have been unaware of. Don’t simply expect customers automatically to be aware of your competitive advantages. You must advertise and promote them.

9. Strategic alliances and joint ventures

One of the best ways to compete against larger businesses is to form alliances and joint ventures with other businesses. For example, by banding together with other businesses in your industry, you can often gain better group discounts from suppliers than you would if you ordered on your own.

Joint venture marketing is another way of sharing advertising costs. An example is a group of shops in a location (such as a mall) joining together to produce an advertising supplement. But there are many variations on this theme you can brainstorm with your staff. The ability to form smart alliances and joint ventures is an increasingly important and distinguishing feature in the success of many businesses.

10. Speed

People want quick service, so the faster you can deliver your product or service the better. Hold regular staff meetings on how to streamline your business processes and fulfil or exceed customer requirements without sacrificing quality of delivery.