If you cannot achieve and sustain a competitive advantage, you will not achieve the long-term performance levels needed to maximise your lifestyle and wealth.
To maximise success, you must understand the key choices you have for creating competitive advantage, make an appropriate choice and stick to it!
Not making a clear choice or not sticking to it, leads to strategic drift and undermines competitive advantage.
Competitive Advantage - Key Strategic Choices
There are two broad means of achieving competitive advantage and superior business performance:
Differentiation – providing superior unique value and commanding higher prices
Lower Cost – providing good value at lower production costs
That is, you can create superior profits by establishing:
A differentiation strategy to achieve above average product prices (increased revenue)
A low cost strategy to achieve below average production costs (reduced costs)
Competitive Advantage - Differentiation Strategy
To establish a competitive advantage based on a differentiation strategy, you must focus on providing superior outcomes across key items of customer value (something that will support above average prices).
With higher customer value, this can be translated into higher relative prices or growing market share to achieve superior performance.
It’s essential to understand that most customer segments have diverse views as to what satisfies their needs in terms of their preferred value and price permutation.
Creating a competitive advantage through a differentiation strategy commences with identifying important customer needs that have enough perceived value for customers to pay a higher price to have those needs fulfilled.
The increased value a differentiation strategy might target, may be in the form of:
In creating a competitive advantage through differentiation, it’s critical to clearly and consistently communicate the higher value to customers to ensure they will recognise and pay for it. This often involves a process of ongoing customer education.
Whilst a differentiation strategy is founded on the trade-off between the need to provide superior value and the increased costs of doing so, it does not mean costs are ignored. Even with higher prices, great care must be exercised in managing the trade-off between value and cost. You cannot:
Trim costs so far that your key points of difference no longer exist!
Allow costs to increase so far that the benefits of higher pricing are lost!
In creating and implementing a differentiation strategy, it’s essential to:
Choose a target market segment (customer, product, geographic region and so forth) with a set of higher-level needs and to service those customers and needs exclusively
Have a product or service that is readily perceived as having superior value
Clearly and consistently communicate your superior value
Carefully manage the trade-off between higher value and the higher cost of providing it
Competitive Advantage – Low Cost Strategy
To establish a competitive advantage based on a low cost strategy, you must focus on:
Serving customers who have a lower set of needs that can be served at a lower cost
Stripping out production costs to serve those particular needs
With lower production costs, this can be translated into higher relative profits or growing market share despite more modest pricing.
In establishing a low-cost competitive advantage, it’s necessary to identify customers that have specific needs but can live without the frills (and associated costs) and to serve that market segment particularly well.
Instead of providing extra features, advantage comes from managing the critical cost drivers to translate more modest pricing, into above-average industry profits.
It’s important to understand that a cost leadership strategy does not mean selling for the lowest price. It means pursuing the lowest production cost for a specific and unique targeted customer value proposition.
In essence, with a low-cost strategy, it’s essential to:
Have a good quality product or service
Choose a target market segment (customer, product or service, geographic region and so forth) with lower level needs and to service those needs exclusively
Focus on cost reduction across the business and making it part of the culture of the business
Key Strategic Alternatives
While there are only two broad means for achieving superior business performance, they can each be used in conjunction with either a narrow or a broad focus. That is, you can choose to focus on:
A broad product or service line – a broader cross-section of product, customers, market segments, etc
A narrow product or service line – a particular type of product, customer, market segment, etc
Together, the choice for achieving superior business performance (differentiation or low cost) coupled with the choice of focus (narrow or broad) provide the four broad strategic options of:
Narrow Low Cost
Broad Low Cost
It’s critical that you are clear on your choice so that you do not unwittingly undermine the competitive advantage you seek to achieve.
Two of the most common errors made in the pursuit of competitive advantage are:
Not making a clear strategic choice
Not sticking to the strategic choice made
Instead, businesses often chase growth wherever they can find it and as a direct consequence, fail to either:
Establish a unique value proposition, or
Develop the capabilities needed to achieve superior business performance!
To succeed, you must dedicate yourself to doing something unique and become good enough at it, that you create the competitive advantage necessary to achieve above average profits.
Sustained Business Growth!
The keys to a successful business strategy are:
Choosing a different basis for competitive advantage to your rivals (differentiation versus cost leadership)
Focusing on either a narrow or broad targeted segment
Implementing the chosen strategy consistently over the long term
Changing focus only if there is a significant shift in the business environment or market conditions
If you would like to learn more about how to create a competitive advantage that will set you on the path to superior industry performance, give the team at Fortitude Business Consulting a call on 1300 551 040.