All organisations have a competitive strategy that defines the manner in which they position themselves in the market to maximise performance have competitive advantage. Thompson et al. (2022)[^1] state that two major factors define competitive strategy which are:
“(1) whether a company’s market target is broad or narrow and (2) whether the company is pursuing a competitive advantage linked to lower costs or differentiation. These two factors give rise to four distinct competitive strategy options, plus one hybrid option” (Thompson et al., 2022, p. 128)[^1].
Low-cost provider strategies
Possibly one of the most well known and visible strategies in the marketplace is to reduce costs in an organisation’s value chain while at the same time producing an acceptable product or service. Thompson et al. (2022 p. 129)[^1] define low-cost strategy as “striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers usually by under pricing rivals”.
Broad low-cost strategy: Striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers usually by under pricing rivals. Thompson et al. (2022, p. 129)[^1].
Costs are many and varied in any organisation and they need to be controlled at every opportunity. This is more important in industry where low margins exist.
Figure 1: Cost Drivers
Economies of scale provide larger organisations with the ability to lower the cost of production. When these are combined with the organisation’s experience accrued over time, then the cost is driven lower again as it finds more efficiencies.
Modification of the value chain can be a costly exercise because of capital requirements. Organisations will generally examine costs in detail to improve them wherever possible. Organisations need to find the balance between indulging in expensive and unnecessary capital investment when there are less costly alternatives to explore. Automation, digitisation and artificial intelligence can certainly provide attractive options, but the most efficient cost management needs to be found.
According to Thompson et al. (2022)[^1], low-cost strategy works best in five areas:
- When there is considerable price competition between sellers in the market;
- Products are virtually identical and readily available from a variety of sellers;
- When there are very few ways to achieve and product differentiation;
- Where there are low switching costs for buyers when changing suppliers;
- Where buyers are price sensitive and have bargaining power.
Broad differentiation strategies
Differentiation is creating a difference between what one organisation provides as a product or service and a competing organisation. In an educated and discerning market, this differentiation is essential to a competitive advantage. The differentiation creates separate markets almost that will attract different buyers; for example a brand of motor vehicle.
Determining the specific needs of buyers in the market is what marketing is all about. It is not always about physical difference either. Perceptions around brand, affluence and other emotional factors can be important.
Broad differentiation strategy: Seeking to differentiate the company’s product/service offering from rivals in ways that will appeal to a broad spectrum of buyers. Thompson et al. (2022, p. 129)[^1].
It is possible to create differentiation in all stages of the value chain, from raw materials through to customer service. The important object here is to create difference that competitors may find difficult to duplicate which will contribute to sustainable competitive advantage.
Thompson et al. (2022) refer to eight areas of value drivers to create difference.
Figure 2: Value Drivers
Where the low-cost provider strategy can work well in price elastic markets, differentiation works well in non price elastic markets where buyers are more conscious of other issues around a purchase such as brand, quality, status etc.
Successfully differentiating products and services provides opportunities for an organisation to:
- Obtain a better price for the product or service;
- Increase sales as more buyers are attracted because of the difference;
- Build brand loyalty through loyalty to the differences established.
Focused or niche strategies
Focused low-cost strategies and focused differentiation strategies are applied when an organisation seeks to service a small or niche market.
Focused low-cost strategy
Organisations seek to establish competitive advantage by identifying a niche area of a market and then bringing skills and knowledge to bear in reducing costs in the value chain.
Focused differentiation strategy
Smaller organisations may take advantage of a niche market when competing with larger organisations through differentiation. By identifying a buyer base and creating difference targeted at that buyer base, smaller organisations may prosper while larger ones offer a more generic product.
Best cost (hybrid) strategy
The best-cost strategy is a combination of both low-cost and differentiation strategies offering the best of both worlds. Essentially, this would involve an organisation creating difference in its product or service and offering it at a lower cost than competitors. There is a focus on marketing “value for money” through greater value by way of difference and the lower price being offered.
Figure 3: Distinguishing Features of the Five Generic Competitive Strategies
Blue Ocean strategy
This relatively new type of strategy was developed by Kim and Mauborgne in 2004[^2]. The concept is to identify and pursue a largely unsaturated market where competition is low or non-existent. This in turn provides opportunities for higher profits (Kim & Mauborgne 2014)^2. Examples of organisations that have used this strategy include Marvel, Nintendo and Air BnB.
There is reference to an article that discusses Porter’s generic strategies to firm performance that is worth reading with a link in the footnote (Islami et al. 2020).[^3]
This module has examined the generic competitive strategies organisations may deploy in order to gain a competitive advantage. These strategies fall within costs, differentiation, and focus or niche. Using one particular strategy over another will depend on the market in which the organisation operates. The best-cost strategy was also discussed where an organisation applies its skills to bring down costs and improve quality at the same time, resulting in quality and value propositions for customers at lower prices.
[^1]: Thompson A, Peteraf MA, Gamble JE and Strickland AJ (2022) Crafting and executing strategy: the quest for competitive advantage: concepts and cases, 23rd edition, international student edition, McGraw-Hill Education, New York, NY.
[^2]: Kim, WC & Mauborgne, R 2014, Blue ocean strategy, expanded edition: How to create uncontested market space and make the competition irrelevant, Harvard Business Review, Boston.
[^3]: Islami X, Mustafa N and Topuzovska Latkovikj M (2020) ‘Linking Porter’s generic strategies to firm performance’, Future Business Journal, 6(1):3, doi:10.1186/s43093-020-0009-1.