- Writing a Business Plan
- Financial Statements
- Business Forecasting
- Business Checklist
THREE COMPETITIVE STRATEGIES
Companies develop and implement several strategies each and every day to achieve or work toward achieving short-term and long-term objectives. Strategies may be designed to achieve sales increases, to reduce expenses, to improve production capabilities, to motivate employees, to improve return on investment, to increase profit margins, to increase product awareness, to provide superior customer service and so on. Such strategies are considered functional area strategies and operating strategies. Although these types of strategies are important to the success of any business, you and your management team must be directed by one or two competitive strategies.
A competitive strategy is what allows your business to successfully compete against other rivals within the industry. Strategic analysts suggest only three types of competitive strategies exist; namely, 1) Low Cost Producer Strategy, 2) Differentiation Strategy, and 3) Focus or Niche Strategy. Below discusses each type of competitive strategy.
1). Low Cost Producer Strategy
As you might suspect, a low cost producer strategy is based on producing a product or service for the lowest conceivable cost. Such a strategy provides the business with a cost advantage relative to competitors. The cost advantage resulting from a business employing a low cost producer strategy provides them with two options. 1) the business can "undercut" competitors thus increasing their share of the market. Or 2) they may continue to sell the product or service at a price similar to competitors, thus receiving a higher profit margin.
A low cost producer strategy tends to operate well in industries where consumers are sensitive to prices. In addition, this strategy is generally successful in industries where the consumers can easily switch to another supplier of product or service (i.e. it does not cost the consumer anything to switch companies).
A firm contemplating this strategy must not dramatically sacrifice the quality of the product in an attempt to reduce their production costs. If your product or service lacks the quality demanded by the consumer, it probably won't sell well. If the product is not appealing to the customer, chances are they will seek your competitors. Ways to reduce costs might include:
Passing your savings onto the consumer, which is one of the options a low cost producer can provide, is usually the most vulnerable strategy a business can employ. It is so easy to match or attack - a new business may spring up tomorrow that has the ability to produce the product or service at even lower costs. Be aware of this when deciding on your competitive strategy.
One final note on the low cost producer strategy. Lets assume for a moment that you are planning to establish a small business, selling home stereos. You decide to underprice all competitors. The first question is "would you use the low cost producer strategy"? The answer is NO - there is no way you could be a low cost producer with the likes of Wal-Mart and K-Mart hanging around. These companies purchase their products in large quantities and receive volume discounts. Therefore, your business probably would not have a cost advantage over these entities. You would have to compete in other ways, such as service, quality, convenience, brand names, and so on. The second question is "can you undercut all other competitors. The answer is YES and if you wanted to, you could give the stereos away for free. Chances are, however, the operation would NOT be open for long.
2). Differentiation Strategy
The differentiation strategy is used when consumer needs, wants, interests and/or desires are so assorted that a standardized product does not satisfy their appetite. In other words, the differentiation strategy is based on learning what features and attributes are important to the majority of consumers and then incorporating or adding those features and attributes to their product. Such additions make the product or service more important, desirable and valuable to the consumer. The company using a differentiation strategy generally gains a competitive advantage over existing operators within the industry.
Since consumers place more value on differentiated products and services, they are willing to pay a premium or higher price. This last statement brings up two important issues: First: the cost to offer the differentiated feature or attribute must not outweigh the price consumers are willing to pay for the feature and attribute. Second: the higher price charged by the firm for the differentiated feature must not exceed the amount consumers are willing to pay for the "additions" or new feature. Therefore, careful research is required for both considerations.
Lets assume a pizza parlor delivers pizza to its customers with no guarantee of arrival time. Another might promise a 30 minute delivery guarantee within a specific area or the pizza is free. The pizza parlor with the 30 minute delivery promise has differentiated the method of providing service. If consumers value this differentiated feature, then the pizza shop will likely enjoy increased market share, be able to charge a higher price, and/or attract and maintain loyal customers.
Other differentiating examples would include; better training, faster service, warrantees, offering extended credit terms, better price, customer service, outstanding technical support, higher quality, cleaner facilities, offering free coffee, friendly and courteous staff, money back guarantees, offer products in different colors, adding one or more features to a product or service, and the list goes on and on.
A computer keyboard manufacturer, for example, may decide to differentiate its keyboard from all other competitors by attaching a wrist support mechanism. If a demand is present and if there is a strong consumer need for the wrist support, retailers are more likely to place the keyboards on their shelves. If customers perceive the product to be more valuable, then a premium price may be charged by all channels.
The risk of differentiating is realized when the customer sees no value in the differentiation. For instance, customers being served by the two pizza shops may see little or no value in the 30 minute delivery guarantee. As a result, they feel the guarantee is not worth paying extra. At the same token, retailers or end customers, targeted by the keyboard manufacturer, may not see the need for a wrist support. Therefore, companies basing their strategy on differentiation, must conduct valuable research to determine if the differentiated feature or attribute is desired by consumers, and if so, what perceived value do they attach to it.
3). Focus or Niche Strategy
A business employing a focus strategy targets (focuses on) a small segment of the marketplace that is not well served by existing businesses. A focus or niche company produces or supplies the narrow segment with products and services that meet their needs, wants, interests, and desires. The philosophy behind the focus strategy is to serve a narrow group especially well, rather then targeting a wide market and serving them only adequately or inadequately. Do not be confused with the word niche - it simply means a small or narrow segment of the market.
Manufacturing an automobile to accommodate people who are four feet tall is an example of a focus or niche strategy. Such an automobile, however, may not prove profitable since few consumers are four feet tall and own a valid driver's licence. Developing wide shoes for people with extra wide feet or supplying clothing for extremely petite women are examples of focus or niche strategies.
The focus strategy does not necessarily require an alternation in a product or service. For instance, locating an electronics shop in your home town can be an example of a focus or niche strategy, if and only if;
Another example of a niche business would be a video store that rents only "martial art" movies. The business would be different from rival movie rental businesses since it targets only one specific group or segment or the marketplace. In addition, the movie rental store will most likely have a much larger selection of martial art movies, a greater knowledge of martial art movies, and a more specialized approach to serving its customers compared to a full scale movie renting competitor. Also, the martial art rental store may have less inventory, less overhead and lower operating costs compared to other competitors within the movie rental industry.
The focus or niche strategy is often confused with the differentiation strategy. The main difference is that a differentiated product or service interests a broad segment of the marketplace, while a focus or niche product or service appeals only to a narrow or small segment of the marketplace. If you wish, you may think of a focus or niche strategy as an extreme case of differentiation, meaning the product is differentiated so much that nobody else wants it, except for a very small segment.
Focus Strategies tend to prove advantageous when each of the following criterion are in place.
To be successful, a focus or niche strategy MUST BE large enough to yield a reasonable profit and MUST HAVE room for growth. In addition, the company exploring this type of strategy must have the necessary skills to adequately serve the focussed segment.
Organizations employing this competitive strategy usually experience a loyal customer base. Furthermore, businesses can focus more attention on the needs of a specific market segment by offering products and services only that segment desires.
The risk associated with a focus or niche strategy is threefold. 1) unfocused competitors may develop productive methods to duplicate the focussed company by meeting the needs of the small market segment. 2) the needs, wants, interests, and/or desires of the focussed group may switch toward the mainstream of the entire market; thus, eliminating the need for the focussed product or service altogether. 3) if the focus or niche segment becomes extremely profitable, then many rivals may decide to enter the segment - many competitors fight for a very small segment proves disastrous for several smaller firms.
It is important for you to determine which competitive strategy will form the foundation of your company. If you cannot isolate your competitive advantage, then it will be extremely difficult to convince consumer to choose your product or service over competitors. Lets review J&B Incorporated's strategy statement to isolate their selected Competitive Strategy(s).
J&B Incorporated's Strategy Statement:
Individuals buy "how to own and operate your own business" products for one reason and one reason only - THEY WANT TO OWN THEIR OWN BUSINESS. This is the most important key success factor within the industry. Companies currently selling self employment products, however, do not provide sufficient training nor the necessary resources to enable their clients to, first of all, start a business and secondly to operate a business successfully. With our business training course, however, clients will have the opportunity to encounter both of these experiences.
Another key success factor within the industry is price. Management's experience and research has uncovered the fact that individuals want to learn how to operate a business, however they do not want to pay hundreds of dollars in the process. By reducing the number of distribution channels, hiring an in-house sales force, and choosing a low cost media for promotions, J&B is able to set its price at half the price of similar rival products.
Our overall business strategy is based on differentiation and low cost production. Our differentiation strategy focuses on the issues that are most important to the buyers such as product benefits, product features, and price. The low cost production strategy focuses on the issues that are most important to J&B - i.e. maintaining low costs without diminishing quality.
As you can see, the company will compete by using a differentiation strategy and a low cost producer strategy. A great deal of data would have been collected before J&B decided upon these competitive strategies. For example, the company would isolate several key success factors within the industry, analyze their competition, uncover their strengths & weaknesses, look at the industry's driving forces and determine that a differentiation strategy coupled with a low cost producer strategy, would certainly make them a competitive force. In essence, these competitive strategies give meaning to the company and provide it with direction. In addition, the company knows how it's different from other rivals which now can be communicated to consumers (marketplace).