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Competitive Advantage Strategies

Competitive Advantage can be created in two main (though not exclusive) ways: through Cost Leadership Strategy and Differentiation Strategy (Porter, 1980. Cited in Hooley et al, 2020, p45). “The two strategies are not mutually exclusive and could be pursued simultaneously” (Hooley et al, 2020, p46).

Justification the Choice of Strategy

To justify your choice of strategy for achieving Competitive Advantage, you can use the “Suitability, Feasibility, Acceptability model“. Make it explicitly clear this relates to your chosen strategy.

Competitive Advantage through Differentiation Strategy

The essence of the strategy:

  • “Creating something that is seen as unique in the market” (Hooley et al, 2020, p46).
  • “Under this strategy, company strengths and skills are used to differentiate the company’s offerings from those of its competitors along some criteria that are valued by consumers” (Hooley et al, 2020, p46).

Justification: 

  • It creates “a reason why the customer should buy from the company rather than from its competitors” (Hooley et al, 2020, p46).
  • Differentiation creates a market-based advantage (Hooley et al, 2020, p46).
  • “Products or services that are differentiated in a valued way can command higher prices and margins, and thus avoid competing on price alone” (Hooley et al, 2020, p46).
  • Differentiation through superior quality can often result in lower unit costs through gains in market share and attendant economies of scale and/or experience effects (Hooley et al, 2020, p47).

Tactics:

  • Can be achieved on a variety of bases: design, style, product or service features, price (low costs could be translated into lower price), image (Hooley et al, 2020, p46).
  • Advertising and branding activities (linked closely with design) (Hooley et al, 2020, p46).

Risks for sustainability, disadvantages:

  • “If differentiation is not based on distinctive marketing assets, it is possible that competitors will try to imitate” (Hooley et al, 2020, p47).
  • “Low price positioning might seem attractive in harsh economic times, but unless costs are also low comparably with competitors, it could spark costly price wars that seriously erode or eliminate margins” (Hooley et al, 2020, p47).
  • “The basis for differentiation may become less important to customers over time, or possibly new bases for differentiation become more important” (Hooley et al, 2020, p47).
  • “The costs of differentiating may outweigh the value placed on it by customers, and as such this would be an untenable approach” (Hooley et al, 2020, p47).
  • “Focusers or nichers in the market (competitors that focus activities on a selected segment or segments) may achieve lower costs, or more valued differentiation, in specific segments. Thus, in markets where segmentation is pronounced, both the basic approaches carry high risks” (Hooley et al, 2020, p47).

Risk minimization approaches: 

  • “Building differentiation around competencies or marketing assets that the company alone possesses, and that competitors cannot copy” (Hooley et al, 2020, p47).  
  • “Customer and competitor monitoring and benchmarking” (Hooley et al, 2020, p47).  

Competitive Advantage through Cost Leadership Strategy

Goals:

  • Obtain a cost structure significantly below that of competitors (Hooley et al, 2020, p45).
  • Retain products on the market that are in close proximity to competitors’ offerings (Hooley et al, 2020, p45).
  • High market shares to achieve the above-average economies (Hooley et al, 2020, p45).

Justification:

  • With a low-cost structure, above-average returns are possible despite heavy competition (Hooley et al, 2020, p45).
  • This strategy is particularly suitable in commodity markets, where there is little or no differentiation between the physical products offered (Hooley et al, 2020, p46).
  • Cost leadership creates an essentially financially based advantage for the company (Hooley et al, 2020, p46).

Tactics:

  • Aggressive construction of efficient scale economies (Hooley et al, 2020, p45).
  • Using Experience effects (Hooley et al, 2020, p45).
  • Tight cost and overhead control (Hooley et al, 2020, p45).
  • Cost minimisation in R&D, services, salesforce and advertising (Hooley et al, 2020, p45).
  • Drive cost from the businesses working with suppliers (Hooley et al, 2020, p46).

Required Strengths:

  • Backward integration (merger with, or acquisition of, suppliers) to secure the relatively cheaper supply of raw materials (Hooley et al, 2020, p46).
  • Efficient production processes (Hooley et al, 2020, p45).
  • Superior production technology enabling cheaper production (Hooley et al, 2020, p45).

Risks for sustainability, disadvantages:

  • Does not create a reason why the customer should buy the company’s offering in markets where products are highly differentiated (Hooley et al, 2020, p46).  
  • Competitor can imitate (using, for example, similar technology and processes) (Hooley et al, 2020, p47).  
  • Technology can change, which may make it cheaper for later market entrants to produce the products or services.
  • Competitors may find and exploite alternative bases for cost leadership (Hooley et al, 2020, p47).
  • Requires minimal spending on R&D, product improvements and image creation, all of which can leave the product vulnerable to competitively superior products (Hooley et al, 2020, p47).
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