The Three Strategies for Competitive Advantage
In 1985, Harvard Business School professor, Michael Porter, published “Competitive Advantage”, which discusses the three competitive business strategies: Focus, Cost Leadership, and Differentiation. Michael Porter is infamous in the academic business community for his work in business strategy, and suggested that these business strategies can enable businesses to achieve competitive advantage. Competitive advantage is what makes one business more favorable to consumers than another. In order for businesses--particularly start-ups--to be profitable and a long-term player in an industry, they must have competitive advantage.
Focus is a strategy businesses employ to determine how narrow a company must market and sell its products in order to appeal to a core group of consumers. In order to implement its Focus, businesses must develop their Strategic Positioning in the marketplace. There are three ways to create a unique and valuable position in the market:
- Serve a few needs of many customers
- Serve many needs of a few customers
- Serve many needs of many customers in a narrow market
Focus helps business owners and managers determine how to best market and sell its goods and services. A strategic Focus can make the difference between a successful startup and an unsuccessful one.
Businesses can enjoy competitive advantage by being a cost leader in any industry. If a business is able to provide a good or service of comparable quality and specifications at a lower price than other offerings in the marketplace, it is likely to be successful. Cost Leadership is generally more difficult for startups and small companies. Small businesses generally cannot compete on price because they cannot leverage economies of scale and low-cost, overseas suppliers. Likewise, in order to be the cost leader a business must have an efficient supply chain and operations process. Continuous process improvements and lean manufacturing are essential for maintaining the cost-leader status. Wal-Mart and McDonalds are examples of cost leaders in their respective industries. Wal-Mart has been the leader in supply chain and logistics for many years, which enables the company to offer its products for ~15% less than competitors. Its Everyday Low Prices model has helped Wal-Mart to grow to be a Fortune 1 company. Likewise, McDonalds became the cost leader in the fast food industry by offering inexpensive, yet consistent fast food. McDonalds cut labor costs by hiring low-skilled workers and training them to be cooks, as opposed to hiring experienced chefs to prepare the meals. By offering its food at a low price point, McDonalds is now one of the biggest companies in the world.
Companies who do not or cannot compete on price can compete by differentiating themselves from the competition. Businesses can design products and offer services that are different from the other offerings in the marketplace. As businesses set themselves apart from other players in the industry, they can market themselves as a premium brand with improved features and services. Businesses with a differentiation strategy must have an effective and robust marketing strategy that communicates the superior features of its goods and services. These differentiated products and services are generally better at meeting the needs of the target market, and likewise have premium pricing. Startups and small companies have more success using a Differentiation strategy as opposed to a Cost Leadership strategy. By creating products with unique features that meet the needs of consumers and improve the user experience, companies can build brand loyalty. Consumers are willing to pay a premium for a product that better meets their needs. Apple and Whole Foods are examples of companies who use a Differentiation strategy. Apple products are more expensive than competitors products, yet it has a strong brand with millions of loyal customers. Apple markets its products as sleek, high quality, and user friendly. Apple’s smart marketing and impressive product design has made it a force to be reckoned with in the industry. Likewise, Whole Foodsnotoriously charges more for groceries than its competitors. Whole Foods focuses on superior customer service and providing healthy and organic food options for its customers. Whole Foods is also highly invested in sustainability and “Green” initiatives, which many of its customers appreciate. Amazon recognized the value of Whole Food’s Differentiation strategy, and recently acquired it for $13.7 Billion.
As entrepreneurs and managers contemplate business strategies, they should determine if their business is more suited for a Cost Leadership or Differentiation strategy to achieve competitive advantage in their industry. These businesses must then decide how to strategically position their goods and services by determining their Focus. In so doing, businesses will be more profitable and more successful.
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