When looking to be a leader within your industry, many companies look towards advantages that it can implement to become better than its competitors. When we look at how companies gain advantages over its competitors we look at competitive strategies. There are 3 main competitive strategies that companies can use to get a leg up on their competition. These are;
- Lower cost provider
- Best cost provider
We can then split these up to create five competitive strategies by applying the word focused (niche), and broad to low cost and differentiation. This will give us;
- Focused (Niche) Low Cost
- Broad Low Cost
- Best Cost
- Focused (Niche) Differentiation
- Broad Differentiation
Let’s understand the main 3, going more in-depth on how you can achieve each strategy and what option may be the best for your company or for your industry. At the end we will go over small business examples to provide an insight in how these competitive strategies can work for a small business in a saturated market.
Understanding low cost is very easy as it’s a company that keeps its cost lower than its competitors giving a company higher profits due to the marginal benefits between cost and revenue. This gives these companies an advantage over its competitors due to this marginal gap letting the company to be able to undercut its competitors with a lower price for products or services because it’s overall cost are smaller. This also can give the company a higher profit over its competitors when products or services are priced the same as rivals.
Usually larger companies within an industry are low cost providers due to a major factor called “economies of scale”. Don’t know what “economies of scale” means, it means the costs advantages that a company obtains due to their size (usually the bigger the company the bigger savings), its product or service output (this is when looking at your value chain to find somewhere to cut costs), or scale of its operation (the market segment that your company is after). When companies look to become low cost providers within their industry they want to find and pursue cutting cost options that competitors find hard to imitate, usually the best place to start is within the value chain of the company, as the value chain is an important feature of a business and is where the bulk of costs are traced to. Companies can do this by seeing if say they built a certain product, is it cheaper for them to make it or is there somewhere they could outsource the job to that is cheaper but keeps the same quality in the product. As we see with this example we can see how companies can assess their value chain.
There are several ways to cut cost within a company, some ways a company can use to find areas to cut cost is;
- Strive to seize all opportunities of “economies of scale”
- Improve the companies supply chain
- Use the company’s bargaining power with the relationships that it has developed with other companies to help lower costs along the value chain
- Improving and updating production process designs by employing technology when possible
These are not all the ways a company can cut costs internally but provides some examples on how a company can lower its costs and increase its profits. When thinking about using the low cost competitive strategy, there are some variables that work best in an industry for a company to adopt this strategy. These are;
- Price competition is strong among rival sellers
- Few ways to differentiation of products/service/company within industry from competitors
- Low switching costs for buyers
- Identical products/services available from many sellers
If a low cost competitive strategy will work for your product/service/company there are some cost reduction plans that a company needs to avoid. You want to avoid being to aggressive in price cutting because this can result in not enough gain in revenues to overcome costs causing a negative in profits, a company also doesn’t want to become too fixated on reducing costs to a point where they don’t think about the product/service features causing the company to lose out due to poor featureless products/services over competitors even though it may cost less, and not looking at ways to lower internal costs in the value chain and having a competitor discover a new lower cost value chain approach giving them a way to lower the cost of products/services lower than your company.
Differentiation can be used in many aspects of the company as well within an industry. This competitive strategy is used commonly by advertisers and marketers alike to try and make a product/service that they are advertising look better than its rivals. When most people think of differentiating they think more on features than other aspects, you can differentiate in many ways from your rivals than just features of a product that you offer.
To understand how a company can differentiate itself from rivals within their industry and location we can look at a family owned pizza restaurant. There are always a high variety of pizza restaurants in city areas and if you are a family owned pizza business, trying to compete with well-known franchises can become hard. If you have noticed a smaller market of specialty pizza’s you could differentiate your pizza business from the rest by offering specialty pizzas and taking away clients from franchise pizza businesses since they won’t offer these type of pizzas. This may be more towards features, but you can also differentiate in other ways. Look at Coke, they differentiate themselves from their rivals through their distribution chain, and through the passion they put into their coke products. There distribution chain differs a lot from its rivals, and gives them a huge advantage in cost doing this as well.
The best way to think of best cost is that it’s a combination of low cost and differentiation. It uses low cost strategies in tandem with differentiation to give a company a profit margin advantage with differentiating their product or company from its rivals, to make itself a new market altogether. Another way to think of a best cost provider, is a company that provides a service or product that is a better quality at a lower cost. This is not a low cost provider as products or services are not the cheapest, but you cannot find products or services that are as high quality for the price. An example of a best cost provider we can say Honda. You cannot find a car that is as good quality as Honda’s car for the price you pay.
A restaurant that grows its own ingredients in a garden, this gives them lower costs for premium ingredients making it harder to find an exceptional meal at such a price.
Niche is a small narrow market within a segment market. To understand a niche look at Reeboks cross-fit line, this is specific training gear for just cross-fit trainers. We can use niche with a low cost provider or when differentiating the product or service from competitors. They differentiate their product from their competitors, and design the product for a small market in the athletic segment
Broad is marketing your product or service to a large market. We see this with Wall-Mart. It provides products for a low price to a large market. They are a low cost provider that markets towards a broad market.
What we have learned
We have learned that there are 5 separate ways to become a competitive leader within your industry, and finding the correct strategy to use will give you better chances at the route being a bigger opportunity cost for your company. I hope this article has given you an idea on competitive strategies that your company can use, and ways to find what strategy works best for your industry.