Creating Competitive Advantage - Lessons for strategic thinkers
Overall cost leadership emphasises producing standardised products at a very low per unit cost for consumers who are price sensitive.
Differentiation strategy is aimed at producing products and services considered unique industry-wide and directed at consumers who are relatively price insensitive.
Focus strategy, on the other hand, aims at producing products and services that fulfil the needs of small groups of consumers.
Companies that pursue a clear strategy – one of the above- will likely perform well in the marketplace. A company, like FedEx, excels at both operational excellence and customer intimacy.
Michael Treacy and Fred Wiersema have come out with a theory they call Value discipline – which involves operational excellence, customer intimacy and product leadership as solutions to creating competitive advantages.
In their study, they found out that leading firms focus on and excel at a single value discipline, while meeting industry standards.
They have further suggested that companies gain a competitive advantage by delivering superior value to their customers. Classifying competitive strategies as value discipline is appealing, because it helps to define marketing strategy in terms of the single-minded pursuit of delivering value to customers. It helps marketers to define a specific way of building lasting customer relationships.
Competitive position
Firms competing in a given industry differ in their objectives and resources. Based on resources, some may be bigger than others, while others may have objectives that could see them expanding into other markets with different sets of offerings. In a particular industry, we could group firms as Market leaders, market challengers, market followers or market nichers.
Market leader strategy
Market leaders usually have the largest share of the market. In a hypothetical situation, a market leader will control about 55 per cent share of the market. The leader leads the other firms in price changes, new product introductions, distribution coverage and promotion spending. Competitors, usually focus on the leader as a company to challenge, imitate or avoid.
As a leader in an industry, you must maintain a constant watch of your offerings and activities in the marketplace, because other firms will never stop challenging you on your strengths and weaknesses.
The slightest mistake will plunge you into the second or third place. A market leader must not be complacent, grow arrogant or misjudge the actions and inaction of other firms in the industry.
To remain the number one, according to Kotler (2006), leading firms must continuously find innovative ways to expand total demand, protect their current market share through defensive and offensive actions, and also seek to expand their market share further even if the market size remains constant.
Market challenger strategy
Market challenger is often the runner-up company that is fighting hard to increase its market share in an industry. The challenger in a hypothetical situation will control about 30 per cent share of the market.
It can decide to challenge the market leader and other firms in an aggressive bid for more market share or they can play along with competitors and not rock the boat. Market challengers must first define which competitor to challenge and its strategic objective.
They can choose to attack the market leader, which comes with a much higher level of risk but potentially rewarding with the aim of taking over leadership in the marketplace. Alternatively, the challenger may avoid the leader and instead, challenge firms of its own size or smaller firms.
Strategic options available are to launch a full frontal attack – thus matching head on the competitor’s product, advertising, price and distribution. Here, the strategy aims at attacking the competitor’s strengths rather than its weaknesses.
Also, the challenger may adopt the indirect attack strategy where it focuses on competitor’s weaknesses or gaps in the competitor’s market coverage. Indirect challenges make good sense when the challenger has fewer resources than the market leader.
Market follower strategies
Market follower is also a runner–up firm that wants to hold its share in an industry without attacking other firms. In the hypothetical situation, the market follower will control about 10 per cent share of the market.
Being a market follower comes with some advantages. In the marketplace, the leader takes the initiative of developing new products and markets, expanding distribution, educating the market, advertising, etc. with all the attending huge expenses. In contrast, the market follower benefits from the leader’s experience.
It can decide to copy or improve on the leader’s products and programmes, usually with less risk and investment. The market follower must know how to hold current customers and win a fair share of new ones.
It must strike a fine balance between following closely enough to win customers from the market and to avoid retaliation or attack from market leaders.
Because the follower is often a major target of attack by challengers, they must keep their manufacturing cost low and their product quality and service high. They must also enter new markets as they open up.
Market niche strategies
The market niche serves a small segment that the other firms in an industry overlook or ignore. Niches are often small firms with limited resources. At times, smaller divisions of large firms may also pursue niching strategies.
Niching helps firms to better serve and know their target customer group. This helps the nicher to charge substantial mark-up over the cost because of the added value.
An advantage a mass marketer can hardly enjoy. An ideal market niche must be big enough to be profitable and possess growth potential.
It should be one that the firm can serve effectively. Perhaps, most importantly, it must be of little interest to the market leader. The risk involved in niching is quite high. It may dry up or it might grow to the point that the major competitors will be attracted to it.
The advice is that the firms using the market niching strategy should practise multiple niching. Let me leave you with an explanation that Howard Bernick, CEO of Alberto Culver, gave about the philosophy of his organisation: “We know who we are and, perhaps more importantly, we know who we are not”.