11.08.2022

Competitive advantage strategies - which one to choose?

Key information:

  • A competitive advantage strategy is an approach that relies on a company achieving higher performance or value than its competitors.
  • There are three main approaches to competitive advantage strategy: cost, differentiation and focus.
  • The cost strategy is to achieve lower production or distribution costs than competitors, which enables products or services to be offered at a lower price.
  • A differentiation strategy involves creating unique products or services that are perceived as more valuable than competitors.
  • The focus strategy is to focus on a narrow group of customers or market, offering products or services that are tailored to their needs.
  • The choice of strategy depends on many factors, such as the industry, competition, company capabilities and customer preferences.
  • Implementing a competitive advantage strategy requires careful analysis of the market and competition, as well as effective implementation and monitoring.
  • A competitive advantage strategy can bring many benefits to a company, such as increasing profits, increasing market share and strengthening market position.

Nowadays, markets are becoming more and more competitive by the ever-increasing number of companies and successive innovations. How to make our product the one that customers are more likely to choose than others? Every company must frame its competitive advantage strategy.

What is a competitive advantage?

Competitive advantage is a factor that makes one brand's product more attractive in the eyes of the customer than others available on the market. This is usually very subjective, as each consumer pays attention to different strengths and suits different types of products. However, it is possible to notice some general trends that characterize almost all markets. By adapting to them, we can significantly increase the chance that buyers will choose our goods or services.

Types of competitive advantage

In order to achieve competitive advantage, it is first necessary to increase the degree of independence of operation from competitors. This means expanding the scope of freedom to operate tools in such a way that allows the company to increase the efficiency of its operations in the market. We can distinguish three basic types of competitive advantage:

quality advantage - Marketing activities and tools, such as product, packaging, distribution, services and the conditions under which they are offered, are susceptible to quality changes. By giving these tools a higher or unique quality compared to competitors and adapting them to buyers' preferences, a company can achieve a qualitative advantage, allowing it to exert greater bargaining power with the buyer.

pricing advantage - The basis for achieving competitive advantage is the use of marketing instruments and activities that directly relate to the material needs of buyers. To achieve this goal, a company must price at a lower level than its competitors, and use other tools, such as promotion, at a higher level than is practiced by competitors.

information advantage - is a process of creating and transmitting information that can serve two functions. The first is subservient to the process of a company achieving competitive advantages related to quality and pricing. In this function, the enterprise informs buyers of higher or different quality products and services than those offered by competitors. The enterprise also communicates lower prices and greater or different benefits that buyers can achieve by opting for its offerings. The second function of informational advantage is to autonomously shape buyers' preferences more effectively than the competition, at a given level of quality and prices. It is this function that seeks to elicit buyers' acceptance of an offer at a given quality and price, and its purpose is to guide buyers' preferences toward the company's offer. In this case, the company takes steps to change buyers' preferences and convince them to choose its products or services.

The role of competitive advantage

When an enterprise achieves a qualitative competitive advantage, it gains more freedom to manipulate prices and other instruments related to the material needs of buyers. When a price advantage is achieved, the enterprise has more freedom to manipulate non-price instruments, while an information advantage allows it to more effectively shape buyers' preferences and gain their acceptance of proposed instruments and actions.

The achievement of a competitive advantage by an enterprise is aimed at increasing its size. The greater the advantage, the greater the independence in operating instruments that promote greater results in the market. The sustainability of a competitive advantage depends on the type and size of the advantage achieved. To maintain and increase the degree of sustainability of competitive advantage, the enterprise should use an integrated set of marketing instruments. Their proper use contributes to the increase and consolidation of competitive advantage.

The goal of any enterprise is to gain a competitive advantage, which can manifest itself through a higher profit than the industry average or a significant market share. To achieve this, an enterprise should hire competent employees who can effectively exploit competitive advantages in the market.

In 1998, Michael E. Porter presented three business strategies to achieve competitive advantage. These are: cost leadership, diversification and concentration. Let's look at their characteristics and the opportunities they bring.

Cost leadership

The cost leadership strategy is based on lowering the price of a product while leaving its quality at a similar level. This can be achieved mainly by reducing production costs or cutting marketing expenses. Such a ploy makes consumers more likely to choose our product over others of similar quality offered at a higher price.

An important advantage of this strategy is the increase in demand for our product or service, according to the rules of the free market, which can lead to a significant increase in profits. However, on the other hand, this concept carries the risk of incurring high costs associated with upgrading equipment and introducing innovations to reduce the price of the product. Likewise, slashing marketing expenses can reduce potential customers' awareness of low prices. These risks mean that only large and stable companies can afford to follow a cost leadership strategy.

Differentiation

Otherwise known as the differentiation or quality leadership strategy, the differentiation strategy involves distinguishing our product among others in the market in terms of quality or uniqueness. Such a move increases demand for the offered commodity and even allows the company to raise its price without the risk of losing customers. The desired effect can also be achieved through effective marketing applied to a given good or service.

This type of price leadership strategy greatly benefits the environment, as the market provides us with the best possible quality and differentiated products. In recent years, many companies are also trying to apply this strategy in terms of naturalness of products or quality of service. As a result, companies gain many regular and returning customers by creating a kind of bond and network of lasting relationships with them.

Focus

A slightly different premise for gaining an advantage in the market is the concentration strategy. It is based on focusing on operations only in one narrow segment of it. This allows for high specialization and the possibility of creating a kind of "small monopoly" in this area. Thanks to its complete concentration on only this one segment, the company immediately catches any new trends and innovations introduced to the market. This ensures that it maintains its leading position and has a significant advantage over its competitors, who are spread over many segments and are not able to react as quickly to changes.

A concentration strategy is often called a market niche strategy, because the goal here is to find a part of the market - a so-called niche - that is still undeveloped or potential competition in it is weak. It must also have growth potential and be appropriately sized for our company. This type of strategy generates a low level of risk and works well for small and medium-sized enterprises.

J. Kay's theory

According to J. Kay, companies achieving competitive success are characterized by three key elements:

Architecture - is the ability to establish and maintain contacts inside and outside the company. Architecture can be divided into two parts: internal and external. Internal refers to the way employees communicate and collaborate, while external refers to maintaining relationships with customers, suppliers and other companies. Through architecture, a company gains organizational awareness, which enables it to adapt flexibly to changes inside and outside.

Innovation - plays a key role in gaining long-term competitive advantage. Successful innovation contributes to the rapid growth of an organization, and a company can use various strategies to support it. There are three types of innovation: organizational, product and process. Organizational innovations refer to the implementation of new strategies in a company, product innovations are improvements to products already manufactured and the expansion of the product mix, while process innovations refer to the introduction of new manufacturing methods.

Reputation - is a very important element for a company. It is used to convey information to customers about the company, its products and services through advertising or company brands. A good reputation provides lasting positive feedback about the company and its offerings, influences the positive image of the company and guarantees various benefits.

 

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    How do you build an advantage for your own company over the competition?

    In order to build an advantage for your own company over the competition, you should focus on creating positive associations with your company. This can be achieved by maintaining an interesting social media page and publishing valuable blog content related to the online store.

    Nowadays, when information exchange is very fast, it is important to respond quickly to questions and problems of potential customers. Care should be taken to respond quickly to any contentious issues. In addition, it is worth paying attention to after-sales care and ensuring customer satisfaction after the transaction. Many companies build a competitive advantage by offering additional warranties on purchased equipment, creating loyalty programs and providing regular customers with systematic promotions.

    Which strategy to choose for your own business?

    The answer to this question is not clear-cut. Much here depends on the industry in which we operate and the size of our company, as well as several other factors. It is worthwhile to focus on looking for the strengths of your company, and on the basis of these to assess which of them you can most effectively build a competitive advantage. However, it is important to be aware of their existence, as well as the opportunities they open up for you. By doing so, you can significantly increase your chances of success in business.

    Michal Horbowski

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