Developing Competitive Advantage

Different industries offer different competitive opportunities: therefore different strategies are required.  There is no one catch all strategy that will be successful across all industries.

So to develop an appropriate strategy for your market, you need to identify the appropriate competitive advantages and hence develop appropriate strategies.

There are three steps to identifying competitive advantage:

  1.  Define the Industry:  What are the market boundaries? What are the ‘rules of the game’? Who are the other players?
  2. Identify the possible competitive moves so as to exploit competitive advantage: What is the life cycle stage of the market? If the market is mature there will be different competitive advantages to a market which is in its growth stage; and therefore different strategies will be applicable. How will the actions of your competitors affect the market?
  3. What is your generic strategy? Differentiation, Cost focus or niche?

Remember successful strategies are the successful completion of a series of competitive moves

The first step, identifying the boundaries of an industry is not as easy as it first appears.  Take a farm shop with a cafe and children’s petting zoo.  Is that business a food retailer and producer; or is it part of the catering industry, or is it part of a wider leisure sector?

In assessing an industry’s boundaries each identified business activity should add perceived value in the minds of potential consumers. That perceived value is the string of benefits accrued by obtaining a product or service.  Some of these benefits can be abstract such as self image. The price is determined by what people are willing to pay to accrue those benefits.  If consumers place low perceived value on goods or services, they will expect those goods and services to come with a low price.

The ‘game’ is to create a disequilibrium between perceived value and the same price offered by competitors. Two factors can be adjusted, the perceived value and the price. this leads to three main options:

  1. Offering more perceived value for the same price as your competitors
  2. Offering the same perceived value as your competitors for a lower price
  3. Offering significantly more perceived value but for a higher price.

We do not live in a world of perfect competition where price is the only differentiating factor between market offers.

Obviously every activity to produce goods or services has a cost. The accrued costs of production and supply set the minimum price level at which products can be marketed.  Your business system must remain profitable. External factors such as tariffs and taxes can affect that profitability.  UK businesses currently exporting in a tariff free environment will likely face pressure on profit margins if, as seems likely, not trade agreement can be agreed with the EU and the country reverts to trading on WTO schedules.

The best approach in a market is to offer the highest possible levels of perceived benefit for the lowest possible delivered cost.

In assessing the ‘rules of the game’, you also need to take into account the logic of the business system; how business activities coordinate to achieve a common goal.  Resources needed to achieve common goals also need to be examined e.g. People, technology and finance.

When assessing competitors you need to look at all market entrants, not just core competitors.  that means suppliers, distributors, retailers etc.  You need to know which market players will sub-optimise your whole business system.

Competitive moves are defined as the best way to utilise your defined business systems to provide perceived value.  This is achieving superior performance in at least one business system activity e.g. best after-sales care; or through the innovative combination of several activities i.e. your marketing mix. This is the basis of all successful marketing strategies.

In assessing which competitive moves you need to make, you need to know the stage of the life cycle the market exists in.  Competitive moves will be different in a new emerging industry than in a mature of declining industry.

To identify strategic groups use perceptual mapping.  Plot consumers perception of value (not product quality) against cost.

There are two forms of generic strategy: one dimensional strategies and out-pacing strategies.

One dimensional strategies affect either perceived quality or price.  They are a repeated single move with the intention of retaining a static market position.  They are defensive strategies.  Short life cycle industries, such as fashion will use one dimensional strategies focused on high perceived value.

Businesses with long life cycles such as commodities (gas, electricity, water, etc) can look at low delivered cost strategies.

Using one dimensional strategies in other circumstances can be dangerous.

Out-pacing strategies do not repeat the same strategic move over and over.  You outpace your competitors by moving from one strategic position to another through altering value options.  The timing of outpacing strategies is crucial.  This is very much a dynamic strategy option.

Pre-emptive outpacing strategies are often used by industry leaders to avoid attacks by competitors. Again this is predominantly a defensive strategy option.  this could include shifting the industry life cycle through the development of product standards.  You need to create a pricing reserve so as to invest in process improvements to allow a shift to low delivered cost strategy until the new industry standard is adopted.

Price can be leveraged to prevent market followers from generating cash flow needed to transition to the next industry stage. For example, many saw Betamax video recorders as the premium product but VHS was cheaper and VHS was able to become the industry standards for home video cassettes. Price can be used to prevent new market entrants; possibly through the creation of fighter brands.

Again, the timing pre-emptive outpacing strategies is crucial.

Pro-active outpacing strategies tend to require market maturity and lower growth rates.  The are used to escape maturity stalemate and to avoid destructive price wars. In effect you are changing the rules of the game.

Unbundling perceived value is a common outpacing strategy.  This is achieved through the use of value chain analysis.  You then remove unacceptable costs which do not add to perceived value.  this may be moving from high street stores to out of town warehouses, or even moving to internet distance shopping from traditional retail. Ikea went from a traditional furniture retailer to a supplier of flat pack self-assembly furniture.

Analysing the competitive advantage options in your industry is critical to the achievement of successful strategies.