Introduction
A company has a competitive advantage when it is in a better position than rivals to secure customers and defend against competitive forces.
There are many sources of competitive advantages: product development with the highest quality, providing superior service to customers, achieving lower costs in rivals, having a better geographical location, designing a product that has better performance than the brands of the competition.
Competitive strategy consists of what a company is doing to try to disarm rival companies and gain a competitive advantage. A company's strategy can be basically offensive or defensive, changing from one position to another depending on market conditions. Companies around the world have tried to follow every conceivable approach to beat their rivals and gain an edge in the market.
The three generic types of competitive strategy are:
- Strive to be the industry's leading producer of costs (The effort to be a low-cost producer) Seek to differentiate the product on offer from rivals (Differentiation Strategy) Focus on a more limited portion of the market rather than a complete market (Approach and specialization strategies).
Feature type
- Strategic objective Competitive advantage base Product line Production focus Maketing approach Strategy preservation
Low Cost Leadership
- A large representative sample of the market. Lower costs than the competitors. A good basic product with few superfluous elements. Cost reduction without sacrificing acceptable quality. Transform the characteristics of the product for its low cost. Economic prices / good value.
Differentiation
- A large cross-section of the marketplace Ability to offer something different to competitors Many variations in products Invent ways to create value for buyers Integrate features that customers are willing to pay Use features to create a reputation and image of the brand
Focus
- Limited market niche. Low cost serving the niche. Adapts the specialized needs of the target segment. Adapted to the niche. Communicates the ability to satisfy buyer requirements. Fully dedicate to satisfying the niche.
Focus and specialization strategies
They consist of the selection of a market niche where the collectors have specific preferences or needs. The niche can be defined by geographic exclusivity, by specialized requirements for the use of the product or by special attributes of the product that will only attract members of the niche. For example: Rolles Royce (Luxury cars).
Focus strategies are attractive when:
The competitive power of a focus strategy is greater when:
- The fast-growing segments are large enough to be profitable, but small enough not to interest large competitors. No other rivals are concentrating on the segment, and segment buyers require special products of experience or use.
The company's ability to focus imposes barriers to entry, which is why other non-niche companies find it very difficult to enter.
The 6 basic ways to mount strategic offensives are:
- Attack on competitors 'strengths: To be successful, the initiator needs sufficient strength and resources to acquire at least a market share from target rivals. Attack on competitors' weaknesses: Has a higher chance Successfully challenge opponents where they are most vulnerable than challenge them where they are strongest, especially if the challenger has advantages in areas where rivals are weak. Simultaneous attack on many fronts. It is to launch a great competitive offensive that includes several important initiatives, to try to unbalance the rival, distract his attention and force him to channel his resources in order to protect all his fronts simultaneously. Side offensives.They avoid direct confrontations and instead focus on innovative product attributes, technological advancements, and early entry into less competitive geographic markets. Guerrilla-type offensive. They are tailored for small challengers who have neither the resources nor the visibility in the market to mount a full-scale attack on companies. They create a competitive advantage by placing the aggressor in a prime competitive position to which rivals do not have access or to which they feel discouraged and do not try to match.They are tailored for small challengers who have neither the resources nor the visibility in the market to mount a full-scale attack on companies. They create a competitive advantage by placing the aggressor in a prime competitive position to which rivals do not have access or to which they feel discouraged and do not try to match.They are tailored for small challengers who have neither the resources nor the visibility in the market to mount a full-scale attack on companies. They create a competitive advantage by placing the aggressor in a prime competitive position to which rivals do not have access or to which they feel discouraged and do not try to match.
Explanation of the figure "construction and erosion of competitive advantage"
This next figure explains the use of offensive strategies that some companies use to ensure competitive advantage.
Firstly, outside the box on the left side we have the "magnitude of the competitive advantage", that is, how far could that offensive strategy that the company is going to apply go, and at the bottom outside the box we have the "time" that it indicates to us how the offensive strategy will be developed to achieve a competitive advantage during its 3 periods.
The first period of development refers to the time in which the company takes to start implementing the offensive strategy or strategies against its competition. If a successful competitive offensive is achieved there is a benefit period.
In this benefit period the results of the strategy that the company achieved are enjoyed. This benefit period lasts until the competition or rivals (company) launch counter-offensives and begin to close that competitive advantage that the company had achieved. But it can take a long time for other companies to turn off the benefits that the other company has achieved.
When these counter-offensives exist, the erosion period begins. In this period, counter-offensives can end with this initial advantage that the company was achieving, so it is recommended to have a second offensive strategy since a company must always go one step ahead of rivals (companies).
All companies attack offensively: both companies with superior resources and to outperform their rivals, spending more time than they need to position themselves as the market leader and gain a competitive advantage; Like those companies that do not have the resources or the visibility in the market to mount a full-scale attack against the leading companies in the industry, they could use a guerilla-type offensive strategy (selectively attacking where and when it can be exploited temporary the situation for your own benefit.
Defensive strategies
In competitive and globalized markets, all companies are subject to attack from their competitors.
The attacks are usually of two types by new companies or by companies seeking to recover in the market.
The purpose of defensive strategy is to decrease the risk of attack and weaken the impact of levels.
Although defensive strategy does not usually increase a company's competitive advantage.
There are several ways to protect a company's competitive position:
- Expand the company's product lines to fill the niches and vacant gaps that challengers may take.Introduce models or brands that match the modules of the competition.Keep prices low on those models.Signing exclusive agreements with suppliers and distributors. Cheap or free training. Prompt offers, coupons and discounts. Reduce delivery times. Increase warranty coverage. Patent alternative technologies. Sign exclusive contracts with all suppliers. Avoid suppliers who provide services to competitors..Challenging rivals' products and practices in legal proceedings. Movements of this kind not only reinforce a company's current position, but also present competitors with a moving target.
A good defense involves quickly adjusting to changing industry conditions, and sometimes taking the first step to obstruct or hinder the movements of potential aggressors.
A mobile fender is always preferable to a stationary one. A second approach to defensive strategy includes sending strong counter defensive signals in case the challenger attacks. Signals can be sent to potential challengers by:
- Publicly announce the commitment to maintain current market share. Publicly announce plans to increase production capacity to meet growing demand. Provide information in advance about a new product or new technology or plans to introduce new ones. brands, waiting for challengers to delay their movements until they confirm the announced actions. Publicly engage the company with a policy of matching the prices or terms offered by competitors. Give a robust response to the movements of weak competitors to enhance the image. of the company of being a tough advocate.
Advantages and disadvantages of taking the first step
It is often just as well to know when to make the strategic move as which move to make.
Timing is especially important when there are advantages and disadvantages to taking the first step.
Being the first to start the strategic move can have a good result when:
- Being a pioneer helps build the company's image and reputation with buyers. Timely commitments to sourcing raw materials, new technologies, distribution channels can yield an absolute cost advantage over rivals. Customers who buy for For the first time, they remain completely loyal to the pioneering companies by repeating their purchases. Taking the first step is a takeover blow, making the invitation difficult or unlikely.
However, the wait-and-see approach does not always carry a penalty in competitive ability. By taking the first step you can take more risks since the disadvantages arise when:
- Pioneering leadership is much more expensive and the effects of experience accumulate to the leader. Technological change is so fast that the initial investments soon become obsolete is easy for those who come later because they have more efficient processes.
Those who make the moves later can easily copy and even exceed the skills and knowledge developed by market leaders so a good timing choice is an important ingredient in deciding whether to be aggressive or cautious.
Competitive advantage
From Wikipedia, the free encyclopedia
In marketing and strategic management, competitive advantage is an advantage that a company has over other competing companies. According to Michael Porter, a company can be said to have competitive advantages over its competitors, if its profitability is above the average profitability of the industrial sector in which it operates.
To be truly effective, a competitive advantage must be:
- difficult to imitate unique possible to keep clearly superior to the competition applicable to various situations
Examples of company characteristics that can constitute a competitive advantage:
- customer focus, customer lifetime value superior product quality long-term distribution contracts accumulated brand value and good reputation of the company low-cost production techniques, cost leadership patent ownership and copyright government-protected monopoly highly qualified professional team.
The list of potential competitive advantages is very long. However, there are those who believe that in such a changing market there are really no competitive advantages that can be maintained for a long time. The only long-term competitive advantage is said to be that a company can be alert and agile enough to always find an advantage no matter what may happen.
Porter's Generic Competitive Strategies
In 1980, Michael E. Porter, Professor at the Harvard Business School, published his book Competitive Strategy, which was the product of five years of work in industrial research and that marked a milestone in the conceptualization and practice in the analysis of industries and competitors.
Porter described competitive strategy, as the offensive or defensive actions of a company to create a defensible position within an industry, actions that were the response to the five competitive forces that the author indicated as determining the nature and degree of competition that surrounded a company and as a result, sought to obtain a significant return on investment.
Although each company looked for different ways to reach that final result, the question was that for a company its best strategy should reflect how well it had understood and acted in the scenario of the circumstances that corresponded to it. Porter identified three generic strategies that could be used individually or together, to create in the long run that defensible position that exceeded the performance of competitors in an industry. Those three generic strategies were:
- Low Total Cost Leadership Differentiation Approach
Low Total Cost Leadership
This was a very popular strategy in the 1970s, due to the deep-rooted concept of the experience curve. Maintaining the lowest cost against competitors and achieving high sales volume was the central theme of the strategy. Therefore, quality, service, cost reduction through greater experience, efficient construction of economies of scale, rigid control of costs and, particularly, of variable costs, were subject to constant and iron scrutiny. Marginal performance clients were avoided and cost minimization was sought in the areas of research and development, sales force, advertising, personnel and in general in each area of the company's operation.
If the company had a low cost position, this was expected to drive it to make profits above the industry average and protect it from the five competitive forces. As competitors struggled through price, their profits eroded until those remaining at the level closest to the most efficient competitor were eliminated. Obviously, the least efficient competitors were the first to suffer from competitive pressures.
Achieving a low total cost position often required a high relative market share (refers to a company's market share relative to its most important competitor) or another type of advantage, such as access to materials. cousins. It could also require product design to facilitate manufacturing, maintain a broad line of related products to spread the cost among them, as well as serve larger customer segments to ensure sales volume. In return, implementing a low-cost strategy could involve large capital investments in state-of-the-art technology, aggressive pricing, and reduced profit margins to buy a bigger market share. At that time,the low cost leadership strategy was the foundation of success for companies like Briggs & Stratton Corp., Texas Instruments, Black & Decker and Du Pont.
Differentiation
A second strategy was to create something or a product that was perceived throughout the industry as unique. Differentiation was seen as the protective barrier against competition due to brand loyalty, which as a result should result in lower price sensitivity. Differentiating yourself meant sacrificing market share and engaging in expensive activities like research, product design, high-quality materials, or increasing customer service. However, this situation of incompatibility with the low cost leadership strategy did not occur in all industries and there were businesses that could compete with low costs and prices comparable to those of the competition. Companies that distinguished themselves at the time by adopting some form of differentiation were:Mercedes-Benz (design and brand image), Caterpillar (distribution network) and Coleman (technology), among many others.
Focus
The third strategy was to focus on a specific group of customers, a segment of the product line, or a geographic market. The strategy was based on the premise that the company was in a position to serve a smaller strategic objective more efficiently than broad-coverage competitors. As a result, the company differentiated itself by better serving the needs of a specific target market, or by reducing costs by serving that market, or both. The Martin-Brower Co., one of the largest food distributors in the United States, was an example in adopting the approach strategy when in its time, it limited its service to only the eight major fast-food restaurant chains (Today it only distributes to McDonald´s).
Porter's three generic strategies were alternatives, viable ways of confronting competitive forces. The company that failed to develop its strategy in at least one of these guidelines, was caught in the center, like company C in the figure, located in an extremely poor strategic position (a company with a high price for products perceived as low quality). Porter described this type of company as failing in its market share, capital investment, and limited ability to maneuver to execute the low-cost, differentiation, or focus strategy.
Company L has a low price and quality. Company M has a high price and quality. Company C is trapped in the center as most customers will wonder why they should buy from C when they can get better quality at the same price from Company M, or get (more or less) the same quality of C's products. and at a lower price by buying L. As the space between L and M is large, C's situation could be further complicated if a new competitor appears to occupy the empty space, also attacking L and M or if one of the competitors Current moves towards a full line strategy.
In his work The Competitive Advantage of Nations (1990), Porter recognizes for the new market circumstances, the instability of these three generic strategies and the need for more dynamic models to conceive competitive advantage.
The three generic strategies outlined here belong to static strategy models that describe the competition at a specific time. They were useful when changes were slow in the world and when the objective was to maintain a competitive advantage. The reality is that the advantages only last until our competitors copy or exceed them. Copied or exceeded, the advantages become a cost. The copier or innovator may only exploit his advantage, for a limited period of time before his competitors react. When the competitors react, the original advantage begins to weaken and a new initiative is needed.
Here is a series of useful videos to continue learning about strategy and competitive advantage. In the first, Professor Fernando Doral Fábregas, from the ENyD Business and Management School, analyzes competitive strategies for differentiation, cost leadership, anticipated movements and targeting. In the following it is Professor Antonio Verdú, from the Miguel Hernández University of Elche, who presents the theoretical bases of Porter's generic strategies. (4 videos - 1 hour and 15 minutes)
