In this article we ask questions about your business strategy. Contrary to popular belief this can be very basic and intuitive questions that business owners should be asking themselves already. Blame it on the academics who are guilty of creating this fuzzy mystery around strategy. Strategy has been complicated by all sorts of models that offer nothing significantly different from what is covered in this article.
Whenever businesses embark on strategy formulation, in most cases, they grapple with the question of how they can gain competitive advantage over their rivals in the market. What then is competitive advantage? you might be asking. Competitive advantage arises when a firm’s products or services differ from and are considered superior to competing firms’ offerings. It may also arise through a firm’s ability to produce goods or services at lower cost than competitors. Thus, enabling the firm to sell its goods or services at a lower price and generate a bigger margin on sales. With this in mind most businesses then look to consultants to help them discover their own sources of competitive advantage.
There are basically two main sources of competitive advantage, namely, positioning and capabilities . This simply means that a firm can position itself as a low cost provider or as a high-quality provider. Capabilities refer to the skills knowledge and attributes that a firm possess that sets it apart from its competitors. Once a firm has chosen a position, they then go about investing in building capabilities that will enhance their positioning strategy. This is the challenging part of strategy management, which is easier said than done. South West airlines is a good example. Southwest’s marketing positioned the airline as fun, with low prices that allowed frequent, convenient travel. From the beginning, its advertising was playful, often poking fun at the competition and emphasizing its low-price and convenience. Year after year, Southwest steadily expanded its network, entering new markets with a predictable impact on customers and competitors—referred to by analysts as the“Southwest effect.” As can be seen here they took several years to complete their low-cost capabilities, that made them the lowest cost airline in the world. Great examples abound of companies that took years to consolidate their capabilities to support their chosen position.
Just to recap, a firm might chose any of these three strategic positions:
Here a firm chooses to develop unique dimensions of products or services that are valued by buyers. Example could be high quality Mercedes Benz products and service. The company then uniquely positions itself to meet the needs of customers who want this. This company can afford to charge premium price for this uniqueness and recoup their cost that went into differentiating in this way.
Low Cost Provider
The other choice is to be the lowest cost producer in the industry as a source of advantage. Here most companies work on lowering their cost structure in order to charge lower price. They can do this by either leveraging on economies of scale, proprietary technology, or preferential access to raw materials, or inputs costs.
In this last piece of strategy formulation, the company selects a segment or group in the industry and tailors its strategy to serving them to the exclusion of others. By optimising its strategy for the target segment, the company seeks to achieve competitive advantage in its segment even though it does not possess a competitive advantage overall. Example is choosing to serve the middle class, or people living in a specific area, exclusively.
Hopefully, we have broken this down sufficiently for any business, big or small, to realise that they can also apply their minds on what strategy they want to pursue for themselves to gain competitive advantage over their rivals.