Building a competitive strategy is about how companies outperform their competitors in generating profits by satisfying the same consumer needs and wants.
There are many businesses around us. Some target the same market. They compete directly in satisfying consumer needs and wants. And, their products replace each other. So, when consumers do not like the product of a company, they will switch to a competitor’s product.
Now, let’s say, you are running a business.
Being successful in the market requires an effective competitive strategy to win the competition. When successful, your company generates above-average profitability by gaining a competitive advantage.
However, due to dynamic competition and market demand, competitive advantage may last only temporary. Competitors may develop superior competitive strategies and eventually outperform your company.
For this reason, your company should adapt the strategy. Thus, it remains relevant and effective in dealing with the changing business environment. And, if your company is able to maintain a superior position over time, that is what we call sustainable competitive advantage.
How does your business successfully compete and gain a competitive advantage? Michael Porter provides a basic framework, known as generic strategy. It tells us how companies compete, in what dimensions.
Then, your business also needs to build core competencies to execute Porter’s generic strategy successfully. In other words, it is a prerequisite for gaining a competitive advantage.
Two alternatives for building a business competitive strategy
Porter’s generic strategy describes two strategies for pursuing competitive advantage. Focusing on one of these can make a business generate above-average profits. The two strategies are:
- Differentiation strategy
- Cost leadership strategy
The company adopts the above strategy to compete in key markets. This market has a lot of consumers, so the size is also large. For this reason, many companies operate and compete for customers.
Furthermore, Porter also presents a focus strategy. In principle, it also adopts the above strategies to compete. However, the company is targeting a niche market. In this market, consumers have specific and different needs from the needs of consumers in the main market.
In addition, competitive pressures in niche markets are often relatively low. Big players are not willing to work on this market because of its small size, making it difficult to achieve economies of scale.
Under a differentiation strategy, your company provides a unique offering. It combines tangible attributes such as design, size, and color with intangible attributes such as quality, reliability, and superior customer service. Your company also supports it with strong promotions to build consumer perception.
Uniqueness makes customers willing to pay a high price. Customers really want the product, even willing to queue to get it. Louis Vuitton, Apple, and Tesla are some great examples.
Then, in some cases, rising prices make the product even more desirable. Some consumers perceive the product as more valuable, so they are more satisfied when the price increases. Economists refer to such products as Veblen goods.
Veblen goods are luxury goods. When their prices rise, it increases their utility, making consumers even more satisfied. In this case, consumers usually pursue not the functional aspect of the product but the emotional aspect. Rising prices make them more confident and increase their prestige. That’s why consumers are willing to buy and are happier if the price is higher.
Furthermore, differentiation strategy does not only focus on creating superior product attributes. Other aspects also contribute. For example, your company can increase product value by offering superior customer service such as after-sales service. Such services add value to the product, allowing your company to charge a higher price.
Then, another important aspect is branding and promotion. Both are important to create customer perception of your company’s products.
Why is a product so unique? Often, consumers have varied answers. They have different judgments and perceptions. And, it is often difficult to justify using real evidence because it involves an emotional aspect.
For this reason, many companies invest in promotion and branding to create consumer perceptions. In fact, some companies may offer products with standard attributes. But, they promote the product as a unique product. And sometimes, they are successful.
Cost leadership strategy
A cost leadership strategy promotes a cost structure that is lower than the industry average. Your company offers standard products and sells them at industry average prices. However, your company can earn higher profits because you produce it at a lower cost than the average competitor.
Alternatively, your company may sell products slightly below the average price of competitors. Indeed, the margin per unit can be lower than the previous alternative. But by doing so, you can increase sales volume and encourage consumers to switch from competing products.
Unlike differentiation strategies, cost leadership typically targets price-conscious consumers. Your company satisfies customers in the same way as competitors. You offer a product that is relatively standard and similar to that of a competitor. However, because your company operates more efficiently, you earn higher profits than the average competitor.
Build core competencies
If Porter’s generic strategy is about how your company should compete, then resource-based theory explains how you build and execute the strategy you have chosen, whether it be differentiation or cost leadership. This theory tells you what you need to execute the strategy successfully.
Under resource-based theory, to pursue competitive advantage, your company must build core competencies. And, it is formed from the resources and capabilities your company has. If you can maximize your core competencies and compete successfully, your company delivers superior value creation.
- Resources – unique assets that your company owns but is not or little available to competitors. Excellent human resources is an example. Other examples are intellectual property, reputation and brand equity. They all help your company compete successfully.
- Capability – about your company’s ability to maximize existing resources. It is inherent in your company, and is often not documented as a procedure. For this reason, capabilities are more difficult to imitate than resources. For example, your company’s ability to maximize resources could depend on aspects such as leadership style, organizational agility, and a culture of innovation and learning. It is difficult to imitate these aspects exactly.
Capabilities plus resources form core competencies if they contribute to creating value, are rare and non-substitutable. Core competencies enable your company to satisfy customers better than competitors by creating a superior value proposition. And, competitors are difficult to surpass you because it is difficult to imitate. And if it’s successful (because competitors may be doing the same thing as you), your company can gain a competitive advantage.