Understanding Competitive Advantage in Business (Part 1)
Every business wants to succeed and many are succeeding. However, a difference exists between succeeding in business and being the best or the leader in your industry. When you get to the point where your product or service becomes synonymous with the industry you are in, it is unquestionable that you have achieved competitive advantage in that market. You are probably aware that many people think that Hoover is another name for vacuum cleaner. When I was growing up, I thought that Coca –Cola was another name for soft drinks. This happens when an organisation gains competitive advantage for a sustained period of time.
In our current series, on gaining competitive advantage, a term coined and made popular by Michael Porter, I will be discussing in brief though, the two broad routes to competitive advantage. An organisation seeking competitive advantage can pursue it through:
• cost leadership and/or
• differentiation strategy
A number of factors, such as efficiency, innovation, quality and customer services are responsible for this and I will examine these at a later time. It takes more than hard work to be the best in your industry. In addition to working hard, it also calls for smart working.
First cost leadership. What do we mean by cost leadership? This is the ability of an organisation to cut cost in such a way as to remain competitive and produce profit margins for itself. It is not just cutting the cost but being able to maintain it over a considerable length of time to the point where its competitors will become ineffective in competing on the basis of price. The price cut should be significant enough to make it difficult for competitors to keep up with it. When your competitors cannot compete with you on the basis of price, you have achieved what in strategy, is referred to, as cost leadership.
This strategy can be risky. For you to adopt cost leadership strategy your organisation must be financially secured. In other words, you have a large capital base that can sustain you in the event of stiff competition from other competitors in your industry. It is not uncommon to see two or more organisations within the same industry adopting the same strategy. For example, a price war often breaks out between TESCO and ASDA in the UK.
However, cost leadership is a good strategy when you are able to hold your grounds, meeting your stakeholders’ expectations and still make a profit. But it can boomerang when you are operating in an industry with very close product substitutes. This strategy, ordinarily puts pressure on your entire value chain except perhaps your customers or service users who stand to benefit.
When you cut significant costs for a considerable length of time, you are likely going to put pressure on your suppliers to lower their own costs. It may pay off if you are a big brand presence in the market and has good bargaining power over your suppliers but if not, your competitors might take over your suppliers because they are willing to buy at the prices the suppliers are selling. That can seriously undermine your position in the market and disadvantage you in the process. It can even run you out of business.
The cost leadership strategy will be ideal for your organisation if it is:
a large corporate body with large capital base and has been in business for a long time to gain enough experience and a good market share in the market it operates in.
an organisation with a small overhead like some family run businesses where the proprietors and other family members can afford to reduce what they pay themselves or work without pay for a considerable length of time.
a small but focused market segment where familiarity with your customers can come with some level of trust like running a grocery in your neighbourhood. Big supermarkets some distance away may find it difficult to compete with “little Joe” at the cornershop. The customer sees little Joe’s price cut as a favour and develops loyalty towards him but will hardly perceive the big supermarket’s cut in the same light.
In our next article, I will be looking at the differentiation strategy.
- Dr. Chuma Osuchukwu
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