STRATEGIC MANAGEMENT

Competitive Advantage
Definition
Competitive advantage can be defines as a "superiority gained by an organisation when it can provide
the same value as its competitors but at a lower price, or can charge higher prices by providing greater
value through differentiation."
According to Salonar, Shepard, Podolny - "most forms of competitive advantage mean either that a firm
can produce some service or product that its customers value than those produced by competitors or
that it can produce its service or product at a lower cost than its competitors."
John Kay (1993: 14) defines distinctive capabilities as ones derived from characteristics that others lack
and which are also sustainable and appropriable. "A distinctive capability becomes a competitive
advantage when it is applied in an industry or brought to a market."
According to Michael Porter sustainable competitive advantage can be achieved through three ways cost leadership, differentiation, and focus.
The challenge for a marketing strategy is to find a way of achieving a sustainable competitive advantage
over the other competing products and firms in a market.
A competitive advantage is an advantage over competitors gained by offering consumers greater value,
either by means of lower prices or by providing greater benefits and service that justifies higher prices.
Porter suggested four "generic" business strategies that could be adopted in order to gain competitive
advantage. The strategies relate to the extent to which the scope of a business' activities are narrow
versus broad and the extent to which a business seeks to differentiate its products.
The four strategies are summarised in the figure below:

Competitive advantage The differentiation and cost leadership strategies seek competitive advantage in
a broad range of market or industry segments.
By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or
industry.
Cost leadership
With this strategy, the objective is to become the lowest-cost producer in the industry. The traditional
method to achieve this objective is to produce on a large scale which enables the business to exploit
economies of scale.
Why is cost leadership potentially so important? Many (perhaps all) market segments in the industry are
supplied with the emphasis placed on minimising costs. If the achieved selling price can at least equal (or

near) the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits.
This strategy is usually associated with large-scale businesses offering "standard" products with
relatively little differentiation that are readily acceptable to the majority of customers. Occasionally, a
low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost
advantage over the competition and, in doing so, it can further increase its market share.
A strategy of cost leadership requires close cooperation between all the functional areas of a business.
To be the lowest-cost producer, a firm is likely to achieve or use several of the following:
High levels of productivity
High capacity utilisation
Use of bargaining power to negotiate the lowest prices for production inputs
Lean production methods (e.g. JIT)
Effective use of technology in the production process
Access to the most effective distribution channels
Cost focus
Here a business seeks a lower-cost advantage in just one or a small number of market segments. The
product will be basic - perhaps a similar product to the higher-priced and featured market leader, but
acceptable to sufficient consumers. Such products are often called "me-too's".
Differentiation focus
In the differentiation focus strategy, a business aims to differentiate within just one or a small number
of target market segments. The special customer needs of the segment mean that there are
opportunities to provide products that are clearly different from competitors who may be targeting a
broader group of customers.
The important issue for any business adopting this strategy is to ensure that customers really do have
different needs and wants - in other words that there is a valid basis for differentiation - and that
existing competitor products are not meeting those needs and wants.
Differentiation focus is the classic niche marketing strategy. Many small businesses are able to establish
themselves in a niche market segment using this strategy, achieving higher prices than un-differentiated
products through specialist expertise or other ways to add value for customers.
There are many successful examples of differentiation focus. A good one is Tyrrells Crisps which focused
on the smaller hand-fried, premium segment of the crisps industry.
Differentiation leadership
With differentiation leadership, the business targets much larger markets and aims to achieve
competitive advantage across the whole of an industry.
This strategy involves selecting one or more criteria used by buyers in a market - and then positioning
the business uniquely to meet those criteria. This strategy is usually associated with charging a premium
price for the product - often to reflect the higher production costs and extra value-added features
provided for the consumer.
Differentiation is about charging a premium price that more than covers the additional production costs,
and about giving customers clear reasons to prefer the product over other, less differentiated products.
There are several ways in which this can be achieved, though it is not easy and it requires substantial
and sustained marketing investment. The methods include:
Superior product quality (features, benefits, durability, reliability)
Branding (strong customer recognition & desire; brand loyalty)
Industry-wide distribution across all major channels (i.e. the product or brand is an essential
item to be stocked by retailers)
Consistent promotional support often dominated by advertising, sponsorship etc

Great examples of a differentiation leadership include global brands like Nike and Mercedes. These
brands achieve significant economies of scale, but they do not rely on a cost leadership strategy to
compete. Their business and brands are built on persuading customers to become brand loyal and
paying a premium for their products.
Porter's Generic Strategies Model
Michel Porter in his Porter's Generic Strategies Model, has applied firm's competitive advantages or
strengths i.e. cost advantage and product differentiation in either broad or narrow market scope and
identified following three generic strategies : Cost Leadership Strategy,
Differentiation Strategy, and
Focus Strategy.
These strategies are applied at business unit level. These strategies are called generic strategies because
they are not dependent on specific firm or industry.
1. Cost Leadership Strategy
This strategy calls for being a low cost producer in an industry for a given level of quality. This strategy
usually targets broad markets. The producer can charge either equal to average industry price to earn a
profit higher than that of competitors, or blow average industry price to gain market share. In the
situation of price war, the firm can earn some profit, but the competitors have to suffer losses. When
the industry matures and prices declines, the firm that produce more cheaply will remain profitable for
longer time.
The firm can reduce cost of production by improving processes efficiency, getting lower cost materials,
vertical integration, optimal outsourcing, efficient distribution channels, expertise in manufacturing and
engineering.
2. Differentiation Strategy
This strategy calls for the development of product or service that offers unique attributes and that is
perceived by customers different or of greater value than the products or services of the competitors.
The unique attributes makes the product different from the competitors' products and adds value to it.
This added value allows the producer to charge a premium price for its product.
The unique attributes can be brought to the product through scientific research and development,
creative and skilled product development team, proper communication of perceived strength of the
product, innovated design and features. This strategy also targets broader market.
3. Focus Strategy
The focus strategy targets a narrow market or segment and within that segment attempt to achieve
either cost advantage or differentiation. As the entire focus of the firm is on a group or segment, so the
needs of the segment can be serviced better, and firm often gain high degree of customer loyalty.
Conclusion
Competitive strategy is a long term action plan that is devised by an organisation to gain sustainable
competitive advantage over its rivals.