ALTERNATIVE APPROACHES TO ACHIEVING COMPETITIVE ADVANTAGE

LEARNING OUTCOMES
At the end of the topic, students will be able to:
1. Compare and contrast the Porter’s generic strategies and explain how they help in
sustaining organization’s competitive advantage
2. Elaborate how organizations can respond to hypercompetitive conditions
3. Assess opportunities for improving competitiveness through collaboration

COST LEADERSHIP, DIFFERENTIATION AND LOCK-IN STRATEGIES

 Competitive Strategies
 They consist of specific efforts of the business organization meant to outwit or
outcompete direct and indirect competitors in certain specific areas or directions.
 They focus on particular areas of concern the company believe it has the
advantage or edge to be able to outrace its competitors in a particular context of
doing business.
 As an offensive or defensive strategy, competitive strategies are also meant to :
a. Counter actions of key rivals;
b. Shift resources to improve long-term market position;
c. Respond to prevailing market conditions; and
d. Pursue new areas of business concern.
 Porter’s Generic Strategies for Competitive Advantage
 Porter has suggested three strategies for sustaining competitive advantage over
rival firms and their products or services. These strategies, which are similar to
some shown on a strategic clock, are:
a. a cost leadership strategy
b. a differentiation strategy
c. a focus strategy
 Porter argues that sustainable competitive advantage is achieved by offering
customers a ‘value proposition’. This is a set of benefits that the product or
service will provide, that are different from those that any competitors offer. A
value proposition can be created in two ways:
a. Operational Effectiveness. This means doing the same things better than
competitors, and so providing the same goods or services at a lower cost.
Through lower costs, sustainable competitive advantage can be gained
through lower selling prices.
b. Strategic Positioning. Strategic positioning means doing things
differently from competitors, so that the company offers something unique
to customers, so that customers will be prepared to pay a higher price to
acquire the unique value combination that the product or service offers.
- Operational effectiveness provides the basis for a cost leadership
strategy and strategic positioning provides the basis for a
differentiation strategy.
 Cost Leadership Strategy
 Cost leadership means being the lowest-cost producer in the market. The
least-cost producer is able to compete effectively on price, by offering its
products at a lower price than rival products. It can sell its products more
cheaply than competitors and still make a profit.
 Companies with a cost leadership strategy must have excellent systems of cost
control and should continually plan for further cost reductions (in order to
remain the cost leader in the market). The source of their competitive advantage
is low cost and they must never lose sight of this fact.
 A cost leadership strategy is similar to a ‘low price’ strategy or a ‘no frills’
strategy on the strategic clock.
 Thompson and Strickland (1999) have identified the following as the keys to
achieving low-cost leadership strategy:
a. Make achievement of low-cots relative to rivals the theme of firm’s business
strategy;
b. Find ways to drive costs out of business year after year;
c. Scrutinize each cost-creating activity, identifying cost drivers;
d. Use knowledge about cost drivers to manage costs of each activity down year
after year;
e. Find ways to reengineer how activities are performed and coordinated-
eliminate the costs of unnecessary work steps; and
f. Be creative in cutting low value-added activities out of value chain system-
reinvent the industry value chain.

 Competitive Advantage Based on Low-Cost Leadership (Pitts and Lei,

2000)

 Differentiation Strategy
 For Porter (and for writers on marketing management), differentiation means
making a product different from rival products in a way that customers can
recognize.
  Objectives of Differentiation Strategy
 Incorporate differentiating features that cause buyers to prefer firm’s product
or service over brands of rivals;
 To produce a product that will serve other market segment; and
 To produce and provide a product or service that will project another image
for the firm.
 Customers might be willing to pay a higher price for the product, because
they value its different features. Companies pursuing a differentiation strategy
need to offer products and services that are perceived as better or more suitable
than those of their competitors. To deliver better products and services usually
requires investment and innovation.
 Products may be divided into three categories:
a. Breakthrough products offer a radical performance advantage over
competition, perhaps at a drastically lower price (e.g. float glass, developed
by Pilkington).
b. Improved products are not radically different from their competition but
are obviously superior in terms of better performance at a competitive price
(e.g. microchips).
c. Competitive products derive their appeal from a particular compromise of
cost and performance. For example, cars are not all sold at rock-bottom
prices, nor do they all provide immaculate comfort and performance. They
compete with each other by trying to offer a more attractive compromise than
rival models.

 How to Differentiate?
a. Build up a brand image, e.g. Pepsi’s blue cans are supposed to offer different
‘psychic benefits’ to Coke’s red ones.
b. Give the product special features to make it stand out, e.g. Russell Hobb’s
Millennium kettle incorporated a new kind of element, which boils water
faster.
c. Exploit other activities of the value chain, e.g. quality of after-sales service or
speed of delivery.
d. Incorporate product features/attributes that lower buyer’s overall costs of
using product;
e. Incorporate features/attributes that raise the performance a buyer gets out of
the product;
f. Incorporate features/attributes that enhance buyer satisfaction in non-
economic or intangible ways;
g. Compete on the basis of superior capabilities; and
h. Capitalize on a variety of service schemes to support a product.

 Focus (or Niche) Strategy

 It is different in that it is directed towards serving the needs of a limited
customer group or segment.
 It concentrates on serving a particular market niche, which can be defined
geographically, by type of customer, or by segment of the product line. The
 sector could be either a group or strata of the economy (e.g., high-end market or
class A market, the low-income group), a particular group of small-scale
producers or businessmen using its product as raw material or inputs or small
group of buyers whose needs are not or least served by traditional sources of a
particular product.
 The sole objective of a focus or niche strategy is to concentrate its attention on a
narrow piece of the total market with a view of fully serving the needs of that
particular market.
 Approaches in Focus/Niche Strategy
a. Achieve lower costs than rivals in serving the segment – a low-cost strategy;
and
b. Offer niche buyers something different from rivals – a differentiation
strategy.

Example 1
In the market for manufacturing and selling soap, one or two companies might pursue
a strategy of being the cost leader in the market, and offer their standard products to
customers at the lowest prices.

Other producers of soap might pursue a differentiation strategy, and promote the
superior quality of their products, for example by including ingredients that are better
for the skin or provide a more attractive aroma.

Some producers of soap might focus on a particular market segment, such as the
market for liquid soap. Within this market segment, firms might either seek to be the
least-cost producers or to offer a differentiated liquid soap product.

Example 2
Porter’s generic strategies can be used to suggest how airline companies seek
competitive advantage.

These are suggestions.

Cost leadership  Low-cost airline.

 Reduce operating costs, such as: cheaper ticket production
(online), no free in-flight meals or drinks, use low-cost
‘out-of-city’ airports, eliminate seat reservations, reduce
baggage allowances for passengers.
Differentiation  Offer extra facilities for customers at airports.
 Offer extra facilities on flights.
 Promote the airline through branding/advertising.
 Fly to major airports.
 Maintain a modern fleet of aircraft.
Focus  Pursue a cost leadership strategy or a differentiation
strategy in a particular geographical region of the world
(for example South West United States), or focus on
 particular high-profit routes (such as London-New York).
 Possibly focus on a particular type of customer. In the UK
an airline might focus on services for business customers
in the City of London, offering convenient flights to and
from City of London Airport on small planes.

Example 3
The market in the UK for holiday companies is another example of a segmented
market, in which different companies pursue a cost leadership, differentiation or focus
strategy.

The main market for holiday companies is probably the package holidays market,
where a small number of competitors attempt to be the cost leader, although
differences in some features of holiday packages mean that a competitive advantage
can be gained from low prices, even if these are not the lowest prices in the market.

Some companies offer a package holiday at a higher price, but with better quality
accommodation or additional benefits such as onsite pastimes and entertainment.

There are a number of market segments, such as fly-drive holidays, city breaks and
adventure holidays. Within each market segment competitors seek to be the cost
leader or differentiate their products.

 Target Market
 It refers to a group of potential customers to whom a company wants to sell its
products and services. This group also includes specific customers to whom a
company directs its marketing efforts.
 An entity must decide which markets or market segments it should target. It
must:
a. identify the total market for the products or services that it sells
b. recognize the ways in which the market is or might be segmented
c. decide whether to sell its products to all customers in the market
d. decide whether to try to be the market leader, or whether to pursue a
differentiation strategy
e. if it chooses a segmentation strategy (focus strategy), select the segments
that it will target with its product
f. within the targeted market segment (or segments), decide whether to try to
be the market leader or whether to pursue a differentiation strategy.

 Leaders, Followers, Challengers and Nichers

 A business entity can be classified as a leader, follower, challenger or nicher in
its markets.
a. The leader is the entity that sells most products in the market. Examples are
Microsoft for PC operating software and Coca-Cola for cola drinks.
b. A challenger is an entity that is not the market leader, but wants to take
over as the market leader.
 c. A follower is an entity that does not have any ambition to be the market
leader, and so follows the strategic lead provided by the market leader (or
challenger). A follower will try to differentiate its product.
d. A nicher is an entity that targets a particular market segment or market
niche for its product, and does not have any strategic ambition to gain a
position in the larger market.

 Product Positioning
 It entails developing schematic representations that reflect how the products or
services compare to competitors’ on dimensions most important to success in the
industry.
 The following steps are required in product positioning:
1. Select key criteria that effectively differentiate products or services in the
industry.
2. Diagram a two-dimensional product-positioning map with specified criteria
on each axis.
3. Plot major competitors’ products or services in the resultant four-quadrant
matrix.
4. Identify areas in the positioning map where the company’s products or
services could be most competitive in the given target market. Look for
vacant areas (niches).
5. Develop a marketing plan to position the company’s products or services
appropriately.

Source: https://www.google.com/search?q=examples+of+product-
positioning+maps&sxsrf=ALeKk01AjUpJgBSPU_aolr5zWm33I7lkCA:1598834666245&source=lnms&tbm=isch&sa=X&ve
d=2ahUKEwi25deim8TrAhUEa94KHWlIC5sQ_AUoAXoECA0QAw&biw=1366&bih=657#imgrc=KAyyBxQTdR76BM

 An effective product-positioning strategy meets two criteria:

1. It uniquely distinguishes a company from the competition, and
2. It leads customers to expect slightly less service than a company can deliver.
 The best product position to achieve in the mind of consumers is the position of
number 1. The market leader dominates the market for many products and
services, and customers will often buy a product because it is the number 1.
 o BEING THE NUMBER 1 - When an entity is the market leader, it should
want to maintain its market leadership. To do this, it needs to maintain its
position as number 1 in the mind of consumers.
a. The most effective way of becoming number 1 in the mind of
consumers is to be first into the market at the beginning of the
product’s life cycle.
b. If this is not possible, an entity needs to create a new image for its
product, that will enable it to take over as the perceived number 1.
o BEING THE NUMBER 2 - When an entity is only the number 2 in its
market, customers will know this. Unless the entity wants to challenge for
the position of number 1, it must do what it can to win customers from its
position as number 2. Advertising can help.

Example 4
In the US, Avis has been the number 2 car-hire company, and Hertz the number 1.
Avis achieved a position as an attractive number 2 by recognizing its number 2
position, but offering something better than the number 1. Its successful advertising
message was: ‘Avis is only the number 2 in rent-a-car, so why go with us? We try
harder.’ (It is not clear what trying harder means, but this did not matter!)

Pepsi promoted its 7-Up soft drink against market leader Coca-Cola by advertising it
as the ‘Uncola’. This recognized that it was not the number one soft drink, but offered
customers the attraction of not being cola.

o PRODUCT POSITIONING FOR FOLLOWERS AND NICHERS

 Ries and Trout argued that entities that are not the number 1 in their
market should try to find a way of being number 1 in a particular
way. It is much better to be seen as the number 1 in a market segment (or
in a special way) than the number 5 in the market as a whole.
 To create a product position of number 1 in the mind of customers,
entities might devise various marketing strategies.
 The approach recommended by Ries and Trout is to be the number 1 for
a particular type of customer, such as the number 1 product for women or
the number 1 product for professional businessmen. For example:
a. a newspaper or magazine might claim to be the number 1 choice for
investment bankers or investors
b. a local radio station might claim to be the number 1 commercial
station in its geographical area, or the number 1 station for a
particular type of music
c. Apple Mac PCs were not the number 1 make of personal computer,
but it was marketed as the number 1 PC for graphic designers.

 Lock-in Strategy
 The idea of ‘lock-in’ is that when a customer has made an initial decision to
purchase a company’s product, it is committed to making more purchases
 from the same company in the future. The customer is ‘locked in’ to the
supplier and the supplier’s products.

Example 5
Lock-in strategies are fairly common in the IT industry.

Microsoft has successfully locked in many customers to its software products.

Customers would find it difficult to switch to personal computers that do not have a
Microsoft operating system or do not include some of the widely-used application
packages such as Word and Excel.

Apple Computers adopted a lock-in strategy for digital downloading of music from
the internet. Its iTunes service cannot (currently) be used on non-Apple MP3 players
or on most mobile telephones. Customers buying an Apple iPod are currently locked
in to buying digital downloads from Apple.

 A successful lock-in strategy often depends on becoming the industry ‘leader’

or provider of the standard product to the industry (such as the Microsoft
operating systems for PCs). Once an organization has become the industry
standard, it is very difficult for other suppliers to break into the market.
Indeed, market standard positions tend to be reinforced as time goes on as more
and more people turn to that supplier.
 Lock-in tends to be achieved early in a product’s life cycle when the new
supplier achieves an unassailable lead.

 Strategies in Conditions of Hyper competition

 Hyper competition occurs when ‘the frequency, boldness and aggressiveness of
dynamic moves by competitors create conditions of consistent disequilibrium
and change.’
 In a market where competitive conditions are more stable, business strategy is
concerned with building and sustaining competitive advantage.
 In a hypercompetitive environment it is much more difficult to establish
sustained competitive advantage through either cost leadership or
differentiation, because any competitive advantage that is gained will be
temporary. Competitors in a hypercompetitive environment continually look for
ways of competing in different ways, so that no company can sustain
competitive advantage for long using the same basis for achieving its advantage.
 Product and services that were once successful might not be relevant for long.
Long-term competitive advantage is achieved only through making a continual
sequence of short-term competitive initiatives.
 Strategies that might be pursued in a hypercompetitive market are as follows:
a. Shorter product life cycles. Seek to introduce new improved products
quickly, to compete against established products of competitors. Introducing
a ‘better’ product might allow a company to gain market share, although this
advantage will only last until another competitor introduces a new,
improved product that is even better.
 b. Imitate competitors. Imitating competitors might remove the competitive
advantage that the competitors currently enjoys.
c. Prevent a competitor gaining a strong initial position by responding
quickly.
d. Concentrate on small market segments that might be overlooked by
competitors. Eventually, the market might be divided into many small
market segments.
e. Unpredictability. Companies should continually strive for radical solutions.
Be prepared to abandon current approaches.
f. In some situations, it might be possible to compete by building alliances
with some smaller competitors to compete with larger companies that are
financially stronger and currently are the market leaders.

COLLABORATION

 The Nature of Collaboration

 It is the situation of two or more people working together
to create or achieve the same thing. (Cambridge Dictionary)
 In a competitive market, companies need to achieve a competitive advantage
over competitors in order to succeed (and survive).
 In some situations, companies might be able to achieve competitive advantage
through collaboration with:
a. suppliers or customers in the value network/value system
b. other business entities in the value network
c. some other competitors.
 Collaboration w/ suppliers & customers can create additional value, in areas
such as:
a. product design: suppliers and customers might collaborate to improve the
product design, by improving the design of product components or
providing better raw materials
b. delivery times: suppliers and customers might collaborate to improve the
reliability and speed of delivery, for example through a just-in-time
purchasing arrangement.

 Collaboration and Strategic Alliances

 Another way of trying to increase competitive advantage is to collaborate with
other companies in the same industry, who might possibly be regarded as
competitors. One form of collaboration is to create a strategic alliance.
 A strategic alliance is an arrangement in which a number of separate companies
share their resources and activities to pursue a joint strategy. By
collaborating, all the companies in the alliance are able to offer a better product
or service to their customers.
 Example 6
Examples of strategic alliances are in the airline industry where groups of airlines
might form alliances in order to offer travelers a better selection of routes and
facilities than any single airline could offer on its own. Strategic alliances have
included One world (British Airways, American Airlines and others) and Star Alliance
(Lufthansa, BMI and others).

A strategic alliance of airlines enables the combined alliance to offer customers the
ability to arrange journeys by air to and from most parts of the world with a single
booking; however, the airlines do not compete on most routes.

A UK-based international airline might want to offer its customers linked flights from
anywhere in the UK to anywhere in the US. Since it does not have a US flight
network, it might enter into a strategic alliance with a domestic US airline. As a result
of the alliance, it expects to be in a better position to compete against larger US
airlines for transatlantic air traffic.

A US domestic airline might want to offer its customers an all-in-one flight service
from anywhere in the US to the UK. It can achieve this aim by forming a strategic
alliance with the UK airline.

For example, a customer in the UK wanting to arrange a flight to a city in the US not
serviced by British Airways might be able to book the journey through British
Airways: the customer would then fly to the US on British Airways to New York and
then switch to American Airlines for onward travel to the US city destination.

 Collaboration and Joint Ventures

 Joint venture is a popular strategy that occurs when two or more companies form
a temporary partnership or consortium for the purpose of capitalizing on some
opportunity. Often, the two or more sponsoring firms form a separate
organization and have shared equity ownership in the new entity.
 It is frequently used for investing in a new business venture where:
a. there is considerable risk
b. large amounts of capital are needed
c. a mix of skills is essential.
 Guidelines for when a joint venture may be an especially effective means for
pursuing strategies:
1. When a privately owned organization is forming a joint venture with a
publicly owned organization; there are some advantages to being privately
held such as closed ownership. There are some advantages of being publicly
held, such as access to stock issuances as a source of capital. Sometimes, the
unique advantages of being privately and publicly held can be
synergistically combined in a joint venture.
2. When a domestic organization is forming a joint venture with a foreign
company; a joint venture can provide a domestic company with the
 opportunity for obtaining local management in a foreign country, thereby
reducing risks such as expropriation and harassment by host country
officials.
3. When the distinct competencies of two or more firms complement each
other especially well.
4. When some project is potentially very profitable but requires overwhelming
resources and risks.
5. When two or more smaller firms have trouble competing with a large firm.
6. When there exists a need to quickly introduce a new technology.
 The joint venture allows the business risk and financing to be shared by the joint
venture partners. The partners might be companies that compete in some markets
of the world, but have agreed to collaborate in a particular venture. Alternatively
the joint venture partners might be companies in different markets, and do not
compete with each other directly; however each partner brings special skills to
the venture that will help to give it a competitive advantage.
 When multinational companies are seeking to expand by investing in a different
country, they might seek to do so by establishing a joint venture with a local
company. There are several advantages in entering a foreign market in an
alliance with a ‘local’ company.
a. It might be a legal requirement for foreign companies setting up business
in the country to operate as a joint venture with a local company.
b. The local company management should have a better knowledge of
business conditions and practices in the country.
c. It is probably easier to succeed by forming an alliance with a local
company than in competition with local companies. For example, the
government might be a major customer, and it might have a policy of
favoring domestic companies when it makes its purchase decisions.
d. The local company might already have customers to which the new joint
venture can sell its products.
 Difficulties can arise with joint ventures, and lead to the eventual break-up of
the partnership. This can happen when:
a. one joint venture partner is perceived (by the other partners) not to be
contributing adequately
b. one joint venture partner wants to withdraw from the venture, or
c. the joint-venture companies start to compete with each other instead of
collaborating.

 Franchising
 It is a continuing relationship in which a franchisor provides a licensed
privilege to the franchisee to do business and offers assistance in organizing,
training, merchandising, marketing and managing in return for a monetary
consideration.
 It is a form of business by which the owner (franchisor) of a product, service or
method obtains distribution through affiliated dealers (franchisees).
 It is an effective means of implementing forward integration and an another form
of collaboration.
  The basic idea of a franchise is that a company develops a product with the
following features:
a. It is a standard product (or range of products), delivered to customers in a
standard way.
b. It has brand recognition, achieved through advertising and other sales
promotion.
c. Systems for delivering the product to customers are standardized (using
standard equipment, and standard work practices.)

Example 7
The most well-known examples of franchise operations are some of the fast-food
restaurant chains, such as McDonalds. The company that originates the product, the
franchisor, protects its patent rights or intellectual property rights over the product. It
then sells the concept to franchisees who pay for the right to open their own store and
sell the branded product.

The franchisor supplies the product ‘design’ and the right to sell the product. It also
provides a centralized marketing service, which includes extensive advertising and
brand promotion. It also supplies other support services, such as business advice to
franchisees.

The franchisee pays for the franchise, and in addition pays a royalty based on the
value of its sales or the size of its profits.

 By buying into a successful franchise, a franchisee suffers much less risk than
would be experienced setting up a business from scratch and can benefit from
extensive marketing by the franchisor.
 The franchisor receives a constant inflow of cash from new franchisees, as the
operation expands, and is therefore able to grow by selling its business concept
to a large number of other businesses, sometimes worldwide. Additionally, their
head office is kept small because there is considerable delegation of day-to-day
management to the franchisee.
 However, the franchisor will always want to protect its brand name and to
present a consistent appearance to its customers. This means that franchise
agreements have very extensive rules governing franchisees’ behavior and they
will also supply the products. Many franchisees find these rules and the
monopoly supply of products very restrictive and frustrating.

 Licensing
 In a typical licensing agreement, a licensee is given permission by the licenser
to make goods, normally making use of a patented process, and to use the
appropriate trademark on those goods. In return the licenser receives a royalty.
The licensee is exposed to relatively little risk and goods can be made wherever
the licensee is located.
 Possible problems with collaboration: restricting competition
 o The purpose of collaboration should be to gain competitive advantage in a
market. However, it should not seek to create unfair restrictions on
competition.
o Governments in countries with advanced economies are generally in favor of
‘free’ competition in their national markets (and in international trade),
although there are many exceptions to this general rule. When it has a policy
of encouraging competition in markets, a government will seek to discourage
actions by companies that will distort or reduce competition in their industry
and markets. They might do this by making some forms of anti-competitive
behavior illegal.
 Cartel
o It is an arrangement between the rival firms in an industry to operate the same
policies on pricing.
o By operating a price cartel, the firms are able to charge higher prices than if
they competed with each other, and as a result make higher profits.
o Provided that the cartel includes all the firms in the industry (or at least all the
major firms), they are able to exercise supplier power.
o Price cartels are often illegal within a country, although an example of a
successful major price cartel is the powerful Organization of Oil Producing
Countries (OPEC).