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Slide 1: The Strategist’s Choice Competitive Strategy And the question of HOW TO COMPETE Competitive strategy provides a company with the actions to create offensive or defensive positions in an industry and thereby yield a superior return on investment. According to Michael Porter a business should adopt a competitive strategy to secure a competitive advantage. Competitive advantage is anything which gives one organisation an edge over its rivals in the products it sells or the services it offers. Firms have discovered many different approaches to this end, and the best strategy for a given firm is ultimately a distinctive creation reflecting its particular circumstances. 3. 2. Cost Leadership A cost leadership strategy seeks to achieve the position of least-cost producer in the industry as a whole. By producing at the lowest cost, the manufacturer can compete on price with every other produce in the industry, and earn higher unit profits, if the manufacturer so chooses. How to Achieve Overall Cost Leadership 1. Set up production facilities to obtain economies of scale. Use the latest technology to reduce costs and/or enhance productivity (or use cheap labour if available). In high technology industries, and in industries depending on labour skills for product design and production methods, exploit the learning curve effect. By producing more than any other competitor, a firm can benefit more from the learning curve, and achieve lower average costs. 4. Concentrate on improving productivity. 5. Minimise overhead costs. The Choice of Competitive Strategy There are three generic strategies for competitive advantage; cost leadership, differentiation and segmentation (or focus) strategy. (Porter, Competitive Advantage, 1988) The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 Page 1
Slide 2: The Strategist’s Choice 6. 7. Get favourable access to sources of supply. Relocate to cheaper areas. 2. competition, perhaps at a much lower price. Improved products which are not radically different from their competition but are obviously superior in terms of better performance for a similar price. 3. Competitive products which 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 Such trade speeds development and growth in less developed countries, allowing them to make use of their main source of economic advantage, and provides cheap labour in IKEA's case. It expects to work closely with its Vietnamese partners, providing advice on purchasing, productivity and expansion. Despite some privatisation, the market-based approach to production is not widely understood in this still largely planned economy. Differentiation is the exploitation of a product or service which the industry as a whole believes to be unique goods to consumers in more developed countries. 3. each other by trying to offer a more attractive compromise than rival models. The Case of IKEA More and more, for manufactured goods, cost advantage is based on cheap labour in the developing world. An example is IKEA's expansion of manufacturing in Vietnam, from where it sourced more than £70 million in products in 2003. It calculated that its Vietnamese business would triple in value within four years. How to Differentiate 1. 2. Build up a brand image. Give the product special features to make it stand out. Exploit other activities in the value chain. Reaching Differentiation with Soya Beans! We all know about branding and product modification in food. Organic food is increasing in popularity, as it is differentiated on the basis of:   Possible health benefits (disputed by some nutritionists) Kindliness to the environment (and to animals) The end product may be the same (e.g. pasta) but the ingredients and process by which it is made are a source of differentiation. Retailers Differentiation A differentiation strategy assumes that competitive advantage can be gained through particular characteristics of a firm's products. Products may be categorised as: 1. Breakthrough products offering a radical performance advantage over The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 Page 2
Slide 3: The Strategist’s Choice and manufacturers of branded goods charge more for organic variants of standard products. The Economist (21 April 2001) reported that Japanese buyers of American soya beans 'are willing to pay a premium for quality - and for knowing exactly where their food came from. By preserving [the] crop's identity [farmers] can fetch over 25% more per bushel.' Ultimately this is about differentiating a commodity - in short, decommoditising it. The advantage for retailers is that, with tens of thousands of new food products introduced to supermarkets each year, the right agricultural pedigree provides further differentiation. 2. The firm does not spread itself too thinly. Drawbacks of a focus strategy 1. The firm sacrifices economies of scale which would be gained by serving a wider market. 2. Competitors can move into the segment, with increased resources (e.g. the Japanese moved into the US luxury car market, to compete with Mercedes and BMW). 3. The segment's needs may eventually become less distinct from the main market. Focus (or niche) Strategy In a focus strategy, a firm concentrates its attention on one or more particular segments or niches of the market, and avoids serving an entire market with a single product – or service. A cost-focus strategy aims to be a cost leader for a particular segment. This type of strategy is often found in the printing, clothes manufacture, food and drink production and car repair industries. A differentiation-focus strategy pursues differentiation for a chosen segment. Luxury goods are the prime example of such a strategy. The Case of Tyrrells' Potato Crisps William Chase, owner of Tyrrells' Potato Crisps, a niche manufacturer of crisps, set up in part to escape from dependence on the major supermarkets and in part to add extra value to his basic product, potatoes. Thus Tyrrells' strategy, to sell through small retailers at the upper end of the grocery and catering markets, may be summarised under six key success factors:  Brand. Marketing taps into the public's enthusiasm for 'authenticity' telling the story of Tyrrells' from 'seed to chip'.  Quality. Crisps are made from traditional varieties of potato and ‘hand-fried' in small batches.  Distribution. Concentrates on direct sales to 80 per cent of its retail stockists. Students from a local agricultural college are employed to trawl through directories and identify fine-food shops to target with Advantages of a focus strategy 1. A niche may be more secure and if so a business can insulate itself from competition. The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 Page 3
Slide 4: The Strategist’s Choice samples. After winning their business, Tyrrells' develops the relationship though personal contact.  Diffusion. Sales to the most exclusive shop creates a showcase to target consumers insensitive to price, so allowing the business to grow profitably.  New product development. New flavours and products are continuously sought and produced in sample runs and given free to shops to test with customers. What are the competitive strategy issues raised in the story below? and perceived added value in the eyes of the customer. The Case of Hermes Telecommunications Plc Hermes has invested a great deal of money in establishing a network which competes with that of Telecom UK, a recently privatised utility. Initially Hermes concentrated its efforts on business customers in SE England, especially the City of London, where it offered a lower cost service to that supplied by Telecom UK. Recently, Hermes has approached the residential market (i.e. domestic telephone users) offering a lower cost service on longdistance calls. Technological developments have resulted in the possibility of a cheap mobile telecommunication network, using microwave radio links. The franchise for this service has been awarded to Gerbil phone, which is installing transmitters in town centres and stations etc. Like anything, it’s rarely straightforward to draw hard and fast distinctions between each generic strategy simply because there are conceptual problems underlying them. Let’s take a look at some of them here starting with cost leadership. Which strategy? What is important though is to pursue one generic strategy. A stuck-in-the-middle strategy is almost certain to return low profits. This firm lacks the market share, capital investment and resolve to play the low-cost game, the industry-wide differentiation necessary to obviate the need for a low-cost position, or the focus to create differentiation or a low-cost position in a more limited sphere.' But guess what! Getting 'stuck-in-the-middle' is what many companies actually do – and believe it or not - quite successfully too! In the end any number of strategies can be pursued, with different approaches to price The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 Cost leadership Page 4
Slide 5: The Strategist’s Choice 1. The focus for strategy is an internal one. Strategists pursue internal measures, rather than the market methods to gain market share. And herein lies the point; it is market share which is important, not cost leadership as such. 2. Only one firm will pursue cost leadership strategies successfully across the whole industry, 3. A cost leader can choose to invest higher margins in differentiation, R & D or marketing. Thus operating with low costs does not mean you have to charge lower prices or compete on price. Being a cost leader gives producers more freedom to choose other competitive strategies. This is one of a series of articles published by UBS Unique Business Strategies. If you want to read more on business strategy visit Unique Business Strategies and chose from a wide range of articles, white papers and books on for example Business Strategy, Marketing, Management and Operations Popular reads include;       How to Create and Exploit a UNIQUE STRATEGIC POSITION for Your Business The Vital Importance of Creative Insight The Purpose Driven Management System Capabilities and Competencies Market Standing How to Locate and Utilize Three Differentiating Capabilities Andrew Pearson Managing Director Unique Business Strategies *********************** Best wishes, Focus There are probably fewer difficulties tied up with this strategy, as it ties in very neatly with ideas of market segmentation. In practice most companies pursue this strategy to some extent, by designing products/services to meet the needs of particular target markets. Differentiation 1. It doesn’t necessarily follow that differentiated product may be sold at a higher price; it may sell at prices similar to competing products to increase market share. 2. An important issue is to differentiate away from competitors. We’ll cover this later but for now let us remember that differentiation is a MAJOR challenge and requires a large amount of thought on positioning and targeting. 3. The source of differentiation may include many or all attributes of a company’s offer. Restaurants aim to create an atmosphere or 'ambience', as well as serving food of good quality. The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 *********************** To find out more please write to Page 5
Slide 6: The Strategist’s Choice andrew@uniquebusinessstrategies.co.uk visit my blog www.uniquebusinessstrategies.co.uk ********************************** The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 Page 6