Competitive Advantage?

A competitive advantage is an attribute that enables a

company to outperform its competitors. This allows a company to achieve
superior margins compared to its competition and generates value for the company
and its shareholders.A competitive advantage must be difficult, if not impossible,
to duplicate. If it is easily copied or imitated, it is not considered a competitive
advantage.

Examples of Competitive Advantage

1. Highly skilled labor

2. A unique geographic location
3. Access to new or proprietary technology

WHAT IS A COMPETITIVE STRATEGY?
A competitive strategy may be defined as a long-term plan of action that a
company devises towards achieving a competitive advantage over its competitors
after examining the strengths and weaknesses of the latter and comparing them to
its own. The strategy can incorporate actions to withstand the market’s competitive
pressures, attract customers and assist in cementing the company’s market
position.
 A low-cost provider strategy-striving to achieve lower overall costs than
rivals and appealing to a broad spectrum of customers, usually by
underpricing rivals.
 2. A broad differentiation strategy-seeking to differentiate the company's
product offering from rivals' in ways that will appeal to a broad spectrum of
buyers.
 A best-cost provider strategy-giving customers more value for their money
by incorporating good-to-excellent product attributes at a lower cost than
rivals; the target is to have the lowest (best) costs and prices compared to
rivals offering products with comparable attributes.
 A focused (or market niche) strategy based on low costs--concentrating on a
narrow buyer segment and outcompeting rivals by having lower costs than
rivals and thus being able to serve niche members at a lower price.
LOW-COST PROVIDER STRATEGIES Striving to be the industry's overall
low-cost provider is a powerful competitive approach in markets with many price-
sensitive buyers. A company achieves low-cost leadership when it becomes the
industry's lowest-cost provider rather than just being one of perhaps several
competitors with comparatively low costs. A low-cost provider's strategic target is
meaningfully lower costs than rivals-but not necessarily the absolutely lowest
possible cost. In striving for a cost advantage over rivals, managers must take care
to include features and services that buyers consider essential-a product offering
that is too frills-free sabotages the attractiveness of the company s product and can
turn buyers off even if it is priced lower than competing products. For maximum
effectiveness, companies employing a low-cost provider strategy need to achieve
their cost advantage in ways difficult for rivals to copy or match. If rivals find it
relatively easy or inexpensive to imitate the leader's low-cost methods, then the
leader's advantage will be too short-lived to yield a valuable edge in the
marketplace.

Cost-Efficient Management of Value Chain Activities For a company to do a

more cost-efficient job of managing its value chain than rivals, managers must
launch a concerted, ongoing effort to ferret out cost-saving opportunities in every
part of the value chain. No activity can escape cost-saving scrutiny, and all
company personnel must be expected to use their talents and ingenuity to come up
with innovative and effective ways to keep costs down. All avenues for performing
value chain activities at a lower cost than rivals have to be explored. Attempts to
outmanage rivals on cost commonly involve such actions as:

1. Striving to capture all available economies of scale. Economies of scale

stem from an ability to lower unit costs by increasing the scale of operation-
there are many occasions when a large plant is more economical to operate
than a small or medium-size plant or when a large distribution warehouse is
more cost efficient than a small warehouse. Often, manufacturing economies
can be achieved by using common parts and components in different models
and/or by cutting back on the number of models offered (especially slow-
selling ones) and then scheduling longer production runs for fewer models.
In global industries, making separate products for each country market
instead of selling a mostly standard product worldwide tends to boost unit
costs because of lost time in model changeover, shorter production runs, and
 inability to reach the most economic scale of production for each country
model.
2. Taking full advantage of learning/experience curve effects. The cost of
performing an activity can decline over time as the learning and experience
of company personnel builds. Learning/experience curve economies can
stem from debugging and mastering newly introduced technologies, using
the experiences and suggestions of workers to install more efficient plant
layouts and assembly procedures, and the added speed and effectiveness that
accrues from repeatedly picking sites for and building new plants, retail
outlets, or distribution centers. Aggressively managed low-cost providers
pay diligent attention to capturing the benefits of learning and experience
and to keeping these benefits proprietary to whatever extent possible.
3. Trying to operate facilities atfull capacity. Whether a company is able to
operate at or near full capacity has a big impact on units costs when its value
chain contains activities associated with substantial fixed costs. Higher rates
of capacity utilization allow depreciation and other fixed costs to be spread
over a larger unit volume, thereby lowering fixed costs per unit. The more
capital-intensive the business, or the higher the percentage of fixed costs as a
percentage of total costs, the more important that full-capacity operation
becomes because there's such a stiff unit-cost penalty for underutilizing
existing capacity. In such cases, finding ways to operate close to full
capacity year-round can be an important source of cost advantage.
4. Pursuing efforts to boost sales volumes and thus spread such costs as R&D,
advertising, and selling and administrative costs out over more units. The
more units a company sells, the more it lowers its unit costs for R&D, sales
and marketing, and administrative overhead.
5. Improving supply chain efficiency. Many companies pursue cost reduction
by partnering with suppliers to streamline the ordering and purchasing
process via online systems, reduce inventory carrying costs via just-in-time
inventory practices, economize on shipping and materials handling, and
ferret out other cost-saving opportunities. A company with a core
competence (or better still a distinctive competence) in cost-efficient supply
chain management can sometimes achieve a sizable cost advantage over less
adept rivals.
 6. Substituting the use of low-cost for high-cost raw materials or component
parts. If the costs of raw materials and parts are too high, a company can
either substitute the use of lower-cost items or maybe even design the high-
cost components out of the product altogether.

Revamping the Value Chain to Curb or Eliminate Unnecessary Activities

Dramatic cost advantages can emerge from finding innovative ways to cut back on
or entirely bypass certain cost-producing value chain activities. There are six
primary ways companies can achieve a cost advantage by reconfiguring their value
chains:

1. Cutting out distributors and dealers by selling directly to customers. Selling

directly and bypassing the activities and costs of distributors or dealers can
involve (1) having the company's own direct sales force (which adds the
costs of maintaining and supporting a sales force but may well be cheaper
than accessing customers through distributors or dealers) and/or (2)
conducting sales operations at the company's Web site (Web site operations
may be substantially cheaper than distributor or dealer channels). Costs in
the wholesale/retail portions of the value chain frequently represent 35-50
percent of the price final consumers pay. There are several prominent
examples in which companies have instituted a sell-direct approach to
cutting costs out of the value chain. Software developers allow customers to
download new programs directly from the Internet, eliminating the costs of
producing and packaging CDs and cutting out the host of activities, costs,
and markups associated with shipping and distributing software through
wholesale and retail channels. By cutting all these costs and activities out of
the value chain, software developers have the pricing room to boost their
profit margins and still sell their products below levels that retailers would
have to charge. The major airlines now sell most of their tickets directly to
passengers via their Web sites, ticket counter agents, and telephone
reservation systems, allowing them to save hundreds of millions of dollars in
commissions once paid to travel agents.
2. Replacing certain value chain activities with faster and cheaper online
technology. In recent years the Internet and Internet technology applications
have become powerful and pervasive tools for conducting business and
reengineering company and industry value chains. For instance, Internet
 technology has revolutionized supply chain management, turning many
time-consuming and labor-intensive activities into paperless transactions
performed instantaneously. Company procurement personnel can-with only
a few mouse clicks-check materials inventories against incoming customer
orders, check suppliers' stocks, check the latest prices for parts and
components at auction and e-sourcing Web sites, and check FedEx delivery
schedules. Various e-procurement software packages streamline the
purchasing process by eliminating paper documents such as requests for
quotations, purchase orders, order acceptances, and shipping notices. There's
software that permits the relevant details of incoming customer orders to be
instantly shared with the suppliers of needed parts and components. All this
facilitates just-in-time deliveries of parts and components and matching the
production of parts and components to assembly plant requirements and
production schedules, cutting out unnecessary activities and producing
savings for both suppliers and manufacturers. Retailers can install online
systems that relay data from cash register sales at the check-out counter back
to manufacturers and their suppliers.
3. Relocating facilities so as to curb the need for shipping and handling
activities. Having suppliers locate facilities adjacent to the company's plant
or locating the company's plants or warehouses near customers can help curb
or eliminate shipping and handling costs.
4. Offering afrills-free product. Deliberately restricting a company's product
offering to the essentials can help the company cut costs associated with
snazzy attributes and a full lineup of options and extras. Activities and costs
can also be eliminated by incorporating fewer performance and quality
features into the product and by offering buyers fewer services. Stripping
extras like first-class sections, meals, and reserved seating is a favorite
technique of budget airlines like Southwest, Ryanair (Europe), easyJet
(Europe), and Gol (Brazil).
5. Offering a limited product line as opposed to a full product line. Pruning
slowselling items from the product lineup and being content to meet the
needs of most buyers rather than all buyers can eliminate activities and costs
associated with numerous product versions and wide selection.

The Keys to Success in Achieving Low-Cost Leadership –

To succeed with a low-cost-provider strategy, company managers have to
scrutinize each cost-creating activity and determine what factors cause costs to be
high or low. Then they have to use this knowledge to keep the unit costs of each
activity low, exhaustively pursuing cost efficiencies throughout the value chain.
They have to be proactive in restructuring the value chain to eliminate nonessential
work steps and lowvalue activities. Normally, low-cost producers work diligently
to create cost-conscious corporate cultures that feature broad employee
participation in continuous cost improvement efforts and limited perks and frills
for executives. They strive to operate with exceptionally small corporate staffs to
keep administrative costs to a minimum.

Many successful low-cost leaders also use benchmarking to keep close tabs on
how their costs compare with rivals and firms performing comparable activities in
other industries. But while low-cost providers are champions of frugality, they are
usually aggressive in investing in resources and capabilities that promise to drive
costs out of the business. Wal-Mart, one of the foremost practitioners of low-cost
leadership, employs state-of-the-art technology throughout its operationsits
distribution facilities are an automated showcase, it uses online systems to order
goods from suppliers and manage inventories, it equips its stores with cutting-edge
sales-tracking and check-out systems, and it sends daily point-of-sale data to 4,000
vendors. Wal-Mart's information and communications systems and capabilities are
more sophisticated than those of virtually any other retail chain in the world. Other
companies noted for their successful use of low-cost provider strategies include
Lincoln Electric in arc welding equipment, Briggs & Stratton in small gasoline
engines, Bic in ballpoint pens, Black & Decker in power tools, Stride Rite in
footwear, Beaird-Poula

When a Low-Cost Provider Strategy Works Best

A competitive strategy predicated on low-cost leadership is particularly powerful

when:

1. Price competition among rival sellers is especially vigorous-Low-cost providers

are in the best position to compete offensively on the basis of price, to use the
appeal of lower price to grab sales (and market share) from rivals, to win the
business of price-sensitive buyers, to remain profitable in the face of strong price
competition, and to survive price wars.

2. The products of rival sellers are essentially identical and supplies are readily
available from any of several eager sellers-Commodity-like products and/or ample
supplies set the stage for lively price competition; in such markets, it is less
efficient, higher-cost companies whose profits get squeezed the most. .

3. There are few ways to achieve product differentiation that have value to
buyersWhen the differences between brands do not matter much to buyers, buyers
are nearly always very sensitive to price differences and shop the market for the
best pnce.

4. Most buyers use the product in the same ways-With common user requirements,
a standardized product can satisfy the needs of buyers, in which case low selling
price, not features or quality, becomes the dominant factor in causing buyers to
choose one seller's product over another's.

5. Buyers incur low costs in switching their purchases from one seller to
anotherLow switching costs give buyers the flexibility to shift purchases to lower-
priced sellers having equally good products or to attractively priced substitute
products. A low-cost leader is well positioned to use low price to induce its
customers not to switch to rival brands or substitutes.

6. Buyers are large and have significant power to bargain down prices-Low-cost
providers have partial profit-margin protection in bargaining with high-volume
buyers, since powerful buyers are rarely able to bargain price down past the
survival level of the next most cost-efficient seller.

7. Industry newcomers use introductory low prices to attract buyers and build a
customer base-The low-cost leader can use price cuts of its own to make it harder
for a new rival to win customers; the pricing power of the low-cost provider acts as
a barrier for new entrants.

As a rule, the more price-sensitive buyers are, the more appealing a lowcost
strategy becomes. A low-cost company's ability to set the industry's price floor and
still earn a profit erects protective barriers around its market position.
The Pitfalls of a Low-Cost Provider Strategy

Perhaps the biggest pitfall of a low-cost provider strategy is getting carried away
with overly aggressive price cutting and ending up with lower, rather than higher,
profitability. A low-costilow-price advantage results in superior profitability only
if (I) prices are cut by less than the size of the cost advantage or (2) the added gains
in unit sales are large enough to bring in a bigger total profit despite lower margins
per unit sold. A company with a 5 percent cost advantage cannot cut prices 20
percent, end up with a volume gain of only 10 percent, and still expect to earn
higher profits! A second big pitfall is not emphasizing avenues of cost advantage
that can be kept proprietary or that relegate rivals to playing catch-up. The value of
a cost advantage depends on its sustainability. Sustainability, in turn, hinges on
whether the company achieves its cost advantage in ways difficult for rivals to
copy or match. A third pitfall is becoming too fixated on cost reduction.

Low cost cannot be pursued so zealously that a firm's offering ends up being too
featurespoor to generate buyer appeal. Furthermore, a company driving hard to
push its costs down has to guard against misreading or ignoring increased buyer
interest in added features or service, declining buyer sensitivity to price, or new
developments that start to alter how buyers use the product. A low-cost zealot risks

EXAMPLES

Southwest Airlines has reconfigured the traditional value chain of commercial

airlines to lower costs and thereby offer dramatically lower fares to passengers. Its
mastery of fast turnarounds at the gates (about 25 minutes versus 45 minutes for
rivals) allows its planes to fly more hours per day. This translates into being able to
schedule more flights per day with fewer aircraft, allowing Southwest to generate
more revenue per plane on average than rivals. Southwest does not offer in-flight
meals, assigned seating, baggage transfer to connecting airlines, or first-class
seating and service, thereby eliminating all the cost-producing activities associated
with these features. The company's fast, user-friendly online reservation system
facilitates e-ticketing and reduces staffing requirements at telephone reservation
centers and airport counters. Its use of automated check-in equipment reduces
staffing requirements for terminal check-in.
Dell has created the best, most cost-efficient value chain in the global personal
computer industry. Whereas Dell's major rivals (Hewlett-Packard, Lenovo, Sony,
and Toshiba) produce their models in volume and sell them through independent
resellers and retailers, Dell has elected to market directly to PC users, building its
PCs to customer specifications as orders come in and shipping them to customers
within a few days ofreceiving the order. Dell's value chain approach has proved
costeffective in coping with the PC industry's blink-of-an-eye product life cycle.
The build-to-order strategy enables the company to avoid misjudging buyer
demand for its various models and being saddled with quickly obsolete excess
components and finished-goods inventories-all parts and components are obtained
on a just-in-time basis from vendors, many of which deliver their items to Dell
assembly plants several times a day in volumes matched to the Dell's daily
assembly schedule. Also, Dell's sell-direct strategy slices reseller/retailer costs and
margins but of the value chain (although some of these savings are offset by the
cost of Dell's direct marketing and customer support activities-functions that would
otherwise be performed by resellers and retailers). Partnerships with suppliers that
facilitate just-in-time deliveries of components and minimize Dell's inventory
costs, coupled with Dell's extensive use of e-commerce technologies further reduce
Dell's costs. Dell's value chain approach is widely considered to have made it the
global low-cost leader in the PC industry.

BROAD DIFFERENTIATION STRATEGIES Differentiation strategies are

attractive whenever buyers' needs and preferences are too diverse to be fully
satisfied by a standardized product or by sellers with identical capabilities. A
company attempting to succeed through differentiation must study buyers' needs
and behavior carefully to learn what buyers consider important, what they think
has value, and what they are willing to pay for. Then the company has to
incorporate buyer-desired attributes into its product or service offering that will
clearly set it apart from rivals. Competitive advantage results once a sufficient
number of buyers become strongly attached to the differentiated attributes.
Successful differentiation allows a firm to:

 Command a premium price for its product, and/or

 Increase unit sales (because additional buyers are won over by the
differentiating features), and
  Gain buyer loyalty to its brand (because some buyers are strongly attracted
to the differentiating features and bond with the company and its products).

Differentiation enhances profitability whenever the extra price the product

commands outweighs the added costs of achieving the differentiation. Company
differentiation strategies fail when buyers don't value the brand's uniqueness and
when a company's approach to differentiation is easily copied or matched by its
rivals

Types of Differentiation Themes Companies can pursue differentiation from

many angles: a unique taste (Dr Pepper, Listerine); multiple features (Microsoft
Windows, Microsoft Office); wide selection and one-stop shopping (Home Depot,
Amazon.com); superior service (FedEx); spare parts availability (Caterpillar);
engineering design and performance (Mercedes, BMW); prestige and
distinctiveness (Rolex); product reliability (Johnson & Johnson in baby products);
quality manufacture (Karastan in carpets, Michelin in tires, Toyota and Honda in
automobiles); technological leadership (3M Corporation in bonding and coating
products); a full range of services (Charles Schwab in stock brokerage); a complete
line of products (Campbell's soups); and top-of-the-line image and reputation
(Ralph Lauren and Starbucks).

The most appealing approaches to differentiation are those that are hard or
expensive for rivals to duplicate. Indeed, resourceful competitors can, in time,
clone almost any product or feature or attribute. If Coca-Cola introduces a vanilla-
flavored soft drink, so can Pepsi; if Ford offers a 50,OOO-mile bumper-to-bumper
warranty on its new vehicles, so can Volkswagen and Nissan. If Nokia introduces
cell phones with cameras and Internet capability, so can Motorola and Samsung.
As a rule, differentiation yields a longerlasting and more profitable competitive
edge when it is based on product innovation, technical superiority, product quality
and reliability, comprehensive customer service, and unique competitive
capabilities. Such differentiating attributes tend to be tough for rivals to copy or
offset profitably, and buyers widely perceive them as having value

The Four Best Routes to Competitive Advantage via a Broad Differentiation

Strategy - While it is easy enough to grasp that a successful differentiation
strategy must entail creating buyer value in ways unmatched by rivals, the big
issue in crafting a differentiation strategy is which of four basic routes to take in
delivering unique buyer value via a broad differentiation strategy. Usually,
building a sustainable competitive advantage via differentiation involves pursuing
one of four basic routes to delivering superior value to buyers.

One route is to incorporate product attributes and user features that lower the
buyer's overall costs of using the company~' product. Making a company's product
more economical for a buyer to use can be done by reducing the buyer's raw
materials waste (providing cut-to-size components), reducing a buyer's inventory
requirements (providing just-in-time deliveries), increasing maintenance intervals
and product reliability so as to lower a buyer's repair and maintenance costs, using
online systems to reduce a buyer's procurement and order processing costs, and
providing free technical support. Rising costs for gasoline have dramatically
spurred the efforts of motor vehicle manufacturers worldwide to introduce models
with better fuel economy and reduce operating costs for motor vehicle owners.

A second route is to incorporate features that raise product performance. 4 This

can be accomplished with attributes that provide buyers greater reliability, ease of
use, convenience, or durability. Other performance-enhancing options include
making the company's product or service cleaner, safer, quieter, or more
maintenance free than rival brands. Cell phone manufacturers are in a race to
introduce next-generation phones with trendsetting features and options.

A third route to a differentiation-based competitive advantage is to incorporate

features that enhance buyer satisfaction in noneconomic or intangible ways.
Goodyear's Aquatread tire design appeals to safetyconscious motorists wary of
slick roads. Rolls Royce, Ralph Lauren, Gucci, Tiffany, Cartier, and Rolex have
differentiation-based competitive advantages linked to buyer desires for status,
image, prestige, upscale fashion, superior craftsmanship, and the finer things in
life. L. L. Bean makes its mail-order customers feel secure in their purchases by
providing an unconditional guarantee with no time limit: "All of our products are
guaranteed to give 100 percent satisfaction in every way. Return anything
purchased from us at any time if it proves otherwise. We will replace it, refund
your purchase price, or credit your credit card, as you wish."
The fourth route is to deliver value to customers by differentiating on the basis of
competencies and competitive capabilities that rivals don't have or can't afford to
match.s The importance of cultivating competencies and capabilities that add
power to a company's resource strengths and competitiveness comes into play here.
Core and/or distinctive competencies not only enhance a company's ability to
compete successfully in the marketplace but can also be unique in delivering value
to buyers. There are numerous examples of companies that have differentiated
themselves on the basis of capabilities. Because Fox News and CNN have the
capability to devote more air time to breaking news stories and get reporters on the
scene very quickly compared to the major networks, many viewers turn to the
cable networks when a major news event occurs. Microsoft has stronger
capabilities to design, create, distribute, and advertise an array of software products
for PC applications than any of its rivals. Avon and Mary Kay Cosmetics have
differentiated themselves from other cosmetics and personal care companies by
assembling a sales force numbering in the hundreds of thousands that gives them
direct sales capability-their sales associates can demonstrate products to interested
buyers, take their orders on the spot, and deliver the items to buyers' homes.
Japanese auto makers have the capability to satisfy changing consumer preferences
for one vehicle style versus another because they can bring new models to market
faster than American and European automakers.

When a Differentiation Strategy Works Best Differentiation strategies tend to

work best in market circumstances where: .

 Buyer needs and uses of the product are diverse-Diverse buyer preferences
present competitors with a bigger window of opportunity to do things
differently and set themselves apart with product attributes that appeal to
particular buyers. For instance, the diversity of consumer preferences for
menu selection, ambience, pricing, and customer service gives restaurants
exceptionally wide latitude in creating a differentiated product offering.
Other companies having many ways to strongly differentiate themselves
from rivals include the publishers of magazines, the makers of motor
vehicles, and the manufacturers of cabinetry and countertops. .
 There are many ways to differentiate the product or service and many buyers
perceive these differences as having value-There is plenty of room for retail
 apparel competitors to stock different styles and quality of apparel
merchandise but very little room for the makers of paper clips, copier paper,
or sugar to set their products apart. Likewise, the sellers of different brands
of gasoline or orange juice have little differentiation opportunity compared
to the sellers of high-definition TVs, patio furniture, or breakfast cereal.
Unless different buyers have distinguishably different preferences for certain
features and product attributes, profitable differentiation opportunities are
very restricted. ·
 Few rival firms are following a similar differentiation approach-The best
differentiation approaches involve trying to appeal to buyers on the basis of
attributes that rivals are not emphasizing. A differentiator encounters less
head to-head rivalry when it goes its own separate way in creating
uniqueness and does not try to outdifferentiate rivals on the very same
attributes-when many rivals are all claiming "Ours tastes better than theirs"
or "Ours gets your clothes cleaner than theirs," the most likely result is weak
brand differentiation and "strategy overcrowding"-a situation in which
competitors end up chasing the same buyers with very similar product
offerings. ·
 Technological change is fast-paced and competition revolves around rapidly
evolving product features-Rapid product innovation and frequent
introductions of next-version products not only provide space for companies
to pursue separate differentiating paths but also heighten buyer interest. In
video game hardware and video games, golf equipment, PCs, cell phones,
and MP3 players, competitors are locked into an ongoing battle to set
themselves apart by introducing the best next-generation products-
companies that fail to come up with new and improved products and
distinctive performance features quickly lose out in the marketplace. In
network TV broadcasting in the United States, NBC, ABC, CBS, Fox, and
several others are always scrambling to develop a lineup of TV shows that
will win higher audience ratings and pave the way for charging higher
advertising rates and boosting ad revenues.

The Pitfalls of a Differentiation Strategy - Differentiation strategies can fail

for any of several reasons. A differentiation strategy is always doomed when
competitors are able to quickly copy most or all of the appealing product
attributes a company comes up with. Rapid imitation means that no rival
achieves differentiation, since whenever one firm introduces some aspect of
uniqueness that strikes the fancy of buyers, fast-following copycats quickly
reestablish similarity. This is why a firm must search out sources of uniqueness
that are time-consuming or burdensome for rivals to match if it hopes to use
differentiation to win a competitive edge over rivals.

A second pitfall is that the company s differentiation strategy produces a ho-

hum market reception because buyers see little value in the unique attributes of
a company s product. Thus, even if a company sets the attributes of its brand
apart from the brands of rivals, its strategy can fail because of trying to
differentiate on the basis of something that does not deliver adequate value to
buyers (such as lowering a buyer's cost to use the product or enhancing a
buyer's well-being). Anytime many potential buyers look at a company's
differentiated product offering and conclude "So what?" the company's
differentiation strategy is in deep trouble-buyers will likely decide the product
is not worth the extra price, and sales will be disappointingly low.

The third big pitfall of a differentiation strategy is overspending on efforts to

differentiate the company s product offering, thus eroding profitability.
Company efforts to achieve differentiation nearly always raise costs. The trick
to profitable differentiation is either to keep the costs of achieving
differentiation below the price premium the differentiating attributes can
command in the marketplace (thus increasing the profit margin per unit sold) or
to offset thinner profit margins per unit by selling enough additional units to
increase total profits. If a company goes overboard in pursuing costly
differentiation efforts and then unexpectedly discovers that buyers are unwilling
to pay a sufficient price premium to cover the added costs of differentiation, it
ends up saddled with unacceptably thin profit margins or even losses. The need
to contain differentiation costs is why many companies add little touches of
differentiation that add to buyer satisfaction but are inexpensive to institute.
Upscale restaurants often provide valet parking. Ski resorts provide skiers with
complimentary coffee or hot apple cider at the base of the lifts in the morning
and late afternoon. FedEx, UPS, and many catalog and online retailers have
installed software capabilities that allow customers to track packages in transit.
Some hotels and motels provide free continental breakfasts, exercise facilities,
 and in-room coffeemaking amenities. Publishers are using their Web sites to
deliver supplementary educational materials to the buyers of their textbooks.
Laundry detergent and soap manufacturers add pleasing scents to their products.

BEST-COST PROVIDER STRATEGIES Best-cost provider strategies aim at

giving customers more value for the money. The objective is to deliver superior
value to buyers by satisfying their expectations on key
quality/features/performance/service attributes and beating their expectations on
price (given what rivals are charging for much the same attributes). A company
achieves best-cost status from an ability to incorporate attractive or upscale
attributes at a lower cost than rivals. The attractive attributes can take the form of
appealing features, good-to-excellent product performance or quality, or attractive
customer service. When a company has the resource strengths and competitive
capabilities to incorporate these upscale attributes into its product offering at a
lower cost than rivals, it enjoys best-cost status-it is the low-cost provider of an
upscale product. Being a best-cost provider is different from being a low-cost
provider because the additional upscale features entail additional costs (that a low-
cost provider can avoid by offering buyers a basic product with few frills). As
Figure 5.1 indicates, best-cost provider strategies stake out a middle ground
between pursuing a low-cost advantage and a differentiation advantage and
between appealing to the broad market as a whole and a narrow market niche.
From a competitive positioning standpoint, best-cost strategies are thus a hybrid,
balancing a strategic emphasis on low cost against a strategic emphasis on
differentiation (upscale features delivered at a price that constitutes superior value)

When a Best-Cost Provider Strategy Works Best A best-cost provider strategy

works best in markets where buyer diversity makes product differentiation the
norm and where many buyers are also sensitive to price and value. This is because
a best-cost provider can position itself near the middle of the market with either a
medium-quality product at a below-average price or a high-quality product at an
average or slightly higher price. Often, substantial numbers of buyers prefer
midrange products rather than the cheap, basic products of low-cost producers or
the expensive products of top-of-the-line differentiators. But unless a company has
the resources, know-how, and capabilities to incorporate upscale product or service
attributes at a lower cost than rivals, adopting a best-cost strategy is ill advised-a
winning strategy must always be matched to a company's resource strengths and
capabilities. Illustration Capsule 5.3 describes how Toyota has applied the
principles of a bestcost provider strategy in producing and marketing its Lexus
brand.

The Big Risk of a Best-Cost Provider Strategy A company's biggest

vulnerability in employing a best-cost provider strategy is getting squeezed
between the strategies of firms using low-cost and high-end differentiation
strategies. Low-cost providers may be able to siphon customers away with the
appeal of a lower price (despite their less appealing product attributes). High-end
differentiators may be able to steal customers away with the appeal of better
product attributes (even though their products carry a higher price tag). Thus, to be
successful, a best-cost provider must offer buyers significantly better product
attributes in order to justify a price above what low-cost leaders are charging.
Likewise, it has to achieve significantly lower costs in providing upscale features
so that it can outcompete high-end differentiators on the basis of a significantly
lower price.

FOCUSED (OR MARKET NICHE) STRATEGIES What sets focused

strategies apart from low-cost leadership or broad differentiation strategies is
concentrated attention on a narrow piece of the total market. The target segment, or
niche, can be defined by geographic uniqueness, by specialized requirements in
using the product, or by special product attributes that appeal only to niche
members. Community Coffee, the largest family-owned specialty coffee retailer in
the United States, is a company that focused on a geographic market niche; despite
having a national market share of only 1.1 percent, Community has won a 50
percent - share of the coffee business in supermarkets in southern Louisiana in
competition against Starbucks, Folger's, Maxwell House, and asserted specialty
coffee retailers. Community Coffee's geographic version of a focus strategy has
allowed it to capture sales in excess of $100 million annually by catering to the
tastes of coffee drinkers across an II-state region. Examples of firms that
concentrate on a well-defined market niche keyed to a particular product or buyer
segment include Animal Planet and the History Channel (in cable TV); Google (in
Internet search engines); Porsche (in sports cars); Cannon dale (in top-of-the-line
mountain bikes); Domino's Pizza (in pizza delivery); Enterprise Rent-a-Car (a
specialist in providing rental cars to repair garage customers); Bandag (a specialist
in truck tire recapping that promotes its recaps aggressively at over 1,000 truck
stops), CGA Inc. (a specialist in providing insurance to cover the cost of lucrative
hole-in-one prizes at golf tournaments); Match.com (the world's largest online
dating service); and Avid Technology (the world leader in digital technology
products to create 3D animation and to edit films, videos, TV broadcasts, video
games, and audio recordings). Microbreweries, local bakeries, bed-andbreakfast
inns, and local owner-managed retail boutiques are all good examples of
enterprises that have scaled their operations to serve narrow or local customer
segments.

Coca-Cola Company has introduced ‘diet cola’ to serve the niche market
consisting of diabetic patients. Kohinoor Chemical Company for its Tibet Snow
initially used niche strategy particularly directed towards rural women.

A Focused Low-Cost Strategy A focused strategy based on low cost aims at

securing a competitive advantage by serving buyers in the target market niche at a
lower cost and lower price than rival competitors. This strategy has considerable
attraction when a firm can lower costs significantly by limiting its customer base to
a well-defined buyer segment. The avenues to achieving a cost advantage over
rivals also serving the target market niche are the same as for low-cost leadership-
outmanage rivals in keeping the costs of value chain activities contained to a bare
minimum and search for innovative ways to reconfigure the firm's value chain and
bypass or reduce certain value chain activities. The only real difference between a
low-cost provider strategy and a focused low-cost strategy is the size of the buyer
group that a company is trying to appeal to-the former involves a product offering
that appeals broadly to most all buyer groups and market segments whereas the
latter at just meeting the needs of buyers in a narrow market segment.

The obvious example of a low-cost leadership business is Walmart, which uses a

top of the line supply chain management information system to keep their costs
low and, consequently, their prices low. Walmart's system also keeps shelves
stocked almost constantly, translating into high profits. Walmart is able to keep
prices in the same cheap range everyday
Another company that employs this strategy is McDonald's. Their food preparation
system allows McDonald's to hire inexperienced cooks, train them, and pay them
at a lesser expense than if McDonald's hired trained chefs. These lower operational
costs in the kitchen allow consumers to purchase cheap fast food.
A Focused Differentiation Strategy A focused strategy keyed to differentiation
aims at securing a competitive advantage with a product offering carefully
designed to appeal to the unique preferences and needs of a narrow, well-defined
group of buyers (as opposed to a broad differentiation strategy aimed at many
buyer groups and market segments). Successful use of a focused differentiation
strategy depends on the existence of a buyer segment that is looking for special
product attributes or seller capabilities and on a firm's ability to stand apart from
rivals competing in the same target market niche. Companies like Godiva
Chocolates, Chanel, Gucci, Rolls-Royce, Hiiagen-Dazs, and W L. Gore (the maker
of Gore- Tex) employ successful differentiation-based focused strategies targeted
at upscale buyers wanting products and services with world-class attributes.
Indeed, most markets contain a buyer segment willing to pay a big price premium
for the very finest items available, thus opening the strategic window for some
competitors to pursue differentiation-based focused strategies aimed at the very top
of the market pyramid. Another successful focused differentiator is Trader Joe's, a
I50-store East and West Coast "fashion food retailer" that is a combination
gourmet deli and grocery warehouse.8 Customers shop Trader Joe's as much for
entertainment as for conventional grocery items-the store stocks out-of-theordinary
culinary treats like raspberry salsa, salmon burgers, and jasmine fried rice,.

When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive

A focused strategy aimed at securing a competitive edge based on either low cost
or differentiation becomes increasingly attractive as more of the following
conditions are met: ·
 The target market niche is big enough to be profitable and offers good
growth potential. ·
 Industry leaders do not see that having a presence in the niche is crucial to
their own success-in which case focusers can often escape battling head-to-
head against some of the industry's biggest and strongest competitors. ·
 It is costly or difficult for multi segment competitors to put capabilities in
place to meet the specialized needs of buyers comprising the target market
niche and at the same time satisfy the expectations of their mainstream
customers. ·
 The industry has many different niches and segments, thereby allowing a
focuser to pick a competitively attractive niche suited to its resource
strengths and capabilities. Also, with more niches, there is more room for
focusers to avoid each other in competing for the same customers.
 Few, if any, other rivals are attempting to specialize in the same target
segment-a condition that reduces the risk of segment overcrowding. ·
  The focuser has a reservoir of customer goodwill and loyalty (accumulat~d
from having catered to the specialized needs and preferences of niche
members over many years) that it can draw on to help stave off ambitious
challengers looking to horn in on its business.

The advantages of focusing a company's entire competitive effort on a single

market niche are considerable, especially for smaller and medium-sized companies
that may lack the breadth and depth of resources to tackle going after a broad
customer base with a "something for everyone" lineup of models, styles, and
product selection. eBay has made a huge name for itself and very attractive profits
for shareholders by focusing its attention on online auctions-at one time a very
small niche in the overall auction business that eBay's focus strategy turned into
the dominant piece of the global auction industry. Google has capitalized on its
specialized expertise in Internet search engines to become one of the most
spectacular growth companies of the past 10 years. Two hippie entrepreneurs, Ben
Cohen and Jerry Greenfield, built Ben & Jerry's Homemade into an impressive
business by focusing their energies and resources solely on the superpremium
segment of the ice cream market.