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Competitive Advantage

Terms in this set (9)

Cost advantage

Objective - reduce costs and improve efficiency

There are seven principal determinants of a firm's unit cost relative to its competitors. These are referred to as cost drivers. Relative importance varies across industries, firms and different activities within a firm. To examine these cost drivers, one can do the following. (1) Analyse a firm's cost position relative to competitors and diagnose source of inefficiency. (2) Improve its cost inefficiency. Value chain is a useful framework to undertake this analysis. Analysing costs requires breaking down firm's value chain to identify: (1) relative importance of each activity with respect to total cost; (2) cost drivers for each activity and comparative efficiency; (3) how costs in one activity influence costs in another; (4) Which activities should be undertaken and which outsourced.

Differentiation advantage

Objective - yield a price premium for the firm

A firm differentiates itself from competitors when it provides something unique that is valuable to buyers beyond simply offering low price. Differentiation advantage occurs when a firm is able to obtain from its differentiation a price premium in the market that exceeds the cost of providing the differentiation. Also, It is not simply about differentiating product features, it is also about identifying and understanding every possible interaction between firm and its customers, asking how these interactions can be enhanced or changed in order to deliver additional value.
Analysing differentiation requires looking at firm (supply side) and customer (demand side). Supply side analysis identifies firm's potential to create uniqueness, but the key issue is whenever such differentiation creates value. Stages for differentiation advantage: (1) construct value chain for firm and customer; (2) identify drivers of uniqueness; (3) select the most promising differentiation variables; (4) locate linkages between the value chain of the firm and the buyer.
By combining two types of competitive advantage with the firm's choice of scope - broad market v.s. narrow segment. Porter defined three generic strategies: cost leadership, differentiation and focus. According to Porter cost leadership and differentiation are mutually exclusive strategies and firms that are 'stuck in the middle' are most guaranteed low profitability.

A firm must make decisions as to which customer requirements to focus on, where to position their product or service in the market. Cost leadership typically implies narrow-line, limited-feature, standardised offering. In case of IKEA or Southwest Airlines, a low-price, no-frills offering is associated with clear market positioning and unique brand image.

Cost leadership - objective is to become the lowest cost producer in the whole industry. Typically involves production of large scale which enable firm to exploit economies of scale.
Differentiation leadership - the business targets much larger markets and aims to achieve competitive advantage across whole industry.

In most industries, market leadership is held by firms that maximise customer appeal by effective differentiation with low cost - Toyota, Nike. Cost leaders are frequently not market leaders but smaller competitors with minimal overhead, cheaply acquired assets.

Cost focus - business seeks a lower cost advantage in only one or small number of market segment. The product will be basic, perhaps similar product to the higher priced and featured market leader, but acceptable to sufficient customers.
Differentiation focus is classic niche marketing strategy. A business aims to differentiate within just one or a small number of target market segments. Clearly identifiable customer needs and wants and a valid basis for differentiation.

Simultaneously pursuing differentiation, cost efficiency and innovation. The most successful firms are often those who have managed to differentiated themselves in a highly cost-effective manner.