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A firm’s competitive advantage in an industry is normally determined by its profitability. For a firm to be competitively advantageous, its profit levels should be above the average profitability of the industry. Firms can possess two types of competitive advantage, that is, differentiation and low cost. These two types of competitive advantage can be combined with the scope of activities, for which firms strive to achieve to form the third generic strategy; focus. Competitive advantage thus consists of Cost Leadership, Differentiation and Focus.
A firm that strives to be a cost leader in the industry will endeavor to be the low cost producer in the industry. The sources of competitive cost advantage normally depend on the structure of the whole industry, such as proprietary technology, preferential access to raw materials among other factors. A firm that strives to be a low cost producer will find and exploit all the sources of cost advantage that might be available to it. The firm usually aims at pulling its costs downwards through efficient utilization of its factors of production such as labor and capital. Cost leadership is often achieved by producing in large quantities, hence minimizing production costs per unit, a concept referred to as economies of scale. It also requires the firms to target the broader market so as to attain higher sales volume, and at the same time, be conscious about the prices of its goods and services since most customers are price-sensitive. Good examples of companies that have applied this strategy in the Flights Industry are the EasyJet Airline and Ryan Air. These two airlines are low cost producers in the industry and have been aiming at lowering their operational costs so as increase their profits without necessarily passing such cost to the passengers, thus have maintained their brand images as premium travel agents.
Through differentiation, a firm strives to be unique in the industry along certain magnitudes that the customers value most. The firm opts for one or more attributes that several consumers in the industry perceive as important and then distinctively positions itself to meet those unmet needs. With differentiation strategies, the companies aspire for focusing their production efforts on particular and distinct segments of the market, and may charge for the added differentiated value. The major areas of differentiation may include products offered, sale and marketing techniques, distribution channels, goods and service quality and brand image. Good examples of companies that have effectively employed differentiation techniques are Apple Computers and Mercedes-Benz automobiles. Apple Computers was able to identify a niche in the personal computers and smart-phones market and came up with high quality laptops and mobile phones with higher performance capabilities. Its Mac, iPhones and iPods brands were created out in order to congregate high technology with elegancy and simplicity in form. The brands are now internationally recognized as iconic products for the highly dynamic techno-driven digital era. Mercedes-Benz on the other hand, differentiated its automobiles by solely targeting the rich who needed luxurious vehicles at premium prices. Another good example is the Brompton bicycles whose exclusive compact design have enhanced noticeable differentiation from other folding bicycles in the market.
Here, a firm that seeks competitive advantage focuses on certain special needs of customers and tailors its strategies towards serving them. The firm selects a narrow focus or part of the entire industry and makes every effort to meet their needs. By so doing, the firms builds an identifiable brand image and becomes distinguished for providing goods or services within that particular segment. They thus form a competitive advantage for the niche market. Focus strategies can be further divided into low-cost focus or differentiated-focus. A good example of a firm employing this strategy is China-based JAC Motors. They recently invested massively in the construction of a new factory plant which would produce affordable cars targeting the Latin America’s market, where there has been increasing demand for imported cars. Its research on this potential market revealed that the number of middle-class citizens grew steadily at 20 percent per year. This population increase would thus result in increased demand for cheap automobiles with lower gears, and hence, it is a crucial market with high potential for future growth for the automobiles industry. By producing low-cost cars they would benefit from competitive advantage over other carmakers such as Volkswagen, General Motors and Chrysler.
Porter’s Five Competitive Forces Model
This model demonstrates how external and internal environments of an organization can be used as a strategic tool in assessing and analyzing the attractiveness or value of an industry. The five competitive forces are:
a) Threat of new entrants tries to find out how easy or difficult new firms can enter the industry. It finds out the barriers that may hinder entry of new competitors. The risk of new organizations entering the industry is high if there are few entry barriers. The analysis of this threat includes scrutiny of customers’ loyalty to existing products, how quick new firms may achieve economy of scales, whether they have easy access to suppliers and if there is any government regulation prohibiting entry into the industry.
b) Threat of substitutes investigates the ease of replacing products by cheaper substitutes. Substitutes exist when there are alternative products that buyers can purchase over one product and get the same benefit at the same or less price. The threat of substitutes is high when the price of a substitute falls, when it is easy for consumers to switch from one product to another and when buyers are willing to substitute.
c) Bargaining power of buyers examines how strong the position of buyers is, that is, their ability to team up and order large volumes. Buyers may manipulate and control the industry when there is little differentiation over the products and when substitutes can be easily found, or if customers are price sensitive, but switching to another product is costly.
d) Bargaining powers of suppliers scrutinizes the strength of sellers and number of potential suppliers. Power of suppliers often generates from their supply of raw materials and will exist if there are only one or few suppliers for the same raw material, if it is costly for organizations to move from one supplier to another or if there is no substitute for the supplied product.
e) Competitive rivalry deals with competition among industry players and concerns whether there is strong competition between the existing players or if one player being dominant. Competitive rivalry will always be high if entry to an industry is easy, when substitutes are readily available, when there is little differentiation between products sold, or when firms have similar strategies or if it is costly to leave the industry, hence they fight to stay.
In conclusion, firms must put into consideration all the above factors in order to gain from competitive advantage.