Strategic Thinking (Part 3—Achieving a Competitive Advantage)
In last week’s Word on the Street, we covered Michael Porter’s five definitions of strategy and his “Five Forces” model, which provides a structured framework for industry analysis and the competitive dynamics impacting an industry’s profitability. In this issue, we close out the Strategic Thinking series by showing how these concepts are used to develop business strategies that create competitive advantages.
Developing “Generic Strategy”
AE firms develop business-level strategy by using company resources and distinctive competencies to gain a competitive advantage over rival firms. It is labeled “generic strategy,” because in principle, the choices of strategy are essentially industry-agnostic. Generic strategy choices involve two dimensions: competitive advantage and competitive scope.
- Competitive Advantage: In seeking a competitive advantage, an AE firm might choose a low-cost strategy when trying to out-market and outperform the competition. This strategy is the ability of an AE firm to design, produce, and market a service more efficiently and at a lower cost than its competitors. Or an AE firm might choose a differentiation strategy as a means of gaining a competitive advantage. Differentiation is the ability to provide services that are perceived to be unique by clients and for which they are willing to pay more.
- Competitive Scope: Besides competitive advantage, AE firms must choose its competitive scope, either targeting a broad or narrow (niche) market. A broad market scope implies that a firm targets a mass market or many market segments, whereas the narrow market scope focuses on one particular buyer group. Bear in mind that an AE firm might choose to pursue and market to a limited number of niche markets—which would still be considered a narrow scope.
Combining Advantage with Scope
Combining the two types of competitive advantage with the two types of target market scopes results in four potential variations of generic strategy options:
- “Cost Leadership” = lower cost + broad mass-market
- “Differentiation” = differentiation + broad mass market
- “Focus Cost Leadership” = lower cost + narrow/niche market
- “Focus Differentiation” = differentiation + narrow/niche market
Pursuing a generic strategy can be a problem if you end up getting stuck in the middle. From a competitive advantage standpoint, this occurs when a firm is unwilling to commit the marketing and investment in developing/acquiring expertise required to pitch and deliver a service that is perceived to be unique, or when a firm tries to keep costs low but does not aggressively pursue low-cost approaches. Regarding competitive scope, a firm can get caught in the middle when it becomes overconfident and spreads itself too thin over multiple market sectors or expands into the mass market without committing the necessary resources to fully reach it.
While achieving a low-cost and high-differentiation position is often temporary, it can be achieved in the AE industry. But it typically only lasts in firms that manage for flow efficiency, investigate disruptions to that flow, and pursue continuous improvement. In any case, firms that establish both low-cost and high-differentiation achieve what’s called a “best-cost” strategy.
Building a Competitive Advantage
The first step for an AE firm to establish a competitive advantage is clarifying the market sector(s) in which the firm competes. This requires defining who the client is, what they need, and how that need will be met. Once those questions are answered, the firm can then begin to seek to differentiate itself from the competition. To be successful in the chosen market(s), leadership identifies a generic strategy that would dictate a set of consistent actions that the firm can undertake to build an advantage over rivals.
A more refined framework for achieving competitive advantage includes the following:
- Differentiation by Price: In pursuing a lower price, an AE firm may be driven to follow a functional strategy that brings down costs, lowers quality, provides less service, offers fewer alternatives, and so on. Everything else remaining the same, clients always prefer a lower price.
- Differentiation by Image: To create an image (or brand) is to create a psychological distinction where it does not otherwise exist, through careful marketing. In a sense, this is an artificial form of differentiation, since it is achieved by creating a different perception. However, if marketing involves positioning the firm as an expert by providing information clients find valuable, the “artificial” tag becomes less applicable and the brand more tangible.
- Differentiation by Support: Support refers to related services that are offered with the primary service. It may be included with the service or delivered under a separate contract.
- Differentiation by Quality: The effort here is to make the service/deliverable itself better and not just different. Thus, the service accomplishes everything that competing services do; however, it does so with no rework, no mistakes, more valuable solutions, etc.
- Differentiation by Design: The focus here is to provide something very different and to provide unique aspects or features. It requires innovation (i.e., bringing something to market that is unavailable from the competition).
- Undifferentiation: When the firm has no clear basis for differentiation, except perhaps through scope, it is following a policy of undifferentiation. Firms that merely try to copy the actions of a main rival are also following undifferentiation.
Tying it Together
These forms of differentiation need not be mutually exclusive. Some firms may try to combine different forms to stand out. For example, some AE firms will use unique designs and combine them with innovative technology to lower price. In any case, when the market space is segmented based on factors such as geography, how clients select (cost-based, quality-based, etc.), and so on, there are many segments to manage. When such segmentation is combined with the forms of differentiation described above, several possibilities exist to generate competitive advantages.
For more information on strategic planning, call Mark Goodale at 508.254.3914 or send an email to [email protected].