Every business, no matter it's size is always striving to maintain it's competitive advantage over its competitors. Let's explore these 3 Small Business Competitive Advantage Strategies; Cost Leadership, Differentiation Strategy and Focus Strategy.
It can be a struggle to identify true cost leaders in any industry. Finding companies that have a sustainable advantage through their differentiation strategy is something that in time can not be copied or imitated.
And then there is Apple – which really is a Blue Ocean company that exists in both categories.
Porter’s generic strategies are ways of gaining competitive advantage – in other words, developing the “edge” that gets you the sale and takes it away from your competitors.
He (and many others) argue that there are three options for businesses to get the edge:
3 Small Business Competitive Advantage Strategies
1. Cost Leadership
There are two main ways of achieving this within a Cost Leadership strategy:
Increasing profits by reducing costs, while charging industry-average prices.
- Increasing market share through charging lower prices, while still making a reasonable profit on each sale because you’ve reduced costs.
Remember that Cost Leadership is about minimising the cost to the organisation of delivering products and services. The cost or price paid by the customer is a separate issue.
The Cost Leadership strategy is exactly that – it involves being the leader in terms of cost in your industry or market. Simply being amongst the lowest-cost producers is not good enough, as you leave yourself wide open to attack by other low cost producers who may undercut your prices and therefore block your attempts to increase market share.
You therefore need to be confident that you can achieve and maintain the number one position before choosing the Cost Leadership route. Companies that are successful in achieving Cost Leadership usually have:
- Access to the capital needed to invest in technology that will bring costs down.
- Very efficient logistics.
- A low cost base (labour, materials, facilities), and a way of sustainably cutting costs below those of other competitors.
The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not unique to you, and that other competitors copy your cost reduction strategies. This is why it’s important to continuously find ways of reducing every cost. One successful way of doing this is by adopting the Japanese Kaizen philosophy of “continuous improvement”.
2. Differentiation Strategy
Differentiation involves making your products or services different from and more attractive those of your competitors. How you do this depends on the exact nature of your industry and of the products and services themselves, but will typically involve features, functionality, durability, support and also brand image that your customers value.
To make a success of a generic Differentiation strategy, organisations need:
- Good research, development and innovation.
- The ability to deliver high-quality products or services.
- Effective sales and marketing, so that the market understands the benefits offered by the differentiated offerings.
Large organisations pursuing a differentiation strategy need to stay agile with their new product development processes. Otherwise, they risk attack on several fronts by competitors pursuing Focus Differentiation strategies in different market segments.
3. Focus Strategy
Companies that use Focus strategies well concentrate on particular niche markets and, by understanding the dynamics of that market and the unique needs of customers in it, develop uniquely low cost or well-specified products for the market. Because they serve customers in their market uniquely well, they tend to build strong brand loyalty amongst their customers. This makes their particular market segment less attractive to competitors.
As with broad market strategies, it is still essential to decide whether you will pursue Cost Leadership or Differentiation once you have selected a Focus strategy as your main approach: Focus is not normally enough on its own.
But whether you use Cost Focus or Differentiation Focus, the key to making a success of a generic Focus strategy is to ensure that you are adding something extra as a result of serving only that market niche. It’s simply not enough to focus on only one market segment because your organisation is too small to serve a broader market (if you do, you risk competing against better-resourced broad market companies’ offerings.)
The “something extra” that you add can contribute to reducing costs (perhaps through your knowledge of specialist suppliers) or to increasing differentiation (though your deep understanding of customers’ needs).
Generic strategies apply to not-for-profit organisations too. A not-for-profit can use a Cost Leadership strategy to minimise the cost of getting donations and achieving more for their income, while one with pursing a Differentiation strategy will be committed to the very best outcomes, even if the volume of work they do as a result is lower. Local charities are great examples of organisations using Focus strategies to get donations and contribute to their communities.