A company can adopt one of the three methods: differentiation, cost leadership and focus. Companies can use the internet to support and strengthen their approach they choose.
The differentiation strategy involves an attempt to distinguish the firm’s products or services from others in the industry. The organization may use advertising, distinctive product features, exceptional service, or new technology to achieve a product perceived as unique. The differentiation method can be profitable because customers are loyal and will pay high prices for the product. Examples of products that have benefited from a differentiation strategy include Mercedes-Benz automobiles and others all of which are perceived as distinctive in their markets. Service companies can also use a differentiation strategy. When a company moved into a new metro it opened several branches on a single day, flooded the market with tricky advertising and sent employees with pizza delivery people, offering prospective customers free pizza from the home of free banking.
Companies that pursue a differentiation strategy typically need strong marketing abilities, a creative flair, and a reputation for leadership. A differentiation method can reduce rivalry with competitors if buyers are loyal to a company’s brand. Successful differentiation can also reduce the bargaining power of large buyers because other products are less attractive and this also helps the firm fight off threats of substitute products. In addition, differentiation creates entry barriers in the form of customer loyalty that a new entrant into the market would have difficulty overcoming. Rather than cutting prices when Amazon.com and other rivals entered the online auction business, eBay continued to focus on building a distinctive community, offering customers services and experiences they could not get on other sites. Customers stayed loyal to eBay rather than switching to low cost rivals.
With a cost leadership method, the organization aggressively seeks efficient facilities, pursues cost reductions and uses tight cost controls to produce products more efficiently than the competitors. A low cost position means that the company can undercut competitors prices, and still offer comparable quality and earn reasonable profits.
Being a low cost producer helps in providing a successful strategy to defend against the competitive forces. For example, the most efficient low-cost company is in the best position to succeed in a price war while still making a profit. Low cost leader Dell Computer declared a price war just as the PC industry entered its worst slump ever. Dell raked in profits while the rest of the industry reported losses. Likewise, the low cost producer is protected from powerful customers and suppliers, because customers cannot find lower prices elsewhere and other buyers would have less slack for price negotiation with the suppliers. If substitute products or potential new entrants occur, the low cost producer is better positioned than higher cost rivals to prevent loss of market share. The low price acts as a barrier against new entrants and substitute products.
With a focus strategy the organization concentrates on a specific regional market or buyer groups. The company will use either a differentiation or low cost approach but only for a narrow target market. Managers aim for controlled growth, gradually moving into new areas. By using a focus strategy, companies will be able to grow rapidly and expand to other markets.
A focused differentiation strategy can be used in business in rural and small towns even by finance investment companies providing clients with conservative long term investment advice.
Managers think carefully about which strategy will provide their company with a competitive advantage.
Some businesses that did not consciously adopt one of these three methods were stuck with no advantage. Without a strategic advantage, businesses earned below average profits compared to those that used differentiation cost leadership or focus methods.
A five year research on management practices in businesses found that a clear strategic direction was a key factor that distinguished winners from losers.
In addition, because the internet is having such a profound impact on the competitive environment in all industries it is more important than ever that companies distinguish themselves through careful strategic positioning in the marketplace. The internet tends to erode both cost leadership and differentiation advantages by providing new tools for managing costs and giving consumers greater access to comparison shopping. However managers can find ways to incorporate the internet into their strategic approaches in a way that provides unique value to customers in an efficient way.