Question

Regarding to governance issues in private companies what are the strategies and development tools that are appropriate for an accounting professional to sustain a competitive advantage in terms of employment and level of competence?

Answer 1

COMPETITIVE ADVANTAGE

A competitive advantage is an attribute that enables a company to outperform its competitors. This allows a company to achieve superior margins compared to its competition and generates value for the company and its shareholders.

A competitive advantage must be difficult, if not impossible, to duplicate. If it is easily copied or imitated, it is not considered a competitive advantage.

CONSTRUCTING A COMPETITIVE ADVANTAGE

Before a competitive advantage can be established, it is important to know the:

1. Benefit: A company must be clear what benefit(s) their product or service provides. It must offer real value and generate interest.
2. Target Market: A company must establish who is purchasing from the company and how it can cater to its target market.
3. Competitors: It is important for a company to understand other competitors in the competitive landscape.

To construct a competitive advantage, a company must be able to detail the benefit that they provide to their target market in ways that other competitors cannot.

STRATEGIES FOR COMPETITIVE ADVANTAGE

1. Cost Leadership

2. Differentiation

3. Focus

1. Cost Leadership:

In a cost leadership strategy, the objective is to become the lowest-cost producer. This is achieved through large-scale production where companies can exploit economies of scale.

If a company is able to utilize economies of scale and produce products at a cost lower than that of its competitors, the company is then able to establish a selling price that is unable to be replicated by other companies. Therefore, a company adopting a cost leadership strategy would be able to reap profits due to its significant cost advantage over its competitors.

2. Differentiation:

In a differentiation strategy, a company’s products or services are differentiated from that of its competitors. This can be done by delivering high-quality products or services to customers or innovating products or services.

If a company is able to differentiate successfully, the company would then be able to set a premium price on its products or services.

3. Focus:

In a focus strategy, a company focuses on a narrow target market segment. This strategy is successful if the company is able to successfully create products/services that can cater to these customers. The focus strategy also has two variants;

1. Cost-focus: Lowest-cost producer in a narrow market segment
2. Differentiation-focus: Differentiated products/services in a narrow market segment