Question

Chapter 11 discusses the concept of Competitive Strategy.

How companies evaluate their competition, the type of environment they compete in and a couple techniques to use in creating a Competitive Strategy. For this Discussion Thread you are to discuss the importance of a Competitive Strategy and provide an example of a Competitive Strategy that a company uses.  

Answer 1

Competitive Strategy

Competitive strategy is a long-term action plan of a company which is directed to gain competitive advantage over its rivals after evaluating their strengths, weaknesses, opportunities and threats in the industry and comparing it with your own. Michael Porter, a professor at Harvard presented a competitive strategy concept. According to him there are four types of competitive strategies that are implemented by businesses globally. It is necessary for businesses to understand the core principles of this concept that will help them to make well-informed business decisions in the course of action.

Definition of Competitive Strategy

As mentioned above, competitive strategy is a long-term action plan of firms so as to gain a competitive advantage over its rivals in the industry. This strategy is focused to achieve above average position and generate a superior Return on Investment (ROI). This strategy is very important when firms having a competitive marketplace and several similar products available for consumers.

Four Types of Competitive Strategy

Companies evaluate their competition use following competitive strategies

Cost Leadership Strategy

Cost leadership strategy is difficult to implement for small scale businesses as it involves making long term commitment for offering products and services at lower prices in the market. For this purpose firms need to produce products at low cost otherwise it will not make profit.

Since the cost leadership means to become low cost producer or provider in the industry, Any large-scale business which can provide and manufacture products at low cost by attaining economies of scale. There are many cost leadership factors such as efficient operation, large distribution channels, technological advancement and bargaining power. Here Walmart is a good example.

Differentiation Leadership Strategy

Identifying attributes of a product which are unique from competitors in the industry is the driving factor in the differentiation leadership strategy. When a product is able to differentiate itself from other similar products or services in the market through superior brand quality and value added features it will be able to charge premium prices to cover the high cost.

There are few business examples who successfully differentiated their brands e.g. Apple, Clif Bar and Company, Ben & Jerry’s and T Mobiles.

Cost Focus Strategy

This strategy is quite a resemblance to the cost leadership strategy; however, a major difference is that the cost focus strategy businesses target a particular segment within the market and that segment is offered the lowest price of the product or service. This type of strategy is very useful to satisfy your consumer and increase brand awareness.

For example, beverage companies manufacturing mineral water can target market segments like Dubai, where people need and use only mineral water for drinking, can be sold at a lower price than competitors.

Differentiation Focus Strategy

Similar to the cost focus strategy, differentiation focus strategy targets a particular segment within the market; however, instead of offering lower prices to consumer; firms differentiate itself from its competitors. Differentiation strategy offers unique features and attributes to appeal its target segment. For example, Breezes Resorts, is a company having several resorts and caters only couple having no children and offer peaceful environment without any children disruption.

Examples of competitive Strategies

Case Study of Aldi

The rise of Aldi in the food retail industry is very impressive and this position is mainly associated with its competitive strategy which is its use of ‘Lean Production’ which makes the organization more efficient. Through lean production, Aldi aims to reduce the number of resources that are used in the provision of goods and services to consumers. Additionally, the concept also involves eliminating waste and utilizing lesser material, space, labour and time. The overall result is a reduced cost of production.

Another competitive strategy which stands for Aldi and against its competitors is that its investment in staff members. Every member undergoes a comprehensive training program which makes them multi-skilled and they are able to undertake different roles in the workplace. In this way, Aldi has to hire lesser staff to run its stores.

Dynamics of Competitive Strategy

1. Competitive Landscape: It tends to identify and understand the competition deeply while cognizing the vision, mission, objectives, strengths, weakness, opportunities and threats of the enterprise. While analysing the competition, the firm also keeps an eye on the competitor’s overall position in the market, to choose the right strategy for the enterprise.
2. Strategic Analysis: It implies the detailed examination of various components of the firm’s business environment. It is important for strategy formulation, strategy implementation and strategic decision making.
3. Industry and Competitive Analysis: The analysis in which a number of methods are used to have a clear view of the basic industry practices, the intensity of competition, strategies of competitors and their share in the market, change drivers, profit prospects and so forth, is called as Industry and Competitive Analysis. It assists the company in strategically observing the condition of the industry.
4. Core Competence: Core competencies of the company are those capabilities which help the company in defeating its competitors by gaining a competitive advantage. It is a blend of company’s technical and managerial know-how, skills, knowledge, experience, strategy, resources, manpower, etc.
5. Competitive Advantage: Competitive Advantage assist the firm in defeating its rival organization, through its core competencies which include a combination of distinguishing characteristics of the firm and the product offered by it, which is considered as outstanding, that has the edge over its competitors.Simply put, competitive advantage is when the profitability of an organization is comparatively higher than the average profitability of the other companies operating in the same industry.
6. Portfolio Analysis: It is a management tool which helps the company to analyze its product lines and business units, from which good returns are expected. In other words, it identifies and evaluates those products and strategic business units which help the company to survive and grow in the market.
7. SWOT Analysis: SWOT Analysis is the analysis of the firm’s strengths, weakness, opportunities and threats, to generate strategic alternatives. It aims at facilitating the management in developing a business model, which accurately aligns the firm’s resources and capabilities, according to the business environment.
8. Globalization: In basic terms, globalization refers to the process through which a business or any other organization creates its presence across the world and begins its operations on an international scale. A competitive strategy is used to attract customers, gain an edge over its competitors, increase market share and strengthen its position, and expand the business to a larger scale.

LEVELS OF COMPETITION

With regard to competition, there are at least four levels that can be distinguished:

1. Product Competition. This is competition focused on the same market segment. For example: Diet Pepsi and Diet Coke.
2. Product Category Competition. This is between products with the same characteristics, such as various soft drinks.
3. Generic Competition. This is competition between products that respond to the same needs of customers, such as drinks.
4. Budget Competition. This competition is for the money of the customer (share of wallet), such as between food and entertainment.

Competitive Environment

       Here we have discussed 6 important factors that influence the competitive environment in brief.

1. Geographical and Ecological or Natural Factors.
2. Demographic Factors.
3. Economic Factors.
4. Political and Legal Factors.
5. Social and Cultural Factors.
6. Physical and Technological Factors.

1.Geographical and Ecological or Natural Factors

          Geographical conditions exert influence on the decisions as to the type of industries and business to be carried on in a region. This is because the people of a particular geographical region will have similar tastes, preferences and requirements.

            Ecological factors consist of natural resources like farmland, fisheries, forests, minerals like coal, metals, oils etc., energy, air and water. The supply of the resources is very much limited. A decade ago, we were all under an impression that natural resources like air and water are not exhaustible and their supply is unlimited. But now the situation is changed and we came to know that such resources are also very much limited in supply.

2.Demographic Environment

        Demographic environment includes a number of sub-factors viz., size, growth, age and sex compositions of the population, educational levels, languages, caste, religion etc. The impact of this demographic factor is more vital in India than any other country in the rest of the world. Indian population is highly heterogeneous with varied religions, languages, castes and creeds. Naturally their tastes, preferences, beliefs, temperaments are bound to differ. This fundamental difference gives rise to different demand patterns and calls for different marketing strategies.

3. Economic Environment

         Economic environment consists of three important factors namely, economic systems, economic policies and economic conditions. The impact of this environment is much more direct and deliberate than other factors. These three elements of the economic environment should be analyzed individually as well as collectively as a whole.

1. Economic Systems

         The scope of private sector depends mainly on the economic system of a country. Economic system can be classified into three broad categories viz.,

Free Trade Economy or Capitalist Economy,

Centrally Planned Economy or Communist Economy or Socialism, and

Mixed Economy.

Capitalist economy is at one end and the communist economy is at the other end. In between these two-extreme situations are mixed economies. Within the mixed economic system itself there are wide variations. Mixed economy refers to a situation where public and private sectors co-exist.

         India has a mixed economy with clear-cut Industrial Policy. Certain industries are exclusively reserved for the public sector, and private enterprises are not allowed to operate in those lines of business. Likewise, certain industries are exclusively reserved for small sector, and large industrial houses and monopoly houses are debarred from entering into such lines of business.

2. Economic Policies

        The economic policy of the Government has a very decisive impact on the business units. Even the very survival of the business firm depends on how the firm reacts and responds to the Government policies.

In India, industries have been divided into two broad categories namely,

Priority Sector, and

Non-priority Sector.

The priority industries shall get a number of incentives and other positive support from the Government as well as from other financial institutions. Such encouragements are denied to non-priority sectors. Hence, entrepreneurs shall naturally tempt to go for priority sector.

Likewise, export oriented units and industrial units started in backward areas can also enjoy a number of benefits. If a priority sector industry is started in a backward area, it can avail both the benefits available to priority sector as well as those meant for backward areas.

Moreover, industrial units started in developed areas particularly within the specified limits of Metropolitan cities are made subject to various difficulties and handicaps. Even banks are asked to ignore them while extending credit. The entrepreneur while promoting a new firm should give due consideration to all these factors.

3. Economic Condition

         Another major general economic factor, which affects the prospects of the individual firm, is the size and the overall state of health of the national economy. Economic condition or the health of the national economy implies the consideration of many elements namely, the stage of development, economic resources, the level of income, the distribution of wealth and income etc.

In developed countries, the per capita income will be high and the size of the market will also be large. When the size of the market is large, large sale production shall also be there. But modern economists are of the view that developed countries are no longer worthwhile propositions for investments because developed economies have almost reached more or less a saturation level in certain spheres of their industrial activities.

4. Political and Legal Environment

          Economic environment within a country is closely linked with the political and legal environment there. Political and legal environment is the background of laws and regulation within which the business firms should conduct their affairs.

The doctrine of “Laizze-faire” has become an outdated or discarded principle and the Government all over the world regulate the business activities. Even in capitalist countries, the Government controls and influences the business policies in many ways.

The degree of control or direction of the Government may differ from country to country but its impact cannot be ruled out elsewhere. Particularly, after the Great Depression, State intervention in economic life is clearly noticeable in all economies of the world.

5. Social and Cultural Environment

        Of the various environments stated above, the social and cultural environment has the greatest impact on the policies and performance of all business firms. This environment poses a serious challenge to the business, and the business managers while formulating business strategies and policies should give due weight to this pivotal factor.

         Social environment is concerned with the environment of society as a whole — of which every one is involved. Cultural environment is an aggregate of all sub-cultures each with distinct concepts, beliefs and faith. The society as we all know is not static. We have a dynamic i.e. ever-changing society. New demands are created and old one lost in due course. The business enterprises should constantly watch the developments taking place and make necessary adjustments in their production and marketing plans and strategies to fulfill the new social demands.

6. Physical and Technological Environment

      Physical factors mean and include geographical factors like weather, climatic conditions etc. These factors have a notable influence on business prospects. The availability of physical facilities limits the scope and prospects of business. Technology refers to the knowledge of how to do things. The dominant features of technology have been made in the last three decades. Particularly for the last ten years, technology has worked wonders. Prof. Kahn and Wiener have called the new development in technology as “Innovation”, “Revolution” or “Break Through”. Technological development can contribute to economic development.