2.5: Competitive Strategy

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Cost Leadership

When pursuing a cost-leadership (low cost) strategy, a firm offers customers its product or service at a lower price than its rivals can. To achieve a competitive advantage over rivals in the industry, the successful cost leader tightly controls costs throughout its value chain activities. Supplier relationships are managed to guarantee the lowest prices for parts, manufacturing is conducted in the least expensive labor markets, and operations may be automated for maximum efficiency. A cost leader must spend as little as possible producing a product or providing a service so that it will still be profitable when selling that product or service at the lowest price. Walmart is the master of cost leadership, offering a wide variety of products at lower prices than its competitors because it does not spend money on fancy stores, it extracts low prices from its suppliers, and it pays its employees relatively low wages. An example of an information system that supports Walmart’s strategy is the Fast Unloader technology that scans and sorts incoming inventory, reducing the truck uploading process by one third.^[1]

Differentiation

Not all products or services in the marketplace are offered at low prices, of course. A differentiation strategy is exactly the opposite of a cost-leadership strategy. While firms do not look to spend as much as possible to produce their output, firms that differentiate try to add value to their products and services so they can attract customers who are willing to pay a higher price. At each step in the value chain, the differentiator increases the quality, features, and overall attractiveness of its products or services. Research and development efforts focus on innovation, customer service, and marketing bolsters the value of the firm brand. Starbucks is a good example of a differentiator: it makes coffee, but its customers are willing to pay premium prices for a cup of Starbucks coffee because they value the restaurant atmosphere, customer service, product quality, and brand. The My Starbucks Rewards Program and Mobile Order & Pay system allows customers to customize their orders and provides convenience to order ahead and pick-up later.

In some instances, products or services are nearly identical to those of the competition. These are referred to as commodities. Consumers buying commodities are price-focused. In order to break the commodity trap, many firms leverage technology to differentiate their goods and services. Dell gained attention not only because of their low prices, but also because it was one of the first PC vendors to build computers based on customer choice. Want a bigger hard drive? Don’t need a fast graphics card? Dell will oblige.

Providing opportunities for personalization or customization means that companies are able to collect valuable data on their customers. The Starbucks app which stores customer’s preferences and data serves as a switching cost. Switching costs exist when consumers incur an expense to move from one product or service to another. This means that the customer would have to go through the whole process again with another company to add in their custom drink preferences. Likewise, consider Amazon, which uses browsing records, purchase patterns, and product ratings to present a custom home page featuring products that the company hopes the visitor will like. This makes it convenient for customers to shop, and provides a barrier to them switching to another company.

Porter’s typology assumes that firms can succeed through either cost leadership or differentiation. Trying to combine these two, Porter suggests, can lead to a firm being stuck in the middle.

Focus

The focus strategy is a little different from the other two. A firm that focuses still must choose one of the other strategies to organize its activities. It will still strive to lower costs or add value. The difference here is that a firm choosing to implement a focused strategy will concentrate its marketing and selling efforts on a smaller market than a broad cost leader or differentiator. A firm following a focus-differentiation strategy, for example, will add value to its product or service that a few customers will value highly, either because the product is specifically suited to a particular use or because it is a luxury product that few can afford. For example, Lululemon is a successful differentiator in the market of athletics apparel. Their products are valued by customers who are willing to pay premium prices for high-quality athletic clothing and a unique experience. To help support the customer experience and their strategy, Lululemon implemented a customer relationship management (CRM) system that collects data from every aspect of the customer’s experience and provides insight into their customer’s behaviours. This helps the company to personalize the experience for their customers and generate more sales. ^[2]

Innovation

The strategy of innovation can be described as a plan to encourage, mobilize, motivate, and achieve advancements in technology or service by investing in research and development activities. Innovation strategy means rethinking the development or delivery of a product or service in a particular market or industry to meet previously unmet needs of buyers or to meet these needs in a new way. In order for a firm to develop a successful innovation strategy, it is imperative that the organization be readied for the effort. This requires flexibility because changes and adjustments to products and processes are filled with risk and uncertainty. Therefore, the management of technology and innovation must balance short-term efficiency with long-term effectiveness in the market if the firm is to add value and thrive in a changing environment.^[3]

To further explain how IT can play a key role in achieving and sustaining competitive advantage, the following sections outline two analysis frameworks developed by Michael Porter that can be used: the value chain and the five forces model.

Thomas, L. (2020, February 18). Walmart changed the way it buys shopping bags and saved $60 million-and that's just one way it cut costs. CNBC.https://www.cnbc.com/2020/02/18/walmart-saves-millions-of-dollars-each-year-by-making-these-small-changes.html. ↵
Mottl, J. (2017, January 20). Lululemon taps data intelligence to amplify customer experience, relationship. Retail Customer Experience.com. https://www.retailcustomerexperience.com/articles/lululemon-taps-data-intelligence-to-amplify-customer-experience-relationship/. ↵
Borowski, P.F. (2021). Innovation strategy on the example of companies using bamboo. J Innov Entrep 10, 3. https://doi.org/10.1186/s13731-020-00144-2. ↵