Michael Porter of Harvard Business School revolutionized how business leaders think about competitive strategy with his publications starting in the 1980s. This included the classic books, Competitive Strategy: Techniques for Analyzing Industries and Competitors and Competitive Advantage: Creating and Sustaining Superior Performance that Free Press published in 1980 and 1985, respectively. Still today, Michael Porter’s treatises on competitive strategy influence executives and political leaders worldwide with decisions they make about their organizations and nations.
However, his premise warns that companies that try to do some of each strategy get "caught in the middle." This prevents the realization of the benefits of any of the three strategies. Most of all, it results in losing to competitors who choose just one strategy.
In summary, the three strategies your company can choose from to sustain a competitive advantage include:
Cost Leadership involves a company that is able to produce and sell its products and services at a much lower cost than its competitors. This enables a low cost leader to earn above average profits. “Big box retailers” such as Walmart, The Home Depot, and Best Buy, as well as McDonalds, Southwest Airlines, and Teva Pharmaceuticals, are low cost leaders.
Cost leadership is not a practical strategy for most companies, especially small to mid-sized companies. This is because it requires a high investment to achieve economies of scale.
Differentiation is a strategy in which a company distinguishes its products and services by its features and benefits from its competitors. Through differentiation, a company creates a product or service that customers perceive as unique in the industry. As a result, you are able to charge a premium price and earn profits with above average margins. Companies that have succeeded with a differentiation strategy include Apple, BMW, and Nike.
A differentiation strategy is a more common and viable strategy for many companies. This is in part because there can only be one cost leader in an industry, but there can be several companies that differentiate features and/or benefits. Yet, it can be expensive to be a dominant leader in your industry through differentiation. It requires extensive research, product development, and marketing to a broad segment to sustain leadership.
Focus is a strategy that enables a company to dominate a niche. Through a focus strategy, your company concentrates on a limited part of a market. Companies that succeed with a focus strategy understand the dynamics and unique customer needs of their market niche. As a result of developing and promoting “niche” products and services, you can attract a higher share of customers in that market segment than competitors. Plus, you can earn above average profits and reduce the threat of competitors entering the niche.
Novo Nordisk, AARP, and Motel 6 are examples of companies and organizations that have sustained competitive advantage with a focus strategy. Novo Nordisk has focused on being a leader in diabetes medications. AARP is the preeminent leader in advocacy for the 50+ age group. Motel 6 has sustained competitive advantage for over 50 years by focusing on budget-conscious consumers.
Focus is the easiest and least costly of the three strategies for most companies. There are three marketing ways you can sustain a competitive advantage with a focus strategy.
Focus on a Narrow Target Market
When you focus on a narrow target market, you have the best chance to become the leader of that niche. This is especially true when you target a segment that is less vulnerable to substitutes or where the competitive landscape is weak. You can choose the customer segment based on marketing trends, demographics, psychographics, and customer needs. You can also decide on the best types of product and service solutions to sell to this niche.
By focusing on a narrow target market, you also are able to contain costs. You are able to advertise and promote your products and services in media that focuses on your target group. Plus, you are able to contain costs of manufacturing products or delivery of services.
Not surprisingly, some of the world’s most successful companies started out by focusing on narrow target markets. Walmart began by focusing on serving rural towns where larger retailers such as Sears and Kmart did not sell. Amazon started by focusing on consumer book buyers with Internet access. Facebook began as a service for Harvard students.
As you can see, your business can sustain competitive advantage by focusing on a narrow target market. Then, as you increase your customer share, you can expand your market and become the next leader in your industry.
Develop Customer Intimacy
A second way to sustain competitive advantage is to develop customer intimacy. Get to know as much about your customers as you can. As you find out different things about each customer, you can tailor your offering to them.
Over time, this strategy leads to stronger trust and customer loyalty. It can induce more purchases by that same customer. Plus, it can lead to more referrals and new customers.
Proctor and Gamble’s headquarters is in Cincinnati, Ohio. However, they have their account managers located in Bentonville, Arkansas so they can be near Walmart, their leading retail customer.
Dell was able to surpass Compaq in computer sales in the 1990s by focusing on customer intimacy. Dell focused on consumers and businesses that wanted to customize computers to their needs, rather than choose from pre-assembled models sold through retailers and distributors. Selling directly to customers gave Dell an insight into customer preferences and needs so it was able to fulfill them faster and better than its competitors.
IBM transformed its business from computer products to consulting services by focusing its strategy on customer intimacy. IBM’s customers no longer wanted to buy technology. They wanted solutions to their problems. So IBM, under Louis Gerstner’s leadership, changed the culture of the company from developing superior technological products to focusing on delivering customized technology-based solutions to fulfill each customer’s needs.
Limit Promotional Channels
Many executives believe their companies should advertise and promote products through many types of media. Yet, the better and more profitable strategy is to focus on a few advertising channels. This way you can get the most from your limited resources, including money, time, and staff. It’s more effective to master and get the most mileage from a few types of media.
It often takes many impressions for a prospective buyer to respond, so why not advertise in a few places more frequently so you can reach prospects and give them multiple impressions of your brand? By doing so, your prospects will see your ad more often in a short span of time. This can speed up the time it would otherwise take for that prospect to buy from you.
You can determine where to advertise your brand based on where your customers are relative to the purchase of your product or service. For example, Motel 6 has “focused” its advertising campaign on car drivers with the same radio message, “We’ll Leave the Light on for You” by Tom Bodett since 1986. In fact, it’s one of the longest running advertising campaigns in history. During this campaign, Motel 6 has grown from 200 to over 1,000 locations across the U.S. and Canada.
Focus Leads to Long-Term Success
A focus strategy enables your company to earn profits in both the short and long term. In fact, a focus strategy is often more profitable than a strategy that supports expansion. Look what happened when Xerox expanded its technology expertise to make and sell computers. It lost its focus and was not successful in the new market. The same thing happened to Yahoo! The former search engine leader, whose focus was on Internet search, lost its dominance when it expanded into other online services. Google soon took over as the leader.
The bottom line is to focus on a niche in which you can create and sustain a competitive advantage. By doing so, you can be the king of your niche, rather than a pawn in a crowded market.