Analysis of Approaches to Market Level Strategy
There are basically three businesses strategies that are used by firms to gain a competitive advantage over its rivals in the industry. The competition may be over a broad market or a more focused market. Usually this strategies involved a five model business strategies called integrated strategy.
Cost Leadership Strategy
Organizations compete for customers based on prices. A good price setting is a function of a firm’s internal efficiency that will help achieve profit margins that are above average and enable setting of a reasonable price that motivates the customers to buy the firm’s products and services. This strategy works well where goods in the market are standardized so that the only competitive element in play is the products’ or services’ prices. Rugman (1996) contended that a firm may price its products and services at lower costs compared to its rivals, accepting a lower profit margin to gain a larger market share and thus increasing its sales volume to compensate for the decrease in profit margin. Continuous efforts to lower costs relative to that of competitors is required to be a successful cost leader. The strategies to lower cost are enumerated as establishing efficient facilities that the competitors may not easily imitate, maintenance of a tight control over production and overhead costs and minimization of cost of sales, R&D plus services. A cost leadership strategy may remain effective even in the presence of rivalry, new entrance, and aggressive suppliers and buyers power and in the presence of substitute products and services.
Porter’s Five Forces Model
In this model a consideration of the impacts of rivalry, new entrance, suppliers’ and buyers’ power and substitute products on the marketing strategy are considered. According to Flouris and Oswald (2006), rivalry rule provides that competitors may avoid price wars because the firm that charges the low prices usually continuous to earn profits after its competitors have competed away their profit (Etihad, Emirates and British Airways). Also, powerful customers that force the firms to reduce the prices of their products to a level they cannot sustain eventually forces the firms out of the market leaving only a few firms which then enjoy and exploit the monopoly positions. The effective result is that the customers lose much of their buying power. Cost leaders must be able to absorb larger price increases in supplies before they can be reflected in the raised prices of products and services offered to customers. The continual focus on the creation of barriers for new firms to enter into the market assures the cost leaders of almost an increasing market share or at its worse a constant one. The effect of substitutes in the market are encountered by cutting down product prices, investing to develop a firm’s own substitutes and purchase of patents.
There are also risks of changes in technology, imitation and tunnel vision in price leadership, as stated by Baack and Boggs (2008). The firms must always reconfigure its value chain through identification and evaluation of internal resources and capabilities and how they can help add value to the firm.
This strategy employs the use of unique product features and characteristics to take competitive advantage over rivals rather than using prices (Michael, 2008). The main concerns are on offering high quality, superior features, high customer services, better use of technology, rapid innovation and image management as used by Hewlett-Packard, Rolex, Ralph Lauren and Intel companies. Creating value is done through lower buyer cost reflected in high qualities depicting less breakdowns and better response to problems, raising buyer’s performance which heightens the buyer’s level of enjoyment and sustainability, achieved through creation of barriers through earning a good reputation, uniqueness and differentiation). The risks of using this strategy include possibility of imitation, the extent of the uniqueness to warrant this competition must be very high and possible loss of value.
Porter’s Five Forces Model
Kossowski (2007) noted that the effective differentiators can earn profits in the face of unattractive five forces. Rivalry is eliminated because customers are less sensitive to increases in price due to a soaring brand loyalty that last for as long as the customers’ needs are satisfactorily satisfied by the firm. Differentiators also charge premium prices because the customers are willing to pay the extra cot and thus, they are able to absorb higher costly supplies. Loyalty to products is also a difficult barrier to break and helps to combat substitute products.
Use of a Combination of Focused Integrated Low-Cost and Differentiation Strategies
As global competition increases, this new strategy has become popular with many firms adopting it to take a competitive advantage in the market over its rivals. The firms specialize in serving a specific area or class of customers only. The firms that have use this strategy see improvements in their ability to adopt to environmental changes, learn new skill and technology in the marketing environment and their ability to leverage major competencies in its business units and product lines more effectively. This specific advantage enables a firm to produce differentiated products at lower costs (Hill, 1988). The customers are therefore served with products that are both value-based and low-priced. The Southwest Airlines, Wal-Mart and Apple Inc. are examples of a companies that use this strategy. The organization that choose to use this strategy must be careful not to get stack on the way when they fail to successfully man the five forces of competition by failing to achieve strategic competition. It must be able to consistently cut down cost while offering differentiated products.
Baack, D. W., & Boggs, D. J. (2008). The difficulties in using a cost leadership strategy in emerging markets. International Journal of Emerging Markets, 3(2), 125-139.
Flouris, T. G., & Oswald, S. L. (2006). Designing and executing strategy in aviation management. Aldershot, England: Ashgate
Hill, C. W. (1988). Differentiation versus low cost or differentiation and low cost: A contingency framework. Academy of Management Review, 13(3), 401-412.
Kossowski, A. (2007). Strategic management: Porter’s model of generic competitive strategies – theory and analysis. München: GRIN Verlag GmbH.
Michael E. Porter (2008). Competitive Strategy: Techniques for Analyzing Industries and Competitors
Rugman, A. M. (1996). The theory of multinational enterprises: The selected scientific papers of Alan M. Rugman. Cheltenham, UK: E. Elgar.