3.8.2 Strategic positioning: choosing how to compete

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    3.8.2 Strategic positioning: choosing how to compete

    How to compete in terms of benefits and price

    Porter’s Generic Five Forces = this includes strategies that could be adopted in order to gain competitive advantage. The strategies relate to the extent to which the scope of a business’ activities are narrow versus broad and the extent to which a business seeks to differentiate its products

     

    Cost leadership:

    • The objective is to become the lowest-cost producer in the industry
    • Produce on a large scales as this enables businesses to exploit economies of scale
    • Associated with large scale firms offering standard products with relatively little differentiation that are readily acceptable to the customers
    • Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share
    • The lowest-cost produce will likely achieve or use several of the following:
      • High levels of productivity
      • High capacity utilisation
      • Use of bargaining power to negotiate the lowest prices for production inputs
      • Lean production methods (e.g. JIT)
      • Effective use of technology in the production process
      • Access to the most effective distribution channels

     

    Cost focus:

    • Businesses seek a lower-cost advantage in just one or a small number of market segments.
    • Products are basic and sometimes similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers
    • Such products are often called “me-too’s”

     

    Differentiation focus:

    • Businesses aim to differentiate within just one or a small number of target market segments.
    • The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers
    • Firms have to ensure customers have different needs/wants (valid basis for differentiation)
    • Also have to make sure competitors aren’t meeting these needs too
    • Niche marketing strategy
    • Small firms establish themselves in a niche market segment using this strategy
    • They achieve higher prices than un-differentiated products through specialist expertise or other ways to add value for customers.

     

    Differentiation leadership:

    • Businesses targets much larger markets and aims to achieve competitive advantage through differentiation across the whole of an industry
    • Involves selecting one or more criteria used by buyers in a market, and then positioning the business uniquely to meet those criteria
    • Associated with charging a premium price for the product
    • Higher prices reflect the higher production costs and extra value-added features provided
    • Give customers clear reasons to prefer these products over others
    • Methods to achieving this include:
      • Superior product quality (features, benefits, durability, reliability)
      • Branding (strong customer recognition & desire; brand loyalty)
      • Industry-wide distribution across all major channels (i.e. the product or brand is an essential item to be stocked by retailers)
      • Consistent promotional support – often dominated by advertising, sponsorship etc

     

    Bowman’s Clock Strategy = a model that explores the options for strategic positioning (ie how a product should be positioned to give it the most competitive position in the market

    • The purpose of the clock is to illustrate that a business will have a variety of options of how to position a product based on two dimensions – price and perceived value

    Low price and low value added (position 1):

    • Not a very competitive position
    • The product is not differentiated (very standardised)
    • Customer perceives very little value, despite a low price. This is a bargain basement strategy
    • The only way to remain competitive is to be as ‘cheap as chips’ and hope that no one else is able to undercut you
    • Example = paperclips

     

    Low price (position 2):

    • Low cost leaders in the market
    • Cost minimisation is needed, often associated with economies of scale
    • Profit margins are low but they produce a high volume of output which generates high overall profits
    • Competition is usually intense – often involving price wars
    • Example = pens such a disposable biros

     

    Hybrid (position 3):

    • Elements of low price and differentiation
    • The aim is to persuade consumers that there is a good added value through the combination of a reasonable price and acceptable product differentiation
    • This can be a very effective positioning strategy, particularly is the added value involved is offered consistently
    • Example = Lidl or Aldi as they sell branded items but also their own branded products

     

    Differentiation (position 4):

    • The aim of a differentiation strategy is to offer customers the highest level of perceived added value
    • Branding plays a key role in this strategy, as does the quality of the good
    • Example = BMW and Audi for their family range cars such as 4x4s

     

    Focused differentiation (position 5):

    • Customers buy the product because of a high perceived value with a higher price
    • Adopted by luxury brands, who aim to achieve premium prices by highly targeted segmentation, promotion, and distribution
    • Done successfully, this strategy can lead to very high profit margins but usually short term
    • Example = Rolex watches as they have maintained their high position in the watch and accessory industry with a high price

     

    Risky high margins (position 6):

    • A high risk positioning strategy that this might argue is doomed to fail
    • High prices without offering anything extra in terms of perceived value
    • Customers will find a better-positioned product that offers more perceived value for a lower price. Very short term
    • Example = Iceland if they were to bring out their own luxury brand

     

    Monopoly pricing (position 7):

    • Only one business offering the product
    • The monopolist doesn’t need to be too concerned about that value the customer perceives in the product – the only choice they have is to buy or not
    • Fortunately, in most countries, monopolies are tightly regulated to prevent them from setting prices as high as they wish
    • Example = eurotunnel / local rail company

     

    Loss of market share (position 8):

    • This position is a recipe for disaster in any competitive market
    • Setting a middle range or standard price for a product with low perceived value is unlikely to win over many customers who will have much better options (eg higher value for the same price from other competitors)
    • Example = British Home Stores or Ryanair/EasyJet

     

    Influences on the choice of a positioning strategy

    Influences on the choice of positioning:

    • Competitors:
      • How strong are the competitors a business faces in its chosen strategic position? What advantages, if any, do those competitors face?
    • A business considering positioning itself using a cost leadership strategy (Porter) will want to assess whether it is capable of achieving the same level of efficiency and productivity as key competitors who also adopt a cost leadership strategy. Can the business access the same economies of scale as competitors?
    • Similarly, a strategy of differentiation may be attractive, but are existing competitors already exploiting the market opportunities for a differentiated product or service? What are their market shares of the market segments a business might want to target?

     

    Core competencies:

    • A honest view about the ability of the business to compete is essential. Does the business has a unique selling point that might enable it to sustain a strategy of differentiation?
    • If innovation is key to positioning, does the business have the appropriate resources, organisational culture and reward systems to create a suitable flow of innovation?

     

    External environment:

    • Careful and regular scanning of changes in the external environment is key to effective strategic positioning. For example, changes in the political and/or regulatory environment can create opportunities as well as pose threats to the existing positions of businesses in a market.
    • Similarly, changes in the economic environment can challenge existing position (e.g. a significant economic downturn might increase the attractiveness of businesses that are positioned as “low cost” operators if demand for such products and services increases at the expense of higher-priced and higher-cost alternatives)

     

    The benefits of having a competitive advantage

    Competitive Advantage = an advantage over competitors gained by offering consumers greater value, either by providing lower prices or by providing greater benefits and service that justifies higher prices

     

    Importance of having a competitive advantage:

    • It distinguishes a company from its competitors
    • It contributes to higher prices, more customers, and brand loyalty
    • It remains one of the main goals of any firm

     

    The difficulties of maintaining a competitive advantage

    Challenges in maintaining a competitive advantage:

    • It can be hair to maintain your target audience when tastes and fashions are constantly changing and customers are always wanting something different
    • Many competitors will always try to outdo you and bring out new product ranges and decrease prices even further
    • To build a sustainable differentiation strategy, firms need to build their reputation around those distinctive characteristics and make their expertise exceptionally visible to your target audience

     

     

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