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