How are the drivers of Differential Advantage threatened in both Low Cost and Differential strategies (HINT: use Exhibit 5.8, page 149)?
There are three key threats to low cost advantages. There is the technological threat, which is when new technologies that provide competitive advantage to a firm can be imitated, threating the firms†ability to compete and lead the market in innovation (Carpenter & Sanders, 2008). In addition, production and process technologies can be adopted when personnel move to different companies, carrying with them the strategies of old firm practices. This can be a threat to any firm who uses production and process technologies to try and gain market advantage.
Quality and competitive pricing is also a threat to low-cost leaders (Carpenter & Sanders, 2008). “A real threat to an intended low-cost position is the failure to offer sufficient quality to satisfy buyers†basic needs.†(Carpenter & Sanders, 2008, p. 149). When costs become low, quality can sometimes be foregone, which impacts a key differentiator to a firm in a competitive market. Customers want quality, and firms should recognize quality as a key differentiator that shouldnâ€t be substituted. This quality can be lost in customer service or product quality. It comes down to maintaining a quality customer experience all around in order to stay differentiated.
Customers also value ethical business practices, particularly when it comes to following labor laws in outsourced production regions. Some firms find themselves searching for the lowest costs when it comes to producing their good or service. This means moving their production overseas to produce product, where lower wage costs, excessive work hours, denial of basic employee services, and even employing children are implemented (Carpenter & Sanders, 2008). To many in the United States, these work practices are considered unacceptable working conditions (Carpenter & Sanders, 2008). Itâ€s important for a firm to be aware of how their business decisions and stay ethical due to the impression it leaves on consumers.
There are four key threats when it comes to differentiation positions. “There is the threat of failing to increase buyers†willingness to pay higher prices.†(Carpenter & Sanders, 2008, p. 149). If a firm is unable to motivate customers into buying into their overpriced product, then they fail to generate demand or interest from the public. This will cause low sales, and decreased overall profits, impacting the firmâ€s ability to compete.
Additionally, another threat is a firm failing to understand total costs of a differentiator (Carpenter & Sanders, 2008). This could be impacted solely by production costs being too high when producing the key differentiator, decreasing overall profits for a firm. “The cost of differentiation has no direct effect on customers†willingness to pay, and in most industries, cost-plus pricing is not an option.†(Carpenter & Sanders, 2008, p. 150). For example, if a firm holds internal processes that are costing the company too much in order to be thorough in producing this differentiator, a business should reassess how their internal processes function adds value. Value chain activities could be examined and the firm could potentially define a better, faster, improved strategy to give the differentiator its competitive advantage to the firm.
“Two additional reasons differentiation can fail are over fulfillment and ease of imitation.†(Carpenter & Sanders, 2008, p. 150). My firm faces imitation all too often, particularly in international regions where patents and proprietary laws are just not respected or followed. Weâ€ve had numerous, best selling products get replicated and then sold in regions around Asia, forcing us to not only take these competitors to court over the illegal copyright, but also go back to the drawing board of investing in R&D to develop a new, competitive product. These threats of differentiation directly impact how a firm develops low-cost strategies to stay competitive in the arena for which they compete.
“As with cost leadership, there are myriad ways to achieve differentiation advantage.†(Martin, 2015, para. 8). Companies must come up with a perfect mix of low-cost strategies, economies of scale to keep average costs low, while exploiting their brand image, and develop a key differentiator that can be capitalized by their efficient production capabilities and resources. Various threats can germinate and should be taken into consideration as the firm works to compete and keep costs low.
What threats (risks) affect firms pursuing a Focus and Integrated position?
One major threat that impacts a firm pursing a focused position in the market is being out-focused by competitors (Carpenter & Sanders, 2008). “A firm relying on a focus strategy may lose its advantage by attempting to grow and consequently attempt to meet the needs of too many customers.†(Carpenter & Sanders, 2008, p. 150). Competitors can move in and easily identify key targets to focus on, pulling customers away from the original firm. Competing firms may also be able to identify new targets, which would pull current customers away from the original firm. This threat therefore can impact the target markets that a firm competes for. A firm doesnâ€t want to get spread too thin, and take on too many customers that it canâ€t satisfy. A firm should therefore clearly assess who the target market is; the firms focused position, and the threats that may arise by competitors entering or currently in the market.
A firm must also understand that it cannot be strategically positioned in all arenas of the market. A firm needs to pick a position and stick to it, if they donâ€t, the firm will get stuck “straddling†multiple positions, and never fully gaining a competitive edge in either (Carpenter & Sanders, 2008). “Although many firms have succeeded in pursing integrated strategies, itâ€s still critical for manages to understand the tradeoffs they make when they opt for one position over the other.†(Carpenter & Sanders, 2008, p. 151). A firm must make a tradeoff to their strategic position in the market they compete in.
At my current company we differentiate ourselves as being the market leaders offering the newest innovative technology, quality products, and excellent customer service. This is an integrated position because we try to offer multiple components to a customer. Competitors on the other hand offer lower prices, but less quality, or lower prices, but less regional support. The integrated strategy has allowed us to offer a competitive position in a market that has grown quickly over the last ten years. Weâ€ve had to slowly change our strategy as our industry grew and more competitors entered the market.
Carpenter, M. A. & Sanders, Wm., G. (2008). Strategic management: A dynamic perspective. Upper Saddle River, NJ: Pearson Prentice Hall.
Martin, R. L. (2015). There are still only two ways to compete. Retrieved from https://hbr.org/2015/04/there-are-still-only-two-w…
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