A competitive advantage exists when a company has a specific way of doing business that others cannot replicate. The different methods of planning for competitive advantage include a differentiation focus, differentiation, cost focus, and cost leadership. Each of these methods takes a specific approach to how a company competes in the business market. These generic strategies are often the result of the competitive forces that exist in an industry. Planning for competitive advantage may result in a company selecting more than one strategy or changing one strategy for another.
Differentiation focus, in terms of planning for competitive advantage, occurs when a business competes in a small number of market segments or target markets. The business creates goods or services that differentiates it from the others that operate in the same market. Businesses tend to find consumers that have a particular unmet need or desire for a specific product. In order for this strategy to work, each target market must have this lack of consumer products in order for a business to succeed. A company can attempt to enter a market and create a new product for the differentiation focus, but this strategy may not work.
An alternate strategy of planning for competitive advantage is to use the differentiation method. Under this approach, the company reviews current buyer criteria in a certain market. Focusing on this specific data, the company creates goods or services to meet this purchase criterion. Companies can often charge higher prices due to their ability to meet the criteria by which buyers operate in a market. The price premium exists because this strategy can cost more than other competitive advantage approaches.
Cost focus is a low-cost approach when planning for competitive advantage. This occurs when a company offers low-cost products in a specific number of market segments. Products are often not fancy or full of specific features. In some cases, the low-cost product is simply a substitute good consumers purchase when a name-brand product is not available. In short, these goods and services are good enough for consumers to purchase and use.
A low-cost leader is a planning for competitive advantage strategy that a company uses to minimize costs. The goods or services produced may be the leaders in a market. The approach demands success, however, through the ability of a company to offer the best products at the lowest prices to consumers. Discounts from these leaders may occur so the business can sell more products in order to maintain its leadership stance. Doing this is possible because of the company’s low-cost products and competitive advantage in the market.