Strategic Positioning:
Competitive advantage is creating better customer value for the same or lower cost than offered by competitors or creating equivalent value for lower cost than offered by competitors. Customer value is the difference between what a customer receives (customer realization) and what the customer gives up (customer sacrifice). What a customer receives is more than simply the basic level of performance provided by a product. What is received is called the total product. The total product is the complete range of tangible and intangible benefits that a customer receives from a purchased product. Thus, customer realization includes basic and special product features, service, quality, instructions for use, reputation, brand name, and any other factors deemed important by customers. Customer sacrifice includes the cost of purchasing the product, the time and effort spent acquiring and learning to use the product, and post-purchase costs, which are the costs of using, maintaining, and disposing of the product. Increasing customer value to achieve a competitive advantage is tied closely to judicious strategy selection. Three general strategies have been identified: cost leadership, product differentiation, and focusing.2
Cost Leadership
The objective of a cost leadership strategy is to provide the same or better value to customers at a lower cost than offered by competitors. Essentially, if customer value is defined as the difference between realization and sacrifice, a low-cost strategy increases customer value by minimizing customer sacrifice. In this case, cost leadership is the goal of the organization. For example, a company might redesign a product so that fewer parts are needed, lowering production costs and the costs of maintaining the product after purchase.
Differentiation
A differentiation strategy, on the other hand, strives to increase customer value by increasing what the customer receives (customer realization). A competitive advantage is created by providing something to customers that is not provided by competitors. Therefore, product characteristics must be created that set the product apart from its competitors. This differentiation can occur by adjusting the product so that it is different from the norm or by promoting some of the product’s tangible or intangible attributes. Differences can be functional, aesthetic, or stylistic. For example, a retailer of computers might offer on-site repair service, a feature not offered by other rivals in the local market. Or a producer of crackers may offer animal-shaped crackers, as Nabisco did with Teddy Grahams®, to differentiate its product from other brands with more conventional shapes. To be of value, however, customers must see the variations as important. Furthermore, the value added to the customer by differentiation must exceed the firm’s costs of providing the differentiation. If customers see the variations as important and if the value added to the customer exceeds the cost of providing the differentiation, then a competitive advantage has been established.
Focusing
A focusing strategy is selecting or emphasizing a market or customer segment in which to compete. One possibility is to select the markets and customers that appear attractive and then develop the capabilities to serve these targeted segments. Another possibility is to select specific segments where the firm’s core competencies in the segments are superior to those of competitors. A focusing strategy recognizes that not all segments(e.g., customers and geographic regions) are the same. Given the capabilities and potential capabilities of the organization, some segments are more attractive than others.
Strategic Positioning
In reality, many firms will choose not just one general strategy, but a combination of the three general strategies. Strategic positioning is the process of selecting the optimal mix of these three general strategic approaches. The mix is selected with the objective of creating a sustainable competitive advantage. A strategy, reflecting combinations of the three general strategies, can be defined as:
. . . choosing the market and customer segments the business unit intends to serve, identifying the critical internal business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives.
As used in the definition, “choosing the market and customer segments” is actually focusing; “deliver[ing] the value propositions” is choosing to increase customer realization and/or decrease sacrifice and, therefore, entails cost leadership and/or differentiation strategies, or a combination of the two. Developing the necessary capabilities to serve the segments is related to all three general strategies. What is the role of cost management in strategic positioning? The objective of strategic cost management is to reduce costs while simultaneously strengthening the chosen strategic position. Remember that a competitive advantage is tied to costs. For example, suppose that an organization is providing the same customer value at a higher cost than its competitors. By increasing customer value for specific customer segments (e.g., differentiation and focusing are used to strengthen the strategic position) and, at the same time, decreasing costs, the organization might reach a state where it is providing greater value at the same or less cost than its competitors, thus creating a competitive advantage.
Competitive advantage is creating better customer value for the same or lower cost than offered by competitors or creating equivalent value for lower cost than offered by competitors. Customer value is the difference between what a customer receives (customer realization) and what the customer gives up (customer sacrifice). What a customer receives is more than simply the basic level of performance provided by a product. What is received is called the total product. The total product is the complete range of tangible and intangible benefits that a customer receives from a purchased product. Thus, customer realization includes basic and special product features, service, quality, instructions for use, reputation, brand name, and any other factors deemed important by customers. Customer sacrifice includes the cost of purchasing the product, the time and effort spent acquiring and learning to use the product, and post-purchase costs, which are the costs of using, maintaining, and disposing of the product. Increasing customer value to achieve a competitive advantage is tied closely to judicious strategy selection. Three general strategies have been identified: cost leadership, product differentiation, and focusing.2
Cost Leadership
The objective of a cost leadership strategy is to provide the same or better value to customers at a lower cost than offered by competitors. Essentially, if customer value is defined as the difference between realization and sacrifice, a low-cost strategy increases customer value by minimizing customer sacrifice. In this case, cost leadership is the goal of the organization. For example, a company might redesign a product so that fewer parts are needed, lowering production costs and the costs of maintaining the product after purchase.
Differentiation
A differentiation strategy, on the other hand, strives to increase customer value by increasing what the customer receives (customer realization). A competitive advantage is created by providing something to customers that is not provided by competitors. Therefore, product characteristics must be created that set the product apart from its competitors. This differentiation can occur by adjusting the product so that it is different from the norm or by promoting some of the product’s tangible or intangible attributes. Differences can be functional, aesthetic, or stylistic. For example, a retailer of computers might offer on-site repair service, a feature not offered by other rivals in the local market. Or a producer of crackers may offer animal-shaped crackers, as Nabisco did with Teddy Grahams®, to differentiate its product from other brands with more conventional shapes. To be of value, however, customers must see the variations as important. Furthermore, the value added to the customer by differentiation must exceed the firm’s costs of providing the differentiation. If customers see the variations as important and if the value added to the customer exceeds the cost of providing the differentiation, then a competitive advantage has been established.
Focusing
A focusing strategy is selecting or emphasizing a market or customer segment in which to compete. One possibility is to select the markets and customers that appear attractive and then develop the capabilities to serve these targeted segments. Another possibility is to select specific segments where the firm’s core competencies in the segments are superior to those of competitors. A focusing strategy recognizes that not all segments(e.g., customers and geographic regions) are the same. Given the capabilities and potential capabilities of the organization, some segments are more attractive than others.
Strategic Positioning
In reality, many firms will choose not just one general strategy, but a combination of the three general strategies. Strategic positioning is the process of selecting the optimal mix of these three general strategic approaches. The mix is selected with the objective of creating a sustainable competitive advantage. A strategy, reflecting combinations of the three general strategies, can be defined as:
. . . choosing the market and customer segments the business unit intends to serve, identifying the critical internal business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives.
As used in the definition, “choosing the market and customer segments” is actually focusing; “deliver[ing] the value propositions” is choosing to increase customer realization and/or decrease sacrifice and, therefore, entails cost leadership and/or differentiation strategies, or a combination of the two. Developing the necessary capabilities to serve the segments is related to all three general strategies. What is the role of cost management in strategic positioning? The objective of strategic cost management is to reduce costs while simultaneously strengthening the chosen strategic position. Remember that a competitive advantage is tied to costs. For example, suppose that an organization is providing the same customer value at a higher cost than its competitors. By increasing customer value for specific customer segments (e.g., differentiation and focusing are used to strengthen the strategic position) and, at the same time, decreasing costs, the organization might reach a state where it is providing greater value at the same or less cost than its competitors, thus creating a competitive advantage.
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