The four methods of competitive advantage tool help startups find higher commercial value for their products and services than their competitors.
How is it used?
Michael Porter, the American academic who created this method, identified 4 main methods that can be used to achieve a successful competitive advantage strategy.
Method 1: Cost Leadership
Cost Leadership is one of the concepts that Porter developed. It is used to identify the companies with the lowest costs in a specific industry. It is driven by the startup’s efficiency, scale, size, scope as well as cumulative experience. Cost Leadership aims to take advantage of the scale of production and the use of advanced technology.
Although Cost Leadership has a lot of benefits such as maintaining profits and expanding a company’s market share, in some cases, it can make it difficult for new MSMEs to enter the market because of the slim profit margins. Additionally, one big disadvantage is that the technique is easily replicated and other companies could outperform your business.
Cost Leadership does not work in every industry. Further analysis needs to be made of the industry before choosing cost leadership. Some industries, such as luxury watches, for instance, could care less about cost. Niche luxury brands find the high cost to be a bonus as fewer people will own the product. This presents the product as a high-end unattainable luxury brand. In addition, it’s often better for small businesses not to compete at all on price if their market includes big competitors with a strong brand positioning.
Method 2: Differentiation
Differentiation is a commonly used business strategy, where MSMEs set themselves apart from competitors by having specific features that are not easily replicated in the industry.
Differentiation Strategy can be a success or a failure. For example, if you have a strong brand you can easily use it to pass along higher supplier costs to your customers because of the lack of alternative products. On the other hand, this method can be a failure if your competitors can quickly adapt and imitate your products’ features. Thus, this can put you at risk because consumer behavior can change leaving your company with insufficient customer demand to cover its higher costs.
Method 3: Defensive Strategy
While other approaches take a leadership approach and attempt to spearhead trends, this approach is a more reactive strategy. It relies on other businesses to take the lead, and it depends on reacting to its initiatives to maintain market share. Defensive companies change their prices or adopt new technologies following the market trend. Such companies are not concerned much with attracting new customers but rather maintaining existing ones. However, this comes at a cost. Without attracting new customers, the business may slowly lose market share.
Method 4: Alliances Strategy
Alliance strategy is considered a key strategy for any company’s development. It’s a formal or informal partnership between two or more organizations to achieve their common goals and commitments. Alliance strategies are flexible, which makes them very attractive to most businesses.
There are 3 types of strategic alliances: trading, functional and dynamic. Trading alliances are straightforward; it’s when buyers and sellers form some sort of agreement or arrangement based on contractual terms. Functional alliances integrate certain basic functions between two parties where they attain specific goals and establish ongoing management relationships. This includes procurement, R&D, production, marketing, or financial alliances. They are characterized by a high degree of collaboration. Dynamic alliances involve the hidden assets of both parties such as skills, knowledge, and capacity necessary to deliver results.
The Alliance Strategy is perfect for MSMEs who don’t have enough resources. It reduces the risks and the overhead costs required for research and development, market penetration, and growth
George wants to launch a company that makes high-end handcrafted jeweled watches. However, he is unsure which method is best for him. He realizes that the higher cost of products will be acceptable to his target demographic, therefore he didn't worry too much about adopting a Cost Leadership strategy. A defensive approach did not appear to be appropriate for his company. Following market trends was pointless because high-end jewelry is usually one-of-a-kind. He wanted to think about forming an alliance, but he was only one man with his mills and drills.
He believed that a differentiation strategy would work effectively for him. He may create new designs that integrate new technologies. That would be his differentiation competitive strategy.
Strategies can be used and overlapped, even changed, in the future.
Pros and Cons:
This is a great tool to set the tune of the business, however, it does little to shed light on the details of the business’ ins and outs.