When running a business it is important to identify external and internal factors of influence, and once this is done to decide and implement a strategy for gaining a competitive advantage over the competing firms. Michael Porter (also know for Porter’s Five Forces Model) has suggested there are 3 general methods in which a firm can gain a competitive advantage. These include:
- Cost Leadership
Cost Leadership Stratgey
This form of strategy, involves the firm minimising the cost of production (increasing production efficiency/technical efficiency) so that it can offer (without decreasing the quality of production) the lowest priced goods.
Through product innovation, branding, customer service and support, marketing and brand affiliation, a firm can increase the apparent quality of their product, develop customer loyalty and thus increase sales without producing at the lowest cost. A great example of this is the premium car brand, Mercedes.
With this strategy a company can use either Cost Leadership or Differentiation in a narrow sector of the market to gain an advantage over a broader focussed competitor. This form of competitive strategy can be used for a newer entrant to the market, and one that is keen in ‘getting its foot in the door’. Once the firm has entered the market, and attained market share then a broadening of products and services can occur to compete on a larger level with competitors.
Porter goes on to argue that if none of the above it decided upon and implemented, then the firm runs the risk of ‘being stuck in the middle‘.