Originally created 05/01/00

Jurgen: Competitive strategy crucial in business

Exceptions notwithstanding, the modern marketplace is one of competition.

Competition takes place either on the basis of cost, especially for commoditylike products (e.g., gasoline, chemicals, metals, many agricultural products), or, where possible, on the basis of real or imagined product differences (e.g., breakfast cereals, stereospeakers, microbrewed beers).

Which competitive strategy should you follow?

Building competitive advantages on the basis of cost is likely to be successful in the following circumstances:

Economies-of-scale and economies-of-learning are potentially important but no competitor seems to exploit them.

This is especially true in new, rapidly growing markets where going for market share and quickly accumulating market experience permits you to lower your costs more rapidly than your competitors can.

The product or service tends to be a commoditylike item so that its benefit or value to the customer cannot be further enhanced by trying to differentiate it in terms of size, texture, shape, or any other attribute. In this case, profits come not from enhanced value to customers but from reduced costs of production. Still, profit opportunities may arise from diversifying your service after the sale if the product itself is commoditylike.

Customers are relatively price-sensitive and unwilling to pay for differences that do not matter to them. When customers shy away from "bells and whistles," it is better to forego the expense of creating and advertising them. Instead, you should focus on cost reduction and price-competition to keep customers happy and competitors at bay.

The product or service is a "search good" rather than an "experience good." Technologically complex or feature-laden goods, as well as personal-service goods, are considered experience goods -- in other words, goods whose value to the customer arises after the sale has been made. In contrast, search goods are those whose attributes are fairly standard and easily comparable by customers. Therefore customers "search" the marketplace on the basis of price rather than attributes.

There is not much to be gained by spending money on nonstandard features that your competitors can easily imitate. It's better to be the nimble imitator and focus on cost reduction to improve your profit-margins.

Building competitive advantages on the basis of differentiation is likely to be successful in these converse circumstances:

Economies-of-scale and economies-of-learning are important and the existing competition already has a head start. To compete effectively in this market, you will have to add value for customers by differentiating your products or services.

Here are some examples: Microbreweries could not compete on the same scale with big, established beer brewers yet found a niche for which customers were willing to pay. Arm & Hammer could not compete on the same scale with big toothpaste producers yet successfully introduced its baking-soda toothpaste (and even forced the big guys to follow suit). The product or service in these examples is custom-designed and anything but a commoditylike item.

Customers are willing and able to pay premium prices for real or imagined product differences.

Products for females -- from clothes to shavers -- often are functionally equivalent to comparable products for males, yet females are willing to pay for perceived product differences. Auto buyers often seek to separate themselves from their neighbors by spending on special features such as interior designs, running boards, spoilers, unique color schemes and unnecessary horsepower, thus allowing manufacturers' and dealers' margins to increase handsomely. The product is an experience rather than a search good or can be converted into an experience good. The Chiquita banana was just another banana until the famous Chiquita sticker and branding converted it into something different.

The problem with this strategy is potential imitation by competitors, so look for product attributes that are difficult or impossible to imitate such as strong and protected branding (Coca-Cola) and long-lasting, patented features (Velcro fasteners), or engage in a strategy of continuous innovation (3M) that keeps competitors on their toes.

I shall revisit the theme of competitive strategy in future columns.

Dr. J. Brauer is associate professor of Economics at Augusta State University's College of Business Administration. He can best be reached via his web-site http:www.aug.edu/~sbajmb.