Business Strategies

Every firm needs a competitive advantage to succeed. While some companies develop strong competitive advantages through patents, brand recognition, and monopolies, new firms entering a market have to have their own competitive advantage. The three most common business strategies for firms to develop a competitive advantage are cost leadership, differentiation, and focus strategies. Many different factors are analyzed before deciding on a specific business strategy; for example, the type of industry and its competitive environment. In a fragmented industry, specializing your product and focusing on a niche market may be better suited. Another important factor in deciding on a business strategy is the cost associated with delivering the product. The higher costs to make, the higher you may have to price it. In this case, you would have to go with a differentiation strategy and focus on a niche market. In my opinion, a differentiation strategy and a focus strategy can be sometimes mixed up as being one and the same, but they are different.. Differentiation has a lot to do with branding; a focus strategy might not necessarily. But when used in combination, these can be effective business strategies for a firm.What type of mass market retailers/department stores implement these strategies, you might ask?

Cost leadership- The classic low-cost retail provider would be Wal-Mart. They offer their customers lower prices than their competitors. Wal-Mart though can lower their prices because they have tremendous purchasing power over suppliers. Suppose you are the supplier of Wal-Mart; they offer to buy some of your merchandise at a price that you agree to. You now have a major client and they buy 10% of your merchandise. But the next order, they want to buy 20%, and because they are buying so much, want a lower price; you of course say yes. Over time they buy more and more of your products, and they own about 60% of your inventory. They are your major customer; you have to negotiate lower prices because you cannot lose their business, and they know that. They now have a grip on your firm.

Differentiation - To effectively differentiate your product, you have to create an image behind this product. I do not mean innovation when i say differentiation; rather your product might be the same or similar to other products on the market, but you want to convince customers that your product is better. Your product could be different for many reasons. Some companies competitive strategy is a strong brand or the image that they create to their consumers. For example, Lexus and Toyota. Toyota owns Lexus. These are two similar products though one costs more. Many apparel retailers and specialty retailers use this strategy. A pair of jeans can range from say 20 dollars to hundreds of dollars. For example, a pair of Levi's may cost around 30 dollars, whereas a pair of True Religion jeans may cost 270 dollars. Here the line may become hazy between focus and differentiation because many of these companies implement both; But, what is it that makes these jeans different? The material used might be a little different, and the time and effort put into making each jean may also be different, but these extra costs, might not be enough to justify the difference between prices. A better answer might lie in the brand/make of the jean, and on the image that it creates for consumers. Much is spent on carefully crafting an image and a brand for the company and its product. These costs will be rewarded through customer loyalty once the image/brand catches on with consumers.

Focus - Examples of focus strategies also abound in retailing. Many specialty retailers and mass market retailers implement focus strategies, and compete based on low-cost or differentiation. Retailers like Forth and Towne (a subsidiary of Gap Inc., which is closing all of its 19 stores) whose focus target is on women over 35 years old; or Motherhood Maternity, which focuses on pregnant mothers; or Neiman Marcus, whose customer base is a more affluent one. Focus strategies work because they fill consumers specific wants, and can provide for underserved markets. Each of Gap Inc.'s three main brands (Banana Republic, Gap, and Old Navy) focus on a different segment of the market, with Banana Republic selling higher priced (better quality) products, and Old Navy serving to a more cost-conscious consumer.

On a side note, for my classmates, if you have read this far, within the simulation these strategies can also be used. Although a focused strategy might be rather difficult because we do not have specific information about the market, some early trends have developed after only two quarters. It is a competition, and i definitely want to win, so I will not write too much about it, but thanks to the progress report, which i did not particularly like because other groups may see our strategies, every second and fourth quarters each group can see what the other is doing, but they need to know what they are looking for. The low-cost leader is obviously the importer. He was in the market with both products before any other group therefore should have some economies of scale where they can provide low prices, and also can provide lower prices because they can take advantage of a lower experience curve than our newly entered firms.I wonder if there any firms using a differentiation strategy in our simulation?