A business can gain competitive advantage by adopting one of the below strategies. It’s imperative that your business falls into one of these brackets. Generally speaking, companies that straddle between strategies struggle to succeed.
- Become the low cost player, offering a wide range of products to a geographically diverse market (e.g. Walmart – global)
- Become a low cost player, offering a narrow range of products regionally (e.g. Ryan Air or Easy Jet – European)
- Become a differentiated player, offering a wide range of products to a geographically diverse market (e.g. Starbucks – Global)
- Become a differentiated player, offering a narrow range of products regionally (e.g. Ducatti – primarily European)
- Become a player with dual advantage where you command higher prices but drive your business costs down. This is not really a feasible business model for most as it leaves you open to attack from low cost and premium brands.
You can be either a low cost player, which requires you to keep your business costs low so that you can offer a low cost product to the end consumer, or, you can be a differentiated player, where you offer a premium product for a premium price tag.
Note: A differentiated strategy does not just mean that you offer something different. It’s a strategy whereby there is a larger gap between a customers willingness to pay and your business costs. A successful differentiated strategy may have 10% higher costs than competitors, but customers may be willing to pay 50% more for the product that they perceive to be more ‘premium’.
You never want to be in a position where you are straddling one of the above options, let me give you a couple of examples why.
British Airways Example
Let’s take British Airways as an example. When Easy Jet (low cost, regional airline) started to become a problem for British Airways, they reacted by launching a new airline called GO. The fundamental reasoning behind this was sound: they’d launch a low cost competitor to Easy Jet while maintaining the premium image of the main British Airways brand.
Had they implemented this properly, it may have worked out well for them. However, they didn’t completely copy the lean model offered by Easy Jet.
They decided that they would still enforce that customers chose their seats, which sounds reasonable, but didn’t follow the cheap airline model. At such low costs, they needed to fill every seat, they couldn’t afford to have an empty seat at the end of each aisle, which would almost certainly be the case if customers choose their own seats.
Then there was the food. Easy Jet did away with food entirely, whereas BA decided that they would offer a meal on every flight and try to charge the customers for it while they were in the air, should they want to have one.
The entire model backfired on British Airways as they straddled between being low cost and differentiated. They were neither a ‘cheap and cheerful’ airline or a premium airline. They straddled somewhere in the middle, making their business model extremely difficult to execute.
In fact, it went so badly for them that Easy Jet, the very company that they were trying to compete with, decided to buy GO & all their planes to expand their own operations. BA’s actions actually served to strengthen their competitors.
The Dell example
Let’s look at one more example of straddling. IBM was once the major player in desktop PCs, dominating the market.
When Dell emerged as a low cost competitor, offering customised computers, built exactly as the customer wanted them, it quickly became a problem for IBM. Dell achieved their low costs, in part, by removing retailers from their supply chain, driving customers to order online or over the phone.
IBM reacted by shipping partially assembled computers so retailers could customise them for customers. Clearly, this didn’t work. The concept of Dell’s model was to remove the middle man to reduce costs – IBM just gave the middleman more work to do.
Today, IBM desktop computers are no longer in the market. They were acquired by Lenovo as IBM came to the realisation that it was no longer a viable business strategy.
Let’s look at a hugely successful strategy now.
Walmart fall into the top category above. They are a low cost player and they offer a broad range of products to a global audience (trading as Asda in the UK). Their entire model is focused around this strategy.
They decided that they would have an ‘every day low prices’ model. This meant:
- There are very rarely sales meaning that they don’t need to spend time & money on national TV ads to promote their latest offers.
- Every day low prices also ensure that there is more predictable product demand, helping stock management.
They didn’t stop there, they extended their lean model further:
- They decided not to put their stores into densely populated urban areas. Rather, they placed their stores in rural areas, nearer to their distribution centres.
- They have no regional offices, further reducing their own overheads.
All of the decisions that the company makes centre around their strategy to deliver everyday low prices to end customers, while keeping their operating costs minimal.
So, when you’re looking at your business, make sure you have a clearly defined strategy and that you fit into one of the strategy models above. You don’t want to end up like GO Air!
To gain competitive advantage you need to do things differently or to do different things.