Bussiness g + Unit Two

UNIT TWOTHE COMPETITIVE ENVIRONMENT

Learning Objectives Up on the completion of this unit, you will be able to:

Understand the concept of environment as a whole Understand the concept of competitive advantage and its importance Be familiar with Michael Porter’s Five-Forces Model of competition Know the benefits and limitations of each of the basic forms of competitive advantages Understand the effect of competition on business Assess the forces of competition Examine the dimensions of competitive strategies Learn how to cope up with a competitive environment.

IntroductionThe oxford dictionary gives the meaning of the word “Environment” as surrounding objects, regions or circumstances. The business environment, in fact, consists of all those aspects and forces in the surroundings of business enterprises under which business operations are to be carried out effectively. In the words of Arthur, M. Weimer, “business environment encompasses the climate or set of conditions, i.e. economic, social, political, and institutional in which business operations are conducted.”William F. Glueck and Lawrence R. Jauch defined the word “Environment” as the factors that pose threats to the firm, and offers opportunities for exploitation. Although there are many factors, the most important of these are socio-economic, technology, suppliers, competitors, government and physical and natural.

In a nutshell, all the definitions given by different authors show that the business environment is the very crucial factor for the successfulness of any business. Business environment can broadly be divided into two categories. Namely the ‘microenvironment’ and the ‘macro environment’. The microenvironment comprises the company’s suppliers, customers, marketing intermediaries and competitors.

The macro environment is made up of wider forces include Macro factors are the one that affect the organization indirectly, these are (pestel). Political, environment, social-cultural, technological and Ecological legal.

The microenvironmentThe microenvironment can be separated into the internal environment and the external environment. The internal environment consists of the firm’s own management structure, the organization’s strategies and objectives, and the departments within the company. The

Business Growth and Strategies - Chapter Two Page 1 of 15

characteristics of the firm’s internal environment affect its ability to serve its customers. The external environment comprises suppliers, marketing intermediaries, customers, competitors and publics. Internal EnvironmentInternal Environment is also called controllable factors. These factors are internally directed by an organization and its marketers. Some of these factors are directed by top management; these are not controllable by marketers. Top management must develop plans to satisfy overall organizational goals. In situations involving small or medium sized institutions, both broad policy and marketing decisions are often made by one person, usually the owner.

A) Factors Directed by Top managementAlthough top management is responsible for numerous decisions, five are of extreme importance to marketers: line of business, overall objectives, role of marketing, role of other business functions, and corporate culture. They have an impact on all aspect of marketing. Figure 2-1 shows the types of decisions in these areas.

Figure 2-1 Factors Controlled by Top Management

1. Line of Business


5. Corporate culture

Customer service orientation

Time orientation

Flexibility

Risk (innovativeness)

Centralized or decentralized

Interpersonal contract

Promotes form with in Line of business General category FunctionsGeographic coverage Type of ownershipSpecific business Top management

controls

3. Role of marketing Importance in

company Functions Integration

4. Role of other business functions ProductionFinance Accounting Engineering Purchasing

Research and development

2. Overall objectives Sales Profits Long term existence Consumer acceptance

The line of business refers to general goods or services category, functions, geographic coverage, type of ownership and specific business of a firm. The general goods or services category is a broad definition of the industry in which a firm seeks to be involved. It may be energy, transportation, computing or a number of others. The business functions out line a firm’s position in the marketing. System from supplier to manufacturer to wholesaler to retailer and the tasks it seeks to do. A firm may want to be in more than one position. Geographic coverage can be neighborhood, city, regional, national or international. Ownership ranges from a sole proprietorship, partnership or franchise to a multiunit corporation. The specific business is a narrow definition of the firm, its functions and its operations.

2. Overall objectives

Overall objectives are the broad, measurable goals set by top management. A firm’s success or failure may be determined by comparing objectives with actual performance. Usually, a combination of sales, profit, and other goals is stated by management for short-run (one year or less) and long-run (several years) periods. Most firms cite customer acceptance as a key goal with a strong effect on sales, profit, and long-run existence.

3. Role of marketingTop management determines the role of marketing by noting its importance, outlining its activities, and integrating it into a firm’s overall operation. Marketing’s importance is evident when marketing people have decision- making authority and proper resources are given. It is not considered important by a firm that gives marketing people advisory status, places marketing personnel in a subordinate position, equates marketing with sales, and withholds the funds needed for research, promotion, and other marketing tasks. The larger marketing’s role, the greater the likelihood that a firm has an integrated marketing organization. The smaller its role, the greater the possibility that a firm undertakes marketing tasks on a project, crisis, or fragmented basis.

4. Role of other business functionsThe role of other functions and their interrelationships with marketing need to be defined clearly to avoid overlaps, jealousy, and conflict. Production, finance, accounting, engineering, purchasing, and research and development each have different perspectives, orientations, and goals.

5. Corporate cultureTop management strongly influences a firm’s corporate culture: the shared values, norms, and practices communicated to and followed by those working for the firm. It may be described in items of: A customer- service orientation- is the commitment to customer service clear to employees? A time orientation- is a firm short-or long- run oriented? The flexibility of the job environment- can employees deviate from rules? How formal are

relations with subordinates? The level of risk/ innovation pursued- is risk taking fostered?


The uses of a centralized/ decentralized management structure- how much input into decisions do middle managers have?

The level of interpersonal contact- do employees freely communicates with one another? The use of promotions from within- is internal personnel given preference as positions open? B. Factors Directed by Marketing The major factors controlled by marketing personnel are the selection of a target market, marketing objectives, the marketing organization, the marketing mix, and assessment of the marketing plan- see figure 2.2

Figure 2.2 Factors Controlled by Marketing 1. Selection of target market One of the most crucial marketing- related decisions involves selecting a target market, which is the particular group (s) of customers a firm proposes to serve, or whose needs its proposes to satisfy, with a particular marketing program. When selecting a target market, a company usually engages in some form of market segmentation, which involves, subdividing a market in to clear subsets of customers that act in the same way or that have comparable needs. These questions must be addressed before devising a marketing approach: Who are our customers? What kinds of goods and services do they want? How can we attract them to our company? 2. Marketing objectives Marketing objectives are more customer oriented than those set by top management. Marketers are quite interested in the image consumers hold of a firm and its products. Sales goals reflect a concern for brand loyalty (repeat purchase), growth via new- product introductions, and appeal to unsatisfied market segments. Profit goals can be related to long-term customer loyalty. Most importantly, marketers seek to create differential advantages, the unique features in a firm’s marketing program that cause consumers to patronize that firm and its competitors. Without


Marketing Directs

1. Selection of target market Size CharacteristicsDesires

5. Performance assessment Day- to –dayPeriodic

2. Marketing objectives Image Sales Profit Differential advantages

3.Marketing organizationFunctions Types

4. Marketing mix Product PlacePromotion Price

differential advantages, firm would have a “me- too” philosophy and offer the consumer no reasons to select its offerings over competitors’ products. 3. Marketing organizationA marketing organization is the structural management that directs marketing functions. It outlines authority, responsibility, and the tasks to be done so that functions are assigned and coordinated. An organization may be:

Functional with jobs assigned in terms of buying, selling, promotion, distributions and other tasks.

Product- oriented with product managers for each product category and brand managers for each brand in addition to functional categories.

Market oriented with jobs assigned by geographic market and customer type, in addition to functional categories. A single firm may use a mixture of forms.

4. Marketing mixA marketing mix is the specific combination of marketing elements used to achieve objectives and satisfy the target market. It encompasses decisions regarding four major variables: Product decisions involve determining what goods, services, organizations people, places

and or ideas to market; the number of items to sell and their quality; the innovativeness pursued; packaging; product feature, warranties; when to drop existing offering; and so on.

Place (Distribution) decisions include determining whether to sell via intermediaries or directly to consumers, how many outlets to sell through, how to interact with other channel members, what terms to negotiate, and the functions to assign to other, supplier choice, and so on.

Promotion decisions include selecting a combination of tools (advertisings public relations, personal selling, and sales promotion,) whether to share promotions with others, the image to pursue, the level of personal service, media choice, message content, promotion timing, and so on.

Price decisions include choosing overall price levels, the range of prices, the relation between price and quality, the emphasis to place on price, how to react to competitors, when to offer discounts, how prices are computed, what billing terms to use, and so on.

II. External Environment External environments are also called uncontrollable factors. These factors affect an organization’s performance that cannot be fully directed by that organization and its marketers. A marketing plan, no matter how well conceived, may fail if uncontrollable factors have too adverse an impact. Thus, the external environment must be regularly observed and its effects considered in any marketing plan. Contingency plans relating to uncontrollable variables should also be a key part of a marketing plan. Uncontrollable factors that especially bear studying are consumers, competition, suppliers and distributors, government, the economy, technology, and independent media. Here, the main concern of the chapter is only one factor i.e., competition.


2.1. Assessing the Nature of Competition2.1.1. Definition of competitionCompetition is simply a situation in which organizations compete with each other for something that not everyone can have. In case of business, the things over which companies are competing are profits and market shares. This competitive environment often affects a company’s marketing efforts and its success in reaching a target market. Thus, a firm should assess its industry structure and examine competitors in terms of marketing strategies, domestic or foreign firms, size, generic competition, and channel competition. Competition StructuresA company could operate under one of four possible competitive structures: monopoly, oligopoly, monopolistic competition and pure computation.Monopoly It is characterized by:

- Single supplier (seller) of a given good/ service- A seller is price maker - There is different barriers to entry - This type of competition is rare in operation - There is price discrimination

OligopolyIt is characterized by:

- The market consists of a few sellers.- Sellers are highly sensitive to each other’s pricing and marketing strategies - Products may be uniform or non uniform

Examples: steel manufacturing and car manufacturing respectively. - It is difficult for entry

Monopolistic competitionIt is characterized by:

- There are several firms in an industry - Firms compete with substitute products - Competition may be in price or non- price - Example: competition of tea and coffee.

Pure competition It is characterized by:

- Many firms sell identical goods or services - Firms are unable to create differential advantages.- Firms are price takers rather than price makers.- There are free entry and exit.- There is perfect knowledge of market information.

2.1.2. Determining forces that affect industrial profitability Even though competitive pressures in various industries are never precisely the same, the competitive process works similarly enough to use a common analytical framework in gauging


the nature and intensity of competitive forces. As Professor Michael Porter of the Harvard Business School has convincingly demonstrated, the state of competition in an industry is a composite of five competitive forces:

1. The Rivalry among competing sellers 2. The Competitive force of potential entry 3. Competitive pressures from substitute products 4. The power of suppliers 5. The power of buyers (customers)

Figure 2-3 The Five–Forces model of Competition

Porter’s Five-Force model, as depicted in figure 2-3, is a powerful tool for systematically diagnosing the chief competitive pressures in a market and assessing how strong and important each is. Not only is it the most widely used technique of competition analysis but, it is also relatively easy to understand and apply.

1. The Rivalry among competing sellersThe strongest of the five competitive forces is usually the jockeying for position and buyer favor that goes on among rival firms. In some industries, rivalry is centered around price competition-sometimes resulting in prices below the level of unit costs and forcing losses on most rivals. In other industries, price competition is minimal and rivalry is focused on such factors as performance feature, new product innovation, quality and durability, warranties, after the sale service, and brand image. Competitive jockeying among rivals heats up when one or more competitors sees an opportunity to better meet customer needs or is under pressure to improve its performance. The intensity of rivalry among competing sellers is a function of how vigorously they employ such tactics as lower prices, excellent features, expanded customer services, longer warranties special


Firms in other IndustriesOffering substitute

products

Rivalry among competing sellers Buyers Suppliers of key inputs

Potential New Entrants

promotions, and new product introductions. Rivalry can range from friendly to competitive; depending on how frequently and how aggressively companies undertake fresh moves that threaten rivals profitability. Ordinarily, industry rivals are clever at adding new wrinkles to their product offerings that enhance buyer appeal, and they persist in trying to exploit weaknesses in each others market approaches. Whether rivalry is lukewarm or heated, every company has to craft a successful strategy for competing ideally, one that produces a competitive edge over rivals and strangeness its position with buyers. The big complication in most industries is that the success of any one firm’s strategy hinges partly on what offensive and defensive maneuvers its rivals employ and the resources rivals are willing and able to put behind their strategic efforts. The “ best” strategy for one firm in its maneuvering for competitive advantage depends, in other words, on the competitive capabilities and strategies of rival companies. Thus, whenever one firm makes a strategic move, its rivals often retaliate with offensive or defensive countermoves. This pattern of action and reaction makes competitive rivalry a “war-games” type of contest conducted according to the rules of fair competition. Indeed, from a strategy making perspective, competitive markets are economic battlefields, with the ebb and flow of the competitive battle varying with the latest strategic moves of the players. In practice, the market out come is almost always shaped by the strategies of the leading players.

Not only do competitive contests among rival sellers assume different intensities but the kinds of competitive pressures that emerge from cross-company rivalry also vary over time. The relative emphasis that rival companies put on price, quality, performance features, customer service, warranties, advertising, dealer networks, new product innovation, and so on shifts as they try different tactics to catch buyers attention and as competitors launch fresh offensive and defensive maneuvers. Rivalry is thus dynamic; the current competitive scene is ever changing as companies act and react, sometimes in rapid–fire order and sometimes methodically, and as they swing form one mix of competitive tactics to another. Regardless of the industry, several common factors seem to influence the tempo of rivalry among competing sellers are: 1. Rivalry intensifies as the number of competitors increase and as competitors become more

equal in size and capacity. 2. Rivalry is usually stronger when demand for the product is growing slowly 3. Rivalry is more intense when industry conditions tempt competitors to use price cuts or

other competitive weapons to boost unit volume.4. Rivalry is stronger when consumer’s costs to switch brands are low.5. Rivalry is stronger when one or more competitors is dissatisfied with its market position

and launches moves to bolster its standing at the expense of rivals.6. Rivalry increases in proportion to the size of the pay-off from a successful strategic move.7. Rivalry tends to be more vigorous when it costs more to get out of a business than to stay in

and compete.


8. Rivalry becomes more volatile and unpredictable the more diverse competitors are in terms of their visions, strategic intents, objectives, strategies, resources, and countries of origin.

2. The Competitive Force of Potential Entry.New entrants to a market bring new production capacity, the desire to establish a secure place in the market, and sometimes-substantial resources. Just how serious the competitive threat of entry is in a particular market depends on two classes of factors:

i) Barriers to entry ii) The expected reaction of incumbent firms to new entry.

A barrier to entry exists whenever it is hard for a newcomer to break in to the market and/or economic factors put a potential entrant at a disadvantage. There are several types of entry barriers:

1. Economic of scale-scale economies deter entry because they force potential competitors either to enter on a large-scale basis (a costly and perhaps risky move) or to accept a cost disadvantage (and lower profitability). Trying to overcome scale economies by entering on a large-scale basis at the outset can result in long-term overcapacity problems for the new entrants (until sales volume builds up), they retaliate aggressively (with price cuts, increased advertising and sales promotion, and similar blocking actions). Either way, a potential entrant is discouraged by the prospects of lower profits. Entrants may encounter scale- related barriers not just in production, but in advertising, marketing and distribution, financing, after-sale customer service, raw materials purchasing, and R&D as well.

2. Inability to gain access to technology and specialized know- how- many industries requires technological capability and skills not readily available to newcomer. Key patents can effectively bar entry as can lack of technically skilled personnel and an inability to execute complicated manufacturing techniques. Existing firms often carefully guard know-how that gives them an edge. Unless new entrants can gain access to such proprietary knowledge, they will lack the capability to compete on a level playing field.

3. The existence of learning and experience curve effects- when lower unit cost are partly or mostly a result of experience in producing the product and other learning curve benefits, new entrants face a cost disadvantage competing against firms with more know- how.

4. Brand preferences and customer loyalty-buyers are often attached to established brands. High brand loyalty means that a potential entrant must build a network of distributors and dealer, then be prepared to spend enough money on advertising and sales promotion to overcome customer loyalties and build it own clientele. Establishing brand recognition and building customer loyalty can be slow and costly process.

5. Resource requirements-the larger the total investment and other resource requirements needed to enter the market successfully, the more limited the pool of potential entrants. The most obvious capital requirements are associated with manufacturing plant and equipment, distribution facilities working capital to finance inventories and customer


credit, introductory advertising and sales promotion to establish a clientele and cash reserves to cover start-up losses.

6. Cost disadvantages independent of size-existing firms may have cost advantages not available to potential entrants. These advantages can include access to the best and the cheapest raw materials, patents and proprietary technology, the benefits of learning and experience curve effects, existing plants built and equipped years earlier at lower costs, favorable locations, and lower borrowing costs.

7. Access to distribution channels- in the case of customer goods, potential entrants may face the barrier of gaining access to product that lacks buyer recognitions.

8. Regulatory policies- government agencies can limit or even entry by requiring licenses and permits.

9. Tariffs and international trade restrictions-national governments commonly use tariffs and trade restriction to raise entry barriers for foreign firms.

In a nut shell the principle of competitive markets states that the threat of entry is stronger when entry barriers and law when there is a sizable pool of entry candidate, when in cum bent firms are unable or unwilling to vigorously contest a new comer’s effort to gain a market foothold, and when a new comer can expect to earn attractive profits.

3. Competitive Pressures from Substitute Products

Firms in one industry are, quite often, in close competition with firms in another industry because their products are good substitutes. For example the producers of wood stoves compete with such substitutes as kerosene heaters and portable electric heater. Just how strong the competitive pressures are from substitute products depends on three factors:

a) When the attractively priced substitutes are available, b) How satisfactory the substitutes are in terms of quality, performance, and other

relevant attributes, and c) The ease with which buyers can switch to substitutes.

In summary, the principle of competitive markets states that the competitive threat posed by substitute products is strong when substitutes are readily available and attractively price, buyers believe substitutes have comparable or better features, and buyers’ switching cost are low. 4. The Power of Suppliers Whether the suppliers to an industry are a weak or strong competitive force depends on market conditions in the supplier industry and the significance of the item they supply. Supplier related competitive pressures tend to be minimal whenever the items supplied are standard commodities available on the open market from a large number of suppliers with ample capability. Then it is simple to obtain whatever is needed from a list of capable suppliers, perhaps dividing purchases among several to promote competition for orders. In such cases, suppliers have market power only when supplies become tight and users are so eager to secure what they need that agree to terms more favorable to suppliers. Suppliers are also relegated to a weak bargaining position


whenever there are good substitute inputs and switching is neither costly nor difficult. For example, soft-drink bottlers can check the bargaining power of aluminum can suppliers on price or delivery by using more plastic containers and glass bottles. Finally, the principle of competitive markets states that the suppliers to a group of rival firms are a strong competitive force whenever they have sufficient bargaining power to put certain rivals at a competitive disadvantage based on the prices they can command, the quality and performance of the items they supply or the reliability of their deliveries.

5. The Power of Byers Buyers have substantial bargaining leverage in a number of situations. The most obvious is when buyers are large and purchase much of the industry’s output. Typically, purchasing in large quantities gives a buyer enough leverage to obtain price concessions and other favorable terms. Retailers often have negotiating leverage in purchasing products because of manufacturers’ need for broad retail exposure and favorable shelf space. “Prestige” buyers have a degree of clout in negotiating with sellers because a seller’s reputation is enhanced by having prestige buyers on its customer lists. Even if buyers do not purchase in large quantities or offer a seller important market exposure or prestige, they may still have some degree of bargaining leverage in the following circumstances:

If buyers’ costs of switching to competing brands of substitutes are relatively low. If the number of buyers is small. If buyers are well informed about sellers’ products, prices, and costs. If buyers pose a credible threat of backward integrating in to the business of sellers. If buyers have discretion in whether they purchase the product.

At the end, the principle of competitive market states that buyers are a strong competitive force when they are able to exercise bargaining leverage over price, quality, service, or other terms of sale.

2.2. Competitive Strategies and Competitive Advantages

Competitive advantage

Competitive Advantage – Definition: A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.

Competitive Strategies

Following on from his work analyzing the competitive forces in an industry, Michael Porter suggested four "generic" business strategies that could be adopted in order to gain competitive


advantage. The four strategies relate to the extent to which the scope of a business' activities are narrow versus broad and the extent to which a business seeks to differentiate its products.

The four strategies are summarized in the figure below:

The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.

Strategy - Differentiation

This strategy involves selecting one or more criteria used by buyers in a market - and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product - often to reflect the higher production costs and extra value-added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products.

Examples of Differentiation Strategy: Mercedes cars

Following are some attributes that can differentiate products. o Product features – the physical characteristics or capabilities of a product may be an

important form of differentiation. For example, Philips developed a television that can be display two channels on the same screen.

o After-sales service – convenience and quality of service may be critical factors in deciding

among alternative products. o Desirable image- these is the obvious basis of virtually all fashion products, ranging from

clothing and shoe to jewelry.


o Technological innovation- technology provides the basis of competitive advantages for a

broad range of firms.o Reputation- a distinguished reputation can be an important source of sales.

o Manufacturing consistency- this is especially important in making components that must

mesh with others to produce a finished good. o Status symbol- Luxury automobiles and limited edition sports cars are well-recognized

examples. A vehicle that costs more than some houses do is obviously purchased for reasons other than just transportation.

A successful differentiation strategy allows a business to address the five environmental forces in such a way that the firm enjoys higher-than-typical returns:o Competitive rivalry may be lessened as firms successfully distinguish themselves. In this

way, firms in the same industry may avoid head- to- head confrontations. o Brand-loyal customers are less sensitive to prices. As a result, if a firm’s supplier raise their

prices, the firm can more easily pass along the resulting cost hike to its customers. In fact, many firms that are successful differentiators are also premium prices-that is, their customers pay the highest prices in the industry.

o New entrants or firms offering product substitutes must overcome barriers to entry

established by brand loyalty.

Though the potential advantages of differentiation are clear, there are also risks in following a strategy based on this competitive advantage. o If several competitors pursue similar differentiation tactics, they may all be perceived as

equals. If such “me, too” behavior goes for enough, competitors can become virtually indistinguishable and competition may be reduced to price wars.

o Specialists operating in niche markets may be more successful at differentiation. Firms that

attempt to offer differentiated products to large segments of market may discover they cannot tailor their products to specific customer needs as well as specialized competitors can.

o Attempts to stay a step ahead of the competition may result in “gold plating”. This refers to

the addition of features that are not valued enough by customers for a company to be able to charge premium prices to offset the features’ costs.

In summary, success based on a differentiation strategy depends on: 1. Understanding what customers value 1. Being uniquely able to provide that valve, and 2. Being able to charge a premium price for it

Strategy - Cost Leadership

The competitive advantage called cost leadership requires achieving a low- cost position relative to one’s competition. Because costs can usually be lowered as a product becomes more


standardized, low-cost manufacturing firms strive for long production runs and low –cost service firms after uniform packages. By targeting broadly defined markets with standard products, mass production techniques with standard the greatest possible benefits from economies of scale and expenses curve effects. A firm aiming for low –cost production will typically spend less on R&D than will competitors who follow a differentiation strategy. A large portion of its total R&D might be directed toward making the products easier and cheaper to produce. Advertising will often be minimal, with promotional that efforts stress price comparison. If successful, a low-cost strategy also allows firms to address the five forces in their competitive environment so they can realize higher- than- normal profits. Following are some examples of how cost leadership addresses competitive forces.

Holding the low-cost position convince rivals not to enter a price war. Price wars can be ruinous to all competitors involved. Thus, a cost advantage that is great enough to serve, as a deterrent may be an important “peace keeping” weapon.

Low-cost producers are protected from customer pressure to lower prices. Competitors cannot consistently price below what is known as their survival price that which allows profit margins just adequate to maintain a business.

Because of their higher margins, low-cost producers are better able to with stand increases in their costs from suppliers. In some industries, the costs of key suppliers are volatile. In this case, the lowest-cost producer may be the only one that comes near to making a profit.

Low cost producer are in the best position to use pricing to compete with substitute products.

Disadvantages of cost leadership Cost leadership is likely to be an “all–or-noting” strategy. In competitive markets for

commodity like products, the number one competitor in terms of low cost may be able price its products at a level that will not allow less efficient producers to remain demand will naturally seek the lowest price, leaving even the second most cost efficient producer in an undesirable position.

Cost cutting that leads to loss of desirable product attributes can be ruinous. Many cost–saving tactics are easily duplicated by competitors. Even competitors

pursuing high-differentiation positions for their flagship product line may choose to offer a low-cost line of products often producing them with the same facilities as their top of the line products.

Dedication to cost cutting often limits a firm’s abilities to remain competitive in other way. In particular, an emphasis on cost control frequently precludes investment in innovation. This leaves a firm vulnerable to technical advances that might make its product obsolete, regardless of any price cuts the firm can offer.

In summary, use of cost as an effective competitive advantage depends on careful monitoring of firm’s internal operations and its customers’ needs. In some ways, competing on the basis of differentiation because there are so many ways of differentiating goods and services.


However, in practice, maintaining a competitive advantage based on cost leadership is difficult: there are many costs to manage, and each has the potential to affect the product’s desirability both positively and negatively.

Strategy - Differentiation Focus

In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants. Examples of Differentiation Focus: any successful niche retailers; (e.g. The Perfume Shop); or specialist holiday operator (e.g. Carrier)

Strategy - Cost Focus

Here a business seeks a lower-cost advantage in just on or a small number of market segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called "me-too's". Examples of Cost Focus: Many smaller retailers featuring own-label or discounted label products.

Review Questions 1. What are the contributions of an environment to the successfulness of a business?2. Distinguish between internal and external environments.3. Discuss on the types of decisions that are made by top managements in the business

environment.4. Discuss about factors directed by marketing. 5. Explain about the nature of external environment.6. Define the term “competition” and discuss about its structures.7. Discuss up on “ five forces module of competition”.8. What we mean by “competitive advantage” ?9. What do we wean by “competitive strategies”?


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Bussiness g + Unit Two