External competitive advantage (based on quality)

This type of competitive advantage is based on the distinctive qualities of the product, which are of increased value to the buyer - either by reducing the costs associated with the product, or by increasing its effectiveness. Thus, the company has the opportunity to set a higher price for the product than competitors.

External competitive advantage provides the firm with increased market power. It can force the market to agree to pay a higher price than a priority competitor that does not have the same distinctive quality. A strategy based on external competitive advantage is a differentiation strategy. In this case, the company must demonstrate its possession of marketing know-how, the ability to identify customer expectations that are not satisfied with any of the existing products, and meet these expectations.

An external competitive advantage strategy can be successful if the price premium that the consumer is willing to pay outweighs the cost of providing additional value.

Internal competitive advantage (cost-based)

Cost-based competitive advantage results from a firm's superiority in price and cost control, and product administration and management. This is especially valuable for the manufacturer, since the cost of goods becomes lower than that of the company's priority competitor.

Internal competitive advantage results from increased productivity, which makes the firm more profitable as well as more resistant to price cuts imposed by the market or competitors. A strategy based on internal competitive advantage is a cost dominance strategy, which is determined primarily by the organizational and technological know-how of the firm. Such a strategy is successful if consumers are offered an acceptable cost and prices are close to the average market. If, in the pursuit of cheaper goods, the firm sacrifices excessive quality, then the price reduction demanded by consumers will not be able to compensate for the low cost.

Assessment of business competitiveness (search for sustainable competitive advantage)

The two types of competitive advantage discussed above have a different nature and origin, often incompatible because they require too different conditions and production traditions. On fig. 1 shows two types of competitive advantage, in relation to which the following questions are relevant:

* Market power: To what extent are buyers willing to pay a higher price than our direct competitor?

* Productivity: What is our cost per unit compared to a direct competitor, higher or lower?

On fig. 1, the maximum acceptable price is plotted along the horizontal axis, and the unit cost of production is plotted along the vertical axis. Both are expressed as a percentage of the corresponding indicators of the priority competitor:

* The performance axis shows a brand's advantage or disadvantage over a priority competitor in terms of cost. If the brand is located at the top of the axis, then it loses in terms of costs, if it is at the bottom, it has an advantage.

* The market power axis characterizes a brand's position in terms of the highest acceptable price for its buyers compared to that of a priority competitor. The more to the right the brand is located, the stronger it is and the higher the price the company can charge. Conversely, the further to the left a brand is on the axis, the less market power it has and the lower the price must be for consumers to accept the brand.

Figure 1. Competitive advantage analysis

The bisector in fig. 1 separates favorable and unfavorable positions. There are four competitive positions in total:

* A position in the upper left quadrant is a disaster, as the trademark has two disadvantages at once. It lags behind the priority competitor in terms of costs and does not have the market power to cover this gap with a price premium. Sooner or later, such a company will have to liquidate the brand or leave the market.

* The lower right quadrant, on the other hand, is an ideal situation where a brand has a low cost, supported by high performance, and a high acceptable price, due to a strong market position. This situation is rarely observed in practice, as these two positions involve completely different corporate cultures.

* The lower left quadrant includes brands that have a cost advantage but less market power than their direct competitors. In such a situation, the firm targets price-sensitive consumer segments and allocates moderate funds to operational marketing (or outsources operational marketing to a third party, such as a large retail chain).

* The upper right quadrant reflects a situation very often observed in industrialized countries : the firm has increased costs, but at the same time its market power is large enough to “cover” this disadvantage with a high affordable price. In this case, the firm seeks to offer more added value and/or higher quality so that its price premium looks reasonable in the eyes of the buyer.

Business competitiveness assessment is carried out in order to enable the firm to find its own position along these two axes and to formulate strategic priorities for each product. To determine the position on the "market power" axis, information obtained from the research of the brand image is used, which allows to assess the perceived value of the brand and the price elasticity of demand. As for the “performance” axis, here you can use the law of accumulation of experience (if applicable) or information from the “market intelligence” service, whose task, among other things, is to monitor competition.

The presence in the industry of an absolute cost advantage in the costs of old-timers compared to potential competitors means that the cost function of the old firm, for any available output, is lower than the cost function of the new firm (Fig. 3.1).

Rice. 3.1

It is clear that in such circumstances the old firm may charge a price above its average cost, but below the average cost of a potential competitor. The old firm itself will make a positive profit, but the new firm will not be able to organize break-even production in the industry.

Absolute cost advantages are created by the following factors at the disposal of the incumbent firm:

■ access to cheaper or better sources of raw materials;

■ access to specific resources;

■ using past innovations;

■ use of industry experience (learning-by-doing).

Business practice

Learning curves in economics

The learning curve creates barriers to market entry because cost differentials between new entrants and established firms make it impossible for them to compete effectively.

The learning curve is based on the experience effect. As they gain experience in the industry, employees learn how to complete tasks faster and more efficiently, the return on management staff increases, new equipment is mastered, and average production costs decrease.

Learning curves were first discovered in the aircraft industry, in the maintenance and repair of ships, on assembly lines where the same type of operations are repeated.

The learning curve in the factories of Henry Ford (1909-1923) looks like this:

Experts have established the general shape of the learning curve:

or in logarithmic form:

Rice. 3.2.

where - average costs in the initial period of time; - average costs in each subsequent period of time; - the total number of units of production produced up to the moment t; a is the elasticity of costs with respect to p; is a random error reflecting the uncertainty in the production process. The elasticity of a determines the slope of the learning curve (with the linear version) and hence the amount of cost savings. With an increase in the accumulated experience, for example, by doubling the average costs are reduced to d% from the previous level, where - shows the slope of the learning curve.

For example, tab. 3.2 shows the savings due to the learning effect.

Table 3.2. Savings due to the learning effect

are created due to the fact that old firms produce a larger volume of output than a potential competitor can master (), therefore, even with the same production technology, the same function

Rice. 3.3.

costs - the cost per unit of output of the old-timer is lower than that of a potential competitor: (Fig. 3.3).

Relative cost advantages can result from economies of scale, first-mover advantages, or learning effects, i.e. due to all those factors that allow the old firm to achieve the optimal level of output (at minimal cost) compared to a potential competitor.

Administrative barriers arise as a result of the regulatory activities of the state at different levels of administrative power - federal, regional and local government. They include the costs of firms associated with the procedure for registering enterprises, not only directly in the amount of money required, for example, to pay license fees, but also in the form of time spent on coordinating instructions from various authorities.

Administrative barriers can take the following forms:

■ licensing of firms' activities;

■ production quotas in the region or in the form of export-import quotas;

■ complicated procedure for registering enterprises and firms;

■ procedure for land acquisition and provision of office space;

■ existence of informal relations between authorities and firms;

■ environmental standards for firms;

■ restrictions on the use of land, forest land, subsoil, mineral reserves.

The state of the market infrastructure in the form of the presence and degree of development of the transport system and the system of storage of goods in the region or country as a whole affects the possibility of moving goods within the territories and, consequently, the presence or absence of local local markets. The better the market infrastructure is developed, the faster goods can move around the territory, the less likely it is that a closed local market will appear, and the more open the food market will be as a whole. The lack of a well-functioning transport and storage system can prevent new firms from entering markets and forming fairly closed, territorially limited market spaces.

The quality of the product serves as an objective barrier to entry into the market, if it is accompanied by the effect of the reputation of the old company or if it is an expression of the learning effect - an established system of relations with consumers.

When it comes to durable goods or fundamentally new goods, the quality of which is difficult to assess before purchase, the purchase of goods from an unfamiliar company acts as a sunk cost for buyers. Buyers will prefer to purchase a new product from a company already familiar from a previous positive buying experience than risk their money. In this regard, for the new company, there are additional costs for "educating" consumers and creating an appropriate reputation. All this complicates the process of entry of new firms into the industry.

Criminalization of the economy. If the functioning of firms depends on having connections with mafia groups, then the penetration of new firms into the markets will be difficult due to the need to bear the additional costs of establishing relations in the criminal world. In addition, the higher the criminalization of the economy as a whole, the higher the likelihood of physical elimination of a competitor, which also discourages the entry of new firms.

• Ghemawat, R. Harvard Business Review / R. Ghemawat. -1985.

The main competitive advantage in all situations is cost savings . This advantage is especially evident in a market where there are many price-sensitive consumers.

The goal of cost advantage is to create a sustainable advantage, either:

1) by offering lower prices and thus increasing its market share at the expense of competitors;

2) by obtaining a larger market sale according to the current market environment.

However, one should not strive to reduce costs too actively, as the company's products can become so simple that they lose their appeal to consumers.

But one should strive to ensure that the costs are lower than those of competitors, moreover, throughout the entire production chain. In practice, the following ways to achieve this goal are distinguished:

1. More efficiently than competitors use the resources available in the entire production cost chain and manage the factors that affect costs.

2. Restructure the cost structure in such a way as to exclude some elements that create large costs.

Factors affecting costs can be divided into two categories:

1. Structural cost factors that depend on the fundamental economic nature of the business.

2. Management cost factors, which come from how well organizations manage.

Structural factors

1. The presence of positive or negative economies of scale, for example, an increase in local market share can reduce the cost of selling and marketing one product, while an increase in national market share can lead to a negative effect.

2. Learning effect - companies accumulate experience in the rational use of resources. The effect of learning depends on management's attention to the possibility of benefiting from the experience of both the firm itself and other market participants. Savings on costs becomes a law, which is called the law of experience.

Management Factors

1. Advantages and Disadvantages of the First Sales Attempt - Sometimes the first sale can support your brand name at a lower cost than the second. In this case, you should not focus on this success.

2. Capacity Utilization Ratio - with more full capacity utilization, indirect costs and overheads are spread over a large volume of production and increase the efficiency of fixed capital.

3. Strategic choice and operational decision - it is possible to influence the company's costs.

9.1. Choosing a strategy based on portfolio analysis: a matrix approach.

to develop a strategy .

In a market economy, portfolio models of strategy analysis are widely used. Analysis of the business portfolio of an enterprise is a condition for effective strategic planning . It is necessary to assess the state of all the industries and other components of the enterprise (branch of the company, product range, or one branded product, etc.) in order to identify more or less profitable industries and make decisions about what to do with each of them. them separately.

It is important for the firm to invest its main resources in the most profitable productions and reduce or even stop investing in weak ones. It can keep its economic portfolio in combat readiness by strengthening or adding to growing industries and getting rid of weak ones.

The effect of this or that product (lines of activity) depends not only on the enterprise, but also on how this product will be accepted by the market. This interdependence is expressed through the concept of " goods market" , reflecting a specific product in a specific market. Portfolio analysis allows you to evaluate the effectiveness of each product market, which is necessary to determine the strategic behavior of the company on it.

Portfolio analysis is a condition for the distribution of the company's resources between the various markets of the product in which it is presented. There are different methods of portfolio analysis

The first method. The classic portfolio model is the BCG matrix, built on the basis of a comparison of growth rates and market share . This model in a certain way reflects the position of a particular type of business in the strategic space See Appendix (1)

The focus of the BCG model (BCG) is on the firm's cash flow. It is believed that the level of income or cash flow is in a very strong functional dependence on the growth rate of the market and the relative share of the firm in this market. The growth rate of a firm's business determines the rate at which the firm will use cash.

In the BCG model, the main commercial goals of the company are assumed to be the growth of the rate and mass of profit. At the same time, the set of feasible strategic decisions regarding how these goals can be achieved is limited to four options:

1. Increasing the share of the firm's business in the market.

2. Struggle to maintain the firm's business share in the market.

H. Maximizing the position of the firm's business in the market.

4. Exemption from this type of business.

The decisions that the BCG model suggests depend on the position of a particular type of business of a firm in a strategic space defined by two coordinate axes, one of which is used to measure the growth rate of the market for the corresponding product, and the other is used to measure the relative share of the company's products in the market of the product in question. This method has advantages and disadvantages.

Second method. The GE McKinsey model is a nine-cell matrix. See Appendix (2). In this matrix, the analysis is carried out according to the following parameters: attractiveness of SBAs and position in competition. The matrix allows us to consider the dynamics of the second factor - the attractiveness of the strategic economic zone. There is a formula for calculation.

Arthur D. Little Matrix (ADL), SM Appendix (3), in contrast to the BCG matrix, is based on two variables that reflect sector maturity (industry life cycle) and position relative to competitors. In the strategic model of Arthur D. Little, the choice of strategy for each SBA can be carried out depending on the phase of the life cycle of the sector (not the product) and the competitive position of the enterprise in the market. Expert assessments showing the maturity of the sector and the position in relation to competitors. on the basis of the accepted heuristic position, the direction of the enterprise's activity, the forms of its economic activity are determined. This is the basis of the company's product policy.

Method 3 The Shell Directed Policy Matrix has a superficial resemblance to the GE-McKinsey Matrix, but at the same time it is a development of the idea of ​​strategic business positioning embedded in the BCG model. The Shell matrix is ​​a two factor 3x3 matrix. It is based on assessments of both quantitative and qualitative business parameters. So, in essence, the Arthur D. Little (ADL) and McKinsey models are an improved version of the BCG matrix, being at the same time multifactorial SM matrices Appendix (3)

The fourth method - Ansoff's product / market development model allows you to use several strategies at the same time. It is based on the premise that the most appropriate strategy for strong sales growth can be determined by the decision to sell existing or new products in existing or new markets. This matrix serves as a diagnostic tool and is intended to describe the possible strategies of the enterprise in the conditions; growing market.

The development of a strategy is carried out at the highest level of management and is based on the solution of the above tasks. At this stage of strategic planning, it is necessary to evaluate alternative ways to operate and choose the best options to achieve its goals. On the basis of the analysis carried out in the process of developing a strategy, strategic thinking is formed by discussing and agreeing with the management apparatus on the concept of the development of the company as a whole. Recommendations for new development strategies, formulation of draft goals, preparation of directives for long-term planning, development of strategic plans and their control are given.

Competitive superiority of the leader in terms of costs is ensured by lower costs than those of competitors. A company with experience in cost reduction successfully implements a cost leadership strategy.

Low cost strategies

If the majority of buyers are price sensitive, companies try to lead in terms of costs, increasing efficiency and reducing costs. The strategic goal is not to reduce costs as much as possible, but to achieve maximum cost superiority over competitors: this is the only way to become an industry leader in terms of costs, and not just join the ranks of companies with relatively low costs.

Source. Based on the book by Michael E. Porter, Competitive Strategy: Technigues for Analyzing Industries and Competitors (New York: Free Press, 1980), p. 35-40.

Rice. 5.1. Five Basic Competition Strategies

But in the pursuit of low costs, it is necessary at the same time to ensure that the product or service contains consumer properties that are significant for buyers; if a product is inferior in its characteristics to a similar product of competitors, then it does not strengthen, but weakens the competitive position of the company. Reducing costs by reducing the consumer value of the product repels buyers. In addition, it is desirable to use methods that are difficult or impossible for competitors to reproduce. The significance of competitive advantage in terms of costs is determined by the degree of its sustainability. If competitors can easily find relatively inexpensive ways to reproduce the actions of the cost leader, the cost leader's leadership will be short-lived and unlikely to provide him with a winning competitive position in the industry.

The cost leader has two ways to generate significant additional profits. The first way is to lower the price of the product through cost reduction and try to attract as many price-sensitive buyers as possible. The main thing here is to keep the difference in price compared to competitors within the cost difference (then the total profit will increase as a result of both the increase in profit from sales of each unit of the product and the overall increase in sales volume) or, at least, ensure the growth of total profit by increasing sales volume, although the profit from the sale of individual units of the product may decrease slightly. The second way - by reducing costs, do not reduce the price and maintain the existing market share; then additional profit will be obtained by increasing the profit from the sale of each unit of the product. Accordingly, the total profit from sales and the overall profitability of the company will increase.

Table 5.1. Distinctive features of various variants of competitive strategies.

Distinctive feature	Cost leadership strategy	Broad differentiation strategy	Best Cost Strategy	Focused strategies based on low costs and wide differentiation
Strategic goal	Large market share	Large market share	Value-Sensitive Buyers	A narrow segment of the market in which consumer preferences differ significantly from those prevailing in the market as a whole
Competitive advantage	Cost Leadership	Offering products that are different from competitors	More customer value for the same price	Cost leadership in a served market niche (niche cost leadership) or giving the product specific properties that are valuable in the eyes of buyers of this segment (niche differentiation)
Product range	High-quality basic product model in several modifications (acceptable quality and limited selection)	A large number of product modifications, a wide choice, an emphasis on differentiating properties	Quality range from medium to high, number of modifications from a few to many	Consumer properties and characteristics that satisfy the specific needs or tastes of this segment of customers
Priorities in production	Constant search for ways to reduce costs while maintaining the level of quality and basic consumer properties of the product	Giving the product additional value in the eyes of consumers, striving for the superiority of the product	Giving the product additional properties and characteristics at a reasonable price	The product is designed taking into account the tastes and needs of consumers in the serviced segment
Priorities in Marketing	An attempt to present as an advantage those properties of the product that provide low costs	Giving the product those properties for which the consumer is willing to pay. Raising the Price of a Good to Cover the Costs of Differentiation	Reducing the price below the level of competitors' prices for similar products or maintaining the price at the level of competitors with the addition of additional properties to the product - to create a reputation for a company offering the best combination of price and quality	Analysis of the level of consumer satisfaction with a set of properties and characteristics of the product that correspond to the tastes and / or specific needs of the segment
Strategy Support	The combination of low prices and acceptable quality. Maintaining cost advantage is the basis for sustainable cost reduction in all links of the value chain	Informing about the differentiating properties of the product through credible channels. Emphasis on continuous product improvement and innovation to maintain leadership. Concentration on the key differentiating properties of the product, their promotion to create a reputation and brand image	Creation of a unique competence in reducing costs while improving the properties of the product	Superiority over competitors in meeting the needs of customers in the selected segment; refusal to develop other market segments or product categories due to possible distortion of the brand image

To achieve a cost advantage, the total cost of a company in the entire value chain must be less than that of competitors. This can be achieved in two ways.

Outperform competitors in the efficiency of managing the internal value chain
and the use of cost reduction reserves in its individual links.

Reorganize the company's value chain, eliminating the most costly links.

There are five basic competitive strategies:
1. Cost leadership strategy - attracting customers by minimizing production costs. It provides for a reduction in the total cost of producing a product or service, which attracts a large number of buyers. To establish a cost advantage, there are 2 ways to achieve it:
- do a better job than competitors by effectively operating in the internal value chain and managing the factors that determine the level of costs in the value chain.
- improving the company's value chain up to the consolidation of operations or the rejection of high-cost activities in the value chain (modernization, reconstruction, simplification of product development, transfer of production facilities closer to the consumer, use of less capital-intensive rational technology, finding ways to eliminate the use of expensive materials and components) . Example - the joint actions of various departments can provide economies of scale, reduce the time to create a new technology and / or achieve full capacity utilization;
reducing specifications for purchased materials; introducing less distinctive features relative to the products of competition. Conditions for a successful cost leadership strategy:
- price competition among sellers is particularly strong;
- the manufactured product has standard characteristics that meet the requirements of consumers.
- most buyers use the product in the same way;
- the cost of buyers to switch from one product to another is quite low;
- there are a large number of buyers who have serious power to reduce the price.
Two ways for the cost leader to generate significant additional profits:
- reduce product prices by reducing costs and attract more customers,
- without changing the price.
Disadvantages of the strategy:
- the strategy is fraught with a protracted price war,
- cost reduction is not always the exclusive property of the company, and competitors can easily repeat them,
- when reducing costs, it is necessary to pay attention to other factors: product improvement.

2. The strategy of broad differentiation - attracting customers by maximizing the difference between the company's products from similar products of competitors.
It becomes attractive when consumer demands and preferences become diversified and can no longer be satisfied with standard products. In order for a differentiation strategy to be successful, a firm must study the needs and behavior of customers, know what customers prefer, what they think about the value of the product and what they are willing to pay for. Successful differentiation allows the company:
- to set a higher price for the product / y;
- increase sales volume (because the bulk of consumers are attracted by the distinctive characteristics of the product);
- win customer loyalty to your brand (some customers become very attached to the additional characteristics of the product).
An example is the delivery of spare parts around the world in less than 48 hours, in case of violation of the deadlines, delivery is free of charge by Caterpillar. A differentiation strategy works best in markets where:
1. there are many ways to change products/s, and most buyers recognize these differences as having value,
2. buyer needs and/or ways to use the product are different,
3. a small number of competitors use a similar approach to differentiation.
As a rule, differentiation provides a longer-term competitive advantage when it is based on:
- technical excellence;
- quality of products;
- excellent customer service.
Such distinctive features are perceived and valued by customers, and moreover, the skills and experience required to produce these features are difficult to copy and profit from by competitors.
Ways to give the product distinctive consumer properties:
- reducing consumer costs for the use of the product,
- increasing the efficiency of using the product by the consumer,
- imparting consumer properties that provide an intangible advantage,
- creating additional consumer value due to competitive opportunities that competitors do not have and cannot have .
Disadvantages of the strategy:
- there is no guarantee that differentiation will bring a competitive advantage,
- it is possible to quickly copy successful distinguishing features.

3. The strategy of optimal costs - increasing customer value due to higher quality at prices at the level of competitors and below.
By choosing this strategy, the company must reduce costs and, accordingly, prices, while maintaining or improving product quality. It implies a focus on low costs, while providing customers with more than the minimum acceptable quality, service, features and attractiveness of the product. Competitive advantage lies in proximity to the parameters "quality - service - characteristics - attractiveness" and cost superiority over competitors. Distinctive features of companies that successfully implement the strategy of optimal costs are:
- the ability to develop and implement additional product attributes at lower cost;
- offer products that are different from competitors' analogues at prices acceptable to the buyer.
The strategy has the greatest appeal in terms of the possibility of competitive maneuvering.
It provides an opportunity to create exceptional customer value by balancing low cost and differentiation strategies. Therefore, it allows the firm to leverage the competitive advantage of both one strategy and the other, creating superior purchasing value. Strategy Drawbacks:
There is a risk of being caught between businesses with the same two strategies
- cost leaders can push the company out of the price sensitive segment -
those who use broad differentiation push the company out of the segment, ullt value quality and custom design.

4. Focused (niche) strategy based on low costs - the company's focus on a narrow segment of customers and crowding out competitors due to lower production costs.
5. A focused (niche) strategy based on product differentiation - focusing on a narrow segment of buyers and crowding out competitors by offering products that better meet the needs of buyers.
Their differences are that they are focused on a narrow part of the market. A target segment or niche can be defined based on geographic uniqueness, specific product usage requirements, or specific product characteristics that are attractive only to that segment. In this strategy, you can achieve an advantage if:
1) have > lower costs than competitors,
2) be able to offer consumers something different from competitors.
A cost-focused strategy assumes that the firm is ahead of competitors due to > low production costs.
A focused differentiation strategy depends on a customer segment that requires unique product features and attributes (generally aimed at high-end buyers who want products with first-class features).
Focused strategies are attractive under the following conditions:
1. the segment has good potential for growth;
2. It is quite expensive and difficult for those operating in various segments to meet the requirements of buyers of a specialized niche;
3. the firm does not have enough resources to serve a wider market share;
4. There are many different segments in the industry, which allows the company to choose its niche according to its strengths and abilities.
Disadvantages:
- there is a possibility that competitors will force them out of the segment,
- the needs and preferences of consumers can be transformed into the needs and preferences of the majority,
- the segment may become attractive, which will lead to a decrease in profits.