A Firm Seeking Competitive Advantage Must Choose the Type Advantage That It Seeks

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Starbucks, the bistro-styled coffee house founded in 1971 (Starbucks Coffee Company, 2014), is known to be the world’s top coffee retailer. Starbucks achieved differentiated competitive advantage against its competitors such as Dunkin’ Brands, Caribou Coffee and McDonald’s by offering high quality coffee at a premium price. In the year 2013, Starbucks had annual revenue of $14.8B whereas Dunkin’ Brands had annual revenue of $687.3M (Businessweek.com, 2014). Starbucks’ core competencies are its use of high quality coffee beans, a fact that is heavily featured in their advertising, convincing their buyers that they are receiving a luxurious coffee house experience for a relatively higher price (Mourdoukoutas, 2013). Starbucks sustained competitive advantage can also be contributed to its innovative ideas of online orders with preferential ingredients and mobile apps to locate nearest outlets, its superior customer services branded as the ‘Starbucks Experience’, its clean and pleasant ambiance and its expanding global presence, with more than 21,000 stores in 65 countries (Starbucks Coffee Company, 2014).

Clearly, the above presented examples show that companies such as Apple and Starbucks maintain sustained competitive advantage in their respective industries by offering differentiated products and services at relatively higher prices, which their competitors cannot replicate. These companies have best utilized one or more of their competencies to reach this differentiation by practicing differentiation competitive strategy. Apple’s innovativeness in the features of its products and Starbucks’ superior quality coffee beans have led to above-average performance through achieving differentiation competitive advantage. These companies were able to create a perception in the mind of their buyers that they cannot get the same high quality product or service by going elsewhere in the market.

Focus:

In every industry, segments of buyers exist that have preferences for certain qualities and characteristics in a product or service which serve their needs in a better way. Each industry can be regarded as a cluster of different buyer segments. Firms can choose either to address the needs of all segments with a ‘broad scope’ or concentrate on a singular segment and possess a ‘narrow scope’ (Porter, 1985). Cost leadership and differentiation strategies sustain competitive advantage by broadly serving the needs of all segments. The third type of strategy, focused generic strategy tends to achieve competitive advantage by aiming to address the needs of a specific segment. After selecting a specific buyer segment in the industry, a focuser should develop its strategy to fulfil the needs of that particular segment and discard other segment groups (Porter, 1985). A focuser must therefore, analyse how distinct are the needs and volume of target segment in the industry.

Competitive advantage can be achieved by the focus strategy in one of two ways, either by being the cost leader for the targeted segment, ‘cost focus’, or by specialized products or services for the targeted segment, ‘differentiation focus’.

Cost focus:

In the airline industry, Ryanair provides a good example for cost focused strategy for sustaining competitive advantage against its competitors, Easyjet, British Airways and Air Berlin. Ryanair achieved competitive advantage by focussing on short-haul flights in European countries, a segment of the airline industry, at cheaper airfare in comparison to its competitors. Ryanair had annual revenue of €5.0B in the year 2013 whereas Air Belin and Easyjet had €4.1B and €4.3B, respectively (Businessweek.com, 2014). Ryanair’s decision to utilise secondary and regional airports near major cities, facilitating faster turnaround times and using standardized air carriers such as the Boeing 737, limiting its personnel training costs, have led to achieve sustained competitive advantage (Ryanair, 2014). Ryanair’s strategy to prefer secondary airports which brings a high volume of passengers to such airports, has enabled it to negotiate favourable contracts with the airport management and reduction of luggage handling costs for connecting flights by operating point-to-point flights only (Korsaa and Jensen, 2010). Short-haul flights have also provided the company with ‘No Frills’ services which passengers otherwise expect on long-haul flights.

Differentiation focus:

Fast moving vehicles are a special segment of the automobile industry. By adopting the differentiation focus strategy, Ferrari gained sustainable competitive advantage against its competitors, Aston Martin and Lamborghini, by producing high-tech fast cars enabling Ferrari to sell them at higher prices. In the year 2013, Ferrari had its highest ever net cash position at $1.87B and an increase of 5.4 percent in annual revenue (Ferrari GT - en-EN, 2014). Ferrari’s integration of parts i.e. engine, chassis and gearbox which are difficult to imitate by its competitors and the reputation of the brand are its core competencies. The exclusivity of its cars, which contributes to Ferrari’s differentiated competitive advantage, makes Ferrari the most powerful brand of the world beating Apple, Coca-Cola and its competitors, not just in the focused segment but in the entire automobile industry (Brandfinance.com, 2014). Ferrari’s technical partnership with Shell, producing highly efficient fast cars, also contributes to its differentiation in the segment (Shell.com, 2014).

The purpose of explaining the focus strategy with examples for cost and differentiation focus is to unveil the fact that even in serving the distinctive needs of a certain segment of the industry, the primary way to achieve sustainable competitive advantage for such companies is either by cost-leader or differentiation, the two fundamental types of competitive advantage. Ryanair’s ability to keep its operational costs low and Ferrari’s technological innovativeness to serve their respective segments have entitled them as above-average performers by adopting cost and differentiation focus strategies, respectively. These focused companies are successful owing to the reason that the needs of their targeted segments are not well addressed by other companies within the industry.

Hybrid:

Porter’s (1985) ‘stuck in the middle’ state of a firm is replaced by the hybrid strategy as an opportunity. The relatively new, hybrid strategy is a combination of the characteristics of cost leadership and differentiation strategies. The products and services provided under such a strategy are low in prices as well as

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