Think about the concept of above average returns for a few minutes. In business, are you happy with average returns – hopefully not! Well, without a valid competitive strategy, that’s about all you can hope for. And, you may not even do that well.
In order to earn above average returns, your business must have a competitive advantage over your rivals. This competitive advantage can be in the form of your ability to produce goods or services at a lower cost than your competitors. It may be that you can produce quality above that of your competitors and charge a premium for that. Or, you may be able to source products from around the globe cheaper and sell them for a good profit, above that of locally made goods.
Achieving a competitive advantage isn’t as easy as just doing it, you must have, or develop the competencies that support and facilitate your advantage. To develop these competencies, you must tap into the intellectual property that exists in your business, invest in R&D or training of your staff. Achieving a competitive advantage is all about identifying and leveraging the unique skills and/or knowledge in your business. If you don’t currently have this, work on developing it.
So, having a competitive advantage translates into above average returns? Not yet. In order to achieve those elusive returns, you must develop a competitive strategy. This means developing a strategy for how you are going to compete in the market place. The 2 most common strategies for competing in markets are cost-leadership and differentiation. Cost-leadership means that you are the cheapest option every time (which can also mean under-cutting a competitor). Bunnings Warehouses operate on this competitive strategy with their “Lowest prices every day, or we’ll beat it by 10%” statements.
Differentiation means that your product or service is different from others on offer which allows you to charge a premium price. Apple Inc use this strategy with their relentless pursuit of new technologies such as the Ipad etc.
We can’t just decide that we’re going to use a cost-leadership strategy and charge ahead though. First, we must conduct a competitor analysis to find out who else might be using the same strategy. A competitor analysis benchmarks you and the other major players in the market on factors such as price, service and quality. To make a cost-leadership strategy work you would offer products of average quality for less than the average price. If you are the only one doing that, and you can actually produce at a lower cost, then you may have a competitive advantage and earn those above average returns.
A word of caution here. If you employ a cost-leadership strategy, charging a lower price then you had better be able to produce at a lower cost, otherwise it’s a recipe for disaster. Virgin Blue have used this strategy successfully for years, operating at a lower cost than their competitors through turning their planes around quicker, having cabin crew clean the aircraft etc. They have an advantage because they genuinely operate on a lower cost base than Qantas for example.
Lastly, I have seen many businesses that state “we won’t be the cheapest option”, but when it comes time to justify the higher price, they find that the customer doesn’t really value what they have to offer above the average offering and negotiate the price down. Just as important as ensuring you have a lower cost to produce when using a cost-leadership strategy, it is important to confirm that the customer values what you’re offering in exchange for the premium price. Think of this in terms of a BMW motor car. Premium price for a premium product.
That’s a lot of information to consider. It is complex and can be tricky to work through on your own. We suggest getting help to develop your competitive strategy and source of competitive advantage. We use tools such as a competitor matrix, portfolio analysis tool and a strategic planning framework. If you would like more information or some of these tools, contact us at email@example.com