Strategic Issues

The profitability and growth of a business depends on several factors, including both the position of business relative to its rivals and overall degree of competition in that industry. Generally a business has very little control over the degree of competition in its industry, however it can take strategic issues and actions to position and market itself favorably relative to its competitors and thereby influence its profitability. Businesses, which achieve profits above the industry average, do so by finding a sustainable competitive advantage. This advantage allows such companies to position themselves relative to their competitors in ways, which stress their relative strengths; and this in turn allows them to effectively cope with the different market forces.

It is natural to differentiate between two broad strategies to attain competitive benefit and advantage. These two broad strategies are cost leadership, and product differentiation. These strategies represent the different modes and routes to achieve sustainable competitive advantage and the above-average profitability. Regardless of the strategy that a firm has adopted, it also needs to determine whether it will compete for all the buyers in a specific market or focus on just a particular target segment of the market. Successful companies will choose a strategy and target segment, which is based upon their own individual strengths and weaknesses.

Cost Leadership
Cost leadership is a strategy that firms adopt to attempt to become a low-cost supplier in the industry. Sources of cost leadership may vary but may include factors, such as pursuit of economies of scale, use of proprietary technology, preferential access to raw materials and various other inputs, and awareness of the specific needs and requirements of customers. Firms pursuing cost leadership strategy must seek out the different sources of cost advantage while at the same time formulate a product, which can be comparable and at par with that of rival firms.

Differentiation Strategy
In a differentiation strategy, a business tries to make itself unique in an industry along dimensions, which are conceived as valuable by buyers. The business needs to find attributes, which buyers perceive as important and position itself to fulfill those needs. The attributes along which differentiation can be attained are extremely broad, and include the delivery system used, the product or service itself, the marketing approach adopted, and so forth. To achieve success in a differentiation strategy, a firm must choose attributes to stress that will allow it to be perceived as different from its competitors. Differentiation is typically a more effective and promising strategy for products sold to consumers rather than to companies processing them for later sale.

Regardless of whether product differentiation or cost leadership is pursued, a firm should also decide how broadly it should compete over the market. Most of markets contain several segments, which are perceived as distinct customer groups, possessing a common set of special needs or characteristics. In soaps and detergent industry, for example buyer groups can be may be segmented by factors, such as income levels, frequency of purchase, understanding of the product, and so forth. Buyers of industrial goods can be segmented on the basis of factors, such as the size of buyer, willingness to trade price for quality, location, or special product requirements. A firm must determine whether it will seek to cater to all of the market segments or focus upon specific target segments.

In the case, a firm focuses its objective to efficiently cater a single or small number of buyer segments in an industry - in some segments it will require to be a low-cost producer, while in other segments it may compete by providing a differentiated product. Firms, which become very narrowly focused are referred to as following a a "niche strategy." By virtue of their very nature, small firms must typically focus on only a few segments of industry. The strategies of cost leadership or product differentiation can be suitable to different businesses depending upon the nature of buyers in the targeted segment and the position of competing firms. For example, consider the following set of questions in reference to a particular buyer segment -

• Are other firms presently competing in this segment utilizing the economies of scale? The presence of such firms may make it difficult to maintain and attract new customers.
• Are the products or services available for this segment almost standardized? Purchases of standardized goods and services are usually made on the basis of price alone.
• Can the characteristics of a product or service and its quality be determined by the buyer prior to purchase? Buyers can judge such products according to acceptability, and for a given quality a supplier should also offer the lowest price.
• Are the buyers highly price sensitive and unwilling to pay high price for improved quality? In such cases, nothing matters except price. As a result, only firms that can offer the lowest prices are able to survive.
• Is any post-sale service required for this product or service? Competition in segments in which post-sale service has little or no importance often will turn on price alone.

If these questions are answered affirmatively, then for this particular segment cost leadership is likely to be a prevalent strategy. Segments that display these characteristics provide little scope for offering value to buyers through differentiation attempts. Successful firms will be those that manage to attain minimum cost in catering to this type of target segment.

Product differentiation has found to be a more effective and viable strategy in segments where the conditions given in questions - (2.) through (5.) above do not persist. Under these conditions, firms have the opportunity to provide differentiated products or services with characteristics, which are especially sough after by buyers. Businesses successful in product differentiation achieve benefit through their ability to obtain higher prices for their products. Small soap and detergent manufacturers are more likely to be selling consumer goods that make the differentiation strategy an attractive option. As previously discussed the demand for natural soaps is growing rapidly. This indicates that one possible approach for small soap and detergent would be to specialize in catering the narrow soap segment outlined by consumers who purchase natural soap products.