2.2 Competitive Advantage in the Market Flashcards
What is a competitive advantage?
A point of difference or superiority over one’s competitors (rival businesses in the same industry of goods or services)
How is competitive advantage achieved?
- Offering a lower retail price
- Producing goods in bulk quantities to achieve economies of scale
- Using technology to improve production or delivery
- Introducing new product features
- Developing a strong brand name
- Using superior raw materials to improve finished product quality
What is Porter’s strategic theory?
A business will choose one of the following options to create a competitive advantage:
- Lower cost (reducing production or delivery expenses)
- Differentiation (of product or service features)
Is there a middle ground to Porter’s strategic theory?
No, a business can only be effective by choosing one option to avoid wasting precious resources and to avoid confusing customers
How does a business become lower cost?
This is where a business produces the same goods or services as a competitor but produces them with fewer operating expenses. Methods for this include:
- Input prices
- Bulk production
- Standardised products
- Storage of materials or finished goods
- Efficient use of labour resources
How do input prices make a business lower cost?
A business can become lower cost by reducing the price of its inputs. It may change suppliers to do this or find a cheaper option for an existing material such as packaging
How does bulk production make a business lower cost?
A business can become lower cost by buying resources in bulk quantities. Buying resources in bulk assists a business in negotiating to receive quantity discounts from suppliers
How do standardised products make a business lower cost?
Large production volumes with standard inputs can reduce operating costs as few production changes need to be made. This achieves both cost and time efficiencies. Products would be basic with limited
How does storage of materials or finished goods make a business lower cost?
A business can aim to have suppliers store raw materials or finished goods wherever possible so that it can minimise expensive storage costs
How does efficient use of labour resources make a business lower cost?
This involves only having staff available to meet customer needs at the appropriate time. E.g. A restaurant having different sitting times
Why does lower cost achieve competitive advantage for a business?
Increases a businesses profit by:
- Reducing operating expenses while charging the same price as competitors
- Passing the cost savings to customers in the form of lower retail prices. Encouraging customers to increase their number of sales
Lower cost also increases a businesses percentage of market share by attracting price sensitive customers from industry competitors, increasing product sales
How does a business use differentiation?
Produces goods that emphasise a point of difference between a particular product or service and those that are similar at competitors by developing a unique feature that customers find appealing
How does marketing make a business use differentiation?
A business can promote specific product or service features that customers will find appealing. It may also include loyalty programs.
How does quality make a business use differentiation?
By using input materials that are of a high standard of excellence (e.g. durability) a business can increase customer satisfaction. (E.g. ingredients in food products for a superior flavour)
How does technology make a business use differentiation?
A business may use scientific applications to research and develop innovative features (e.g. customer friendly apps or software)
