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BlogCost Leadership Strategy Definition For Small Business

17th April 20170

Marketing And Strategy Tools For Your Small Business

To be successful, every business needs strategies. Strategy means you decide where your business is going to go and you create the plan to take your business there.

Every business needs to have a competitive advantage and there are two types of competitive advantage.  One is cost leadership and the other is differentiation.

Being all things to all people is a recipe for business disaster so you must have a strategy to gain a competitive advantage in the marketplace.  You can do this through being the product leader, or by providing operational excellence or by customer intimacy.

Michael Porter created a theory of competitive advantage referred to as the Five Forces.  These define the rules of competition in any industry.  The five forces determine industry profitability, and some industries may be more attractive than others.   The crucial question in determining profitability is how much value your business can create for their buyers, and how much of this value will be captured or competed away.

The five-forces framework highlights what is important, and directs manager’s towards those aspects most important to long-term advantage.  Think of the Five Forces framework as sort of a checklist for getting started, and as a reminder of the many possible sources for what those few driving forces could be.

How To Create Competitive Advantage

You must create a perception in your market that you are able to meet buyer needs in a new way or have a new or different technology or have changed accessibility, etc.

Porters “Value Chain” and “Activity Mapping” concepts help us think about how activities build competitive advantage.

The value chain is a systematic way of examining all the activities your company performs and how you interact.  It scrutinizes each of the activities of your business from business development, sales, marketing, and operations, as a potential source of advantage.  The value chain maps a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation.   

Your business gains competitive advantage by performing these strategically important activities more cheaply or better than your competitors. One of the reasons the value chain framework is helpful is because it emphasizes that competitive advantage can come not just from great products or services, but from anywhere along the value chain.

Activity mapping is where Porter builds on his ideas of generic strategy and the value chain to describe strategy implementation in more detail.  Competitive advantage requires that your business’s value chain be managed as a system rather than a collection of separate parts.  Positioning choices determine not only which activities your company will perform and how it will configure individual activities, but also how they relate to one another.  This is crucial since the essence of implementing strategy is in the activities – choosing to perform activities differently or to perform different activities than your competitors.

What have you learned here that you can apply?

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