"It is always expensive to gain a competitive advantage". Discuss.

University Degree Business and Administrative studies

“It is always expensive to gain a competitive advantage”. Discuss.

Competitive advantage can be achieved in many ways. One of the ways a company can look to gain a competitive advantage is through cost leadership. This involves businesses trying to produce goods or services at a lower cost than its competitors allowing it to charge lower prices than rivals and possibly to compete in price wars that can take place. An example of this is with the airlines “Easyjet” and “Go” they offer a low frills service to keep prices down, no on-board meals are served on Easyjet planes, this is just one way costs are lowered. This way of gaining a competitive advantage is not expensive because it involves cutting costs, however the profit margin is likely to be lower because prices are as low as possible.

Another way firms try to gain competitive advantage is through differentiation. This is where a business builds up the reputation of a product through advertising and marketing making the customer see the product as unique. An example of this is Rolex watches; the price they cost to make is not even close to what customers pay for it, you are paying for the prestige surrounding the brand. The cost of the advertising and marketing to build up the reputation of the company is expensive but the prices it later allows them to charge will make up for the initial outlay.

The next way firms look to gain a competitive advantage is through focus. This involves a business focussing on a particular segment of the market. This segment could be geographical area, age range or income group. By focussing on this segment it tries to identify and anticipate the needs of this group. An example of this is at the supermarket Tescos where they have economy, standard and finest ranges for different income groups. This is a reasonably inexpensive process other than the costs of the extensive market research required.

Consolidation is another way to achieve competitive advantage in a particular ...

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Consolidation is another way to achieve competitive advantage in a particular market. Consolidation is where a business tries to maintain its position in the market, range of activities and customer base. This is achieved through increasing marketing and promotional activities, improvements in productivity, quality and reductions in costs. As a product starts to decline companies will use this strategy, compared to other ways of gaining a competitive advantage it is reasonably heap but will still cost the company money.

Market entry penetration is where a company sees an entry into a market and uses strategies to gain entry to the market to gain a competitive advantage. It is more likely to occur when the market is growing, can be made to grow or has growth potential and when there is sales potential because existing businesses are failing to meet demand. When existing operators are complacent or there has been a fall in the level of quality or service a company will be more willing to consider market entry penetration into that market. An example of this from the transport market is Stagecoach who by using their reputation for their successful bus services have penetrated in to other transport services such as trains.

Market development and domination is where businesses try to increase their share of the market in order to dominate it gaining competitive advantage. Domination of a market can lead to economies of scale where through growth they can produce goods cheaper due to a greater buying power when purchasing the raw materials etc. from suppliers and help them attract the best staff. An example of domination is in the computing industry where Microsoft® control the market. Rather than a form of competitive advantage market development and domination is more the outcome of using many techniques to gain competitive advantage.

Developing new products is another method used to gain competitive advantage. By using market research companies can assess whether there is the need for a product that has not yet been developed. An example of this from the tourism market is “Club 18 to 30 holidays” they recognised the growing market for young people going abroad for the nightlife on the Mediterranean islands and filled a void in the market. Technological advances can also lead to new products being made an example of this is with mobile phones as photo messaging becomes available more people will buy the new Nokia phone complete with a digital camera. Developing a new product has a lot of risk attached to it and can be very expensive.

Diversification strategies are used by business to gain a competitive advantage. They involve extending a companies range of products or services. Related diversification is where a company develops products that are similar to those that it already develops. Similarities between the existing products and new ones may be in existing, provision, existing technology or expertise, related markets, extensions of production and the complimentarity of products or services. Unrelated diversification is where an organisation moves into completely foreign areas. An example of this is the Virgin Group who moved from music merchandising, to airlines, to soft drinks, to financial services, to mobile phones. Once again this form of competitive advantage is very expensive due to the costs of developing completely new products and the risks involved.

I would agree with the statement “It is always expensive to gain a competitive advantage” but argue that the outcomes can far outweigh the eventual increase in profits. Cost leadership is the exception to the statement as it is concerned with saving money and cutting costs. For a company to increase market share and profits gaining competitive advantage is crucial so no matter how expensive it is possible to argue that the investment is worth it.