With this strategy, the objective is to become the lowest-cost producer in the industry. The traditional method to achieve this objective is to produce on a large scale which enables the business to exploit economies of scale. Why is cost leadership potentially so important? Many perhaps all market segments in the industry are supplied with the emphasis placed on minimising costs. If the achieved selling price can at least equal or near the average for the market, then the lowest-cost producer will in theory enjoy the best profits.
This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are readily acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.
A strategy of cost leadership requires close cooperation between all the functional areas of a business. To be the lowest-cost producer, a firm is likely to achieve or use several of the following:. In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments.
The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers.
The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants. Factor Conditions. Demand Conditions. Related and Supporting Industries. The presence or absence in the nation of supplier industries and other related industries that are internationally competitive.
Firm Strategy, Structure, and Rivalry. The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry. These determinants create the national environment in which companies are born and learn how to compete. Sophisticated and demanding local buyers, strong and unique distribution channels, and intense rivalry among local companies created constant pressure for innovation.
Knowledge grew quickly from continuous experimentation and cumulative production experience. Private ownership of the companies and loyalty to the community spawned intense commitment to invest in the industry.
Tile producers benefited as well from a highly developed set of local machinery suppliers and other supporting industries, producing materials, services, and infrastructure. The presence of world-class, Italian-related industries also reinforced Italian strength in tiles. Finally, the geographic concentration of the entire cluster supercharged the whole process. Today foreign companies compete against an entire subculture.
Tile production in Sassuolo grew out of the earthen-ware and crockery industry, whose history traces back to the thirteenth century. Immediately after World War II, there were only a handful of ceramic tile manufacturers in and around Sassuolo, all serving the local market exclusively. Demand for ceramic tiles within Italy began to grow dramatically in the immediate postwar years, as the reconstruction of Italy triggered a boom in building materials of all kinds.
Italian demand for ceramic tiles was particularly great due to the climate, local tastes, and building techniques. Because Sassuolo was in a relatively prosperous part of Italy, there were many who could combine the modest amount of capital and necessary organizational skills to start a tile company.
In , there were 14 Sassuolo area tile companies; by , there were The new tile companies benefited from a local pool of mechanically trained workers. The region around Sassuolo was home to Ferrari, Maserati, Lamborghini, and other technically sophisticated companies.
As the tile industry began to grow and prosper, many engineers and skilled workers gravitated to the successful companies. Initially, Italian tile producers were dependent on foreign sources of raw materials and production technology.
In the s, the principal raw materials used to make tiles were kaolin white clays. Since there were red- but no white-clay deposits near Sassuolo, Italian producers had to import the clays from the United Kingdom.
Tile-making equipment was also imported in the s and s: kilns from Germany, America, and France; presses for forming tiles from Germany. Sassuolo tile makers had to import even simple glazing machines. Over time, the Italian tile producers learned how to modify imported equipment to fit local circumstances: red versus white clays, natural gas versus heavy oil. As process technicians from tile companies left to start their own equipment companies, a local machinery industry arose in Sassuolo.
By , Italian companies had emerged as world-class producers of kilns and presses; the earlier situation had exactly reversed: they were exporting their red-clay equipment for foreigners to use with white clays.
The relationship between Italian tile and equipment manufacturers was a mutually supporting one, made even more so by close proximity. The equipment manufacturers competed fiercely for local business, and tile manufacturers benefited from better prices and more advanced equipment than their foreign rivals. As the emerging tile cluster grew and concentrated in the Sassuolo region, a pool of skilled workers and technicians developed, including engineers, production specialists, maintenance workers, service technicians, and design personnel.
An array of small, specialized consulting companies emerged to give advice to tile producers on plant design, logistics, and commercial, advertising, and fiscal matters. With its membership concentrated in the Sassuolo area, Assopiastrelle, the ceramic tile industry association, began offering services in areas of common interest: bulk purchasing, foreign-market research, and consulting on fiscal and legal matters.
The growing tile cluster stimulated the formation of a new, specialized factor-creating institution: in , a consortium of the University of Bologna, regional agencies, and the ceramic industry association founded the Centro Ceramico di Bologna, which conducted process research and product analysis. By the mids, per-capita tile consumption in Italy was considerably higher than in the rest of the world.
Italian customers, who were generally the first to adopt new designs and features, and Italian producers, who constantly innovated to improve manufacturing methods and create new designs, progressed in a mutually reinforcing process. The uniquely sophisticated character of domestic demand also extended to retail outlets.
In the s, specialized tile showrooms began opening in Italy. In , the Italian company Piemme introduced tiles by famous designers to gain distribution outlets and to build brand name awareness among consumers. The sheer number of tile companies in the Sassuolo area created intense rivalry. News of product and process innovations spread rapidly, and companies seeking technological, design, and distribution leadership had to improve constantly.
Proximity added a personal note to the intense rivalry. All of the producers were privately held, most were family run. The owners all lived in the same area, knew each other, and were the leading citizens of the same towns. In the early s, faced with intense domestic rivalry, pressure from retail customers, and the shock of the energy crisis, Italian tile companies struggled to reduce gas and labor costs.
These efforts led to a technological breakthrough, the rapid single-firing process, in which the hardening process, material transformation, and glaze-fixing all occurred in one pass through the kiln. A process that took employees using the double-firing method needed only 90 employees using single-firing roller kilns. Cycle time dropped from 16 to 20 hours to only 50 to 55 minutes.
The new, smaller, and lighter equipment was also easier to export. Working together, tile manufacturers and equipment manufacturers made the next important breakthrough during the mid-and late s: the development of materials-handling equipment that transformed tile manufacture from a batch process to a continuous process. The innovation reduced high labor costs—which had been a substantial selective factor disadvantage facing Italian tile manufacturers.
The common perception is that Italian labor costs were lower during this period than those in the United States and Germany. In those two countries, however, different jobs had widely different wages. In Italy, wages for different skill categories were compressed, and work rules constrained manufacturers from using overtime or multiple shifts. The restriction proved costly: once cool, kilns are expensive to reheat and are best run continuously.
Because of this factor disadvantage, the Italian companies were the first to develop continuous, automated production. By , Italian domestic demand had matured. The stagnant Italian market led companies to step up their efforts to pursue foreign markets.
The presence of related and supporting Italian industries helped in the export drive. Individual tile manufacturers began advertising in Italian and foreign home-design and architectural magazines, publications with wide global circulation among architects, designers, and consumers. This heightened awareness reinforced the quality image of Italian tiles. Assopiastrelle, the industry association, established trade-promotion offices in the United States in , in Germany in , and in France in It organized elaborate trade shows in cities ranging from Bologna to Miami and ran sophisticated advertising.
When a national environment permits and supports the most rapid accumulation of specialized assets and skills—sometimes simply because of greater effort and commitment—companies gain a competitive advantage. When a national environment affords better ongoing information and insight into product and process needs, companies gain a competitive advantage. Finally, when the national environment pressures companies to innovate and invest, companies both gain a competitive advantage and upgrade those advantages over time.
According to standard economic theory, factors of production—labor, land, natural resources, capital, infrastructure—will determine the flow of trade. A nation will export those goods that make most use of the factors with which it is relatively well endowed. This doctrine, whose origins date back to Adam Smith and David Ricardo and that is embedded in classical economics, is at best incomplete and at worst incorrect.
In the sophisticated industries that form the backbone of any advanced economy, a nation does not inherit but instead creates the most important factors of production—such as skilled human resources or a scientific base. Moreover, the stock of factors that a nation enjoys at a particular time is less important than the rate and efficiency with which it creates, upgrades, and deploys them in particular industries.
The most important factors of production are those that involve sustained and heavy investment and are specialized. Basic factors, such as a pool of labor or a local raw-material source, do not constitute an advantage in knowledge-intensive industries. Companies can access them easily through a global strategy or circumvent them through technology.
Contrary to conventional wisdom, simply having a general work force that is high school or even college educated represents no competitive advantage in modern international competition.
These factors are more scarce, more difficult for foreign competitors to imitate—and they require sustained investment to create. Nations succeed in industries where they are particularly good at factor creation. Competitive advantage results from the presence of world-class institutions that first create specialized factors and then continually work to upgrade them.
Denmark has two hospitals that concentrate in studying and treating diabetes—and a world-leading export position in insulin. What is not so obvious, however, is that selective disadvantages in the more basic factors can prod a company to innovate and upgrade—a disadvantage in a static model of competition can become an advantage in a dynamic one. When there is an ample supply of cheap raw materials or abundant labor, companies can simply rest on these advantages and often deploy them inefficiently.
But when companies face a selective disadvantage, like high land costs, labor shortages, or the lack of local raw materials, they must innovate and upgrade to compete. Just-in-time production, for example, economized on prohibitively expensive space.
Italian steel producers in the Brescia area faced a similar set of disadvantages: high capital costs, high energy costs, and no local raw materials. Located in Northern Lombardy, these privately owned companies faced staggering logistics costs due to their distance from southern ports and the inefficiencies of the state-owned Italian transportation system. The result: they pioneered technologically advanced minimills that require only modest capital investment, use less energy, employ scrap metal as the feedstock, are efficient at small scale, and permit producers to locate close to sources of scrap and end-use customers.
In other words, they converted factor disadvantages into competitive advantage. Disadvantages can become advantages only under certain conditions. First, they must send companies proper signals about circumstances that will spread to other nations, thereby equipping them to innovate in advance of foreign rivals.
Switzerland, the nation that experienced the first labor shortages after World War II, is a case in point. Swiss companies responded to the disadvantage by upgrading labor productivity and seeking higher value, more sustainable market segments.
Companies in most other parts of the world, where there were still ample workers, focused their attention on other issues, which resulted in slower upgrading. The second condition for transforming disadvantages into advantages is favorable circumstances elsewhere in the diamond—a consideration that applies to almost all determinants. To innovate, companies must have access to people with appropriate skills and have home-demand conditions that send the right signals.
They must also have active domestic rivals who create pressure to innovate. Another precondition is company goals that lead to sustained commitment to the industry. Without such a commitment and the presence of active rivalry, a company may take an easy way around a disadvantage rather than using it as a spur to innovation.
For example, U. Instead of upgrading their sources of advantage, they settled for labor-cost parity. On the other hand, Japanese rivals, confronted with intense domestic competition and a mature home market, chose to eliminate labor through automation. This led to lower assembly costs, to products with fewer components and to improved quality and reliability. Soon Japanese companies were building assembly plants in the United States—the place U. It might seem that the globalization of competition would diminish the importance of home demand.
In practice, however, this is simply not the case. In fact, the composition and character of the home market usually has a disproportionate effect on how companies perceive, interpret, and respond to buyer needs.
Nations gain competitive advantage in industries where the home demand gives their companies a clearer or earlier picture of emerging buyer needs, and where demanding buyers pressure companies to innovate faster and achieve more sophisticated competitive advantages than their foreign rivals.
The size of home demand proves far less significant than the character of home demand. Home-demand conditions help build competitive advantage when a particular industry segment is larger or more visible in the domestic market than in foreign markets.
A good example is hydraulic excavators, which represent the most widely used type of construction equipment in the Japanese domestic market—but which comprise a far smaller proportion of the market in other advanced nations. This segment is one of the few where there are vigorous Japanese international competitors and where Caterpillar does not hold a substantial share of the world market. More important than the mix of segments per se is the nature of domestic buyers. Sophisticated, demanding buyers provide a window into advanced customer needs; they pressure companies to meet high standards; they prod them to improve, to innovate, and to upgrade into more advanced segments.
As with factor conditions, demand conditions provide advantages by forcing companies to respond to tough challenges. Especially stringent needs arise because of local values and circumstances. For example, Japanese consumers, who live in small, tightly packed homes, must contend with hot, humid summers and high-cost electrical energy—a daunting combination of circumstances.
In response, Japanese companies have pioneered compact, quiet air-conditioning units powered by energy-saving rotary compressors. In industry after industry, the tightly constrained requirements of the Japanese market have forced companies to innovate, yielding products that are kei-haku-tan-sho— light, thin, short, small—and that are internationally accepted.
The international success of U. Nations export their values and tastes through media, through training foreigners, through political influence, and through the foreign activities of their citizens and companies.
The third broad determinant of national advantage is the presence in the nation of related and supporting industries that are internationally competitive. Internationally competitive home-based suppliers create advantages in downstream industries in several ways. First, they deliver the most cost-effective inputs in an efficient, early, rapid, and sometimes preferential way. Far more significant than mere access to components and machinery, however, is the advantage that home-based related and supporting industries provide in innovation and upgrading—an advantage based on close working relationships.
Suppliers and end-users located near each other can take advantage of short lines of communication, quick and constant flow of information, and an ongoing exchange of ideas and innovations. Shoe producers, for instance, interact regularly with leather manufacturers on new styles and manufacturing techniques and learn about new textures and colors of leather when they are still on the drawing boards.
Leather manufacturers gain early insights into fashion trends, helping them to plan new products. Examples of competitive advantage. Get our Mastering Prioritization eBook Learn how to prioritize by making it a simple process, to build products that stand out.
General FAQ When does a company achieve a sustainable competitive advantage? A company achieves sustainable competitive advantage when it meets one or more of the following three criteria, as outlined by a professor at Harvard Business School in Cost leadership — offering reasonable value at a lower rate than competitors Differentiation — delivering better or unique products and service than others Focus — recognizing, understanding, and committing to a target market in a way no other company is.
What are some common strategies for achieving a competitive advantage? A business may be able to create a competitive advantage by charging a higher price than competitors.
But hear us out… By setting a higher price point for products, a company can establish itself as a luxury brand and create an air of exclusivity. This provides you with a competitive edge. Define Niches that are Under-serviced In fishing, there are two types of fish.
Those you find in oceans and those you find in lakes or rivers. For obvious reasons, fish that grow in oceans are bigger, but they take much more effort to catch. Fish that grow in lakes and rivers are easy to catch but tend to be smaller compared to their ocean counter-parts. When looking to gain a competitive advantage, it can be easy to go after known niches where customers are easy to find. However, looking for niches where customers are under-serviced can provide you with a market advantage.
There are often few competitors, plus you can tap a market an establish brand recognition early. Targeting the right customer, being aware of the buying process, who is involved in decision-making, what information is needed and at what time, and so forth can help your sales team and post-sales support teams win business and retain lifelong customers.
When customers feel that you understand them, truly are in tune with their needs, serve them exactly what they need at the very time that they need it, they will place you far above the competition.
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