The purpose of this article is to throw light on the different types of strategies that help in gaining a competitive edge in the industry and the importance of having an innovative business model. It explains in-depth the need to be competitive in an unstable, dynamic business environment, the two broad forms of competition, and how business models can help organizations excel.
Airbnb. I am sure most of us would have heard about this online marketplace, making travel easy. It is one of the largest providers of tourist accommodations at a much cheaper rate than what most hotels charge. IKEA, the worldwide one-stop-shop for all home decors, also isn’t a new name that we come across. Many more brands became instantly popular in such a short span of time. How were they able to manage it? The answer to that is by creating innovative business models and constantly adapting those models to an ever-dynamic business environment.
This poses another question as to what business models exactly are. Reiterating the same examples, Airbnb mainly focused on creating and maintaining a strong network of hosts who would be willing to rent out their houses. They generated a local environment for the travelers away from the tourist crowd by doing so. On the other hand, IKEA concentrated on developing new markets and managing the supply and availability of goods at economical costs. Both these brands brought out their ideas and implemented a course of action suitable to the right people at the right time and place. So, a business model essentially comprises distinctive strategies and notions of a business that help attain growth and market standing.
WHY BUSINESS MODELS?
Planning is the first and foremost step in every aspect of a business. An efficient business model translates those plans to measurable and achievable targets. Any organization, be it nascent or well established, would require a business model to convert intangible ideas into tangible results (higher profits, greater market share, reputation, etc.)
The success of a business doesn’t merely depend on its internal management but also many external factors like government policy, the progress of technology, changes in tastes and preferences of consumers, entry of new competitors in the market, and much more. Having a flexible and leading-edge business model makes coping with the uncertain environment simple and, most important of all, secure.
Since companies are also legally required to share their models with the public, a good business idea instills a sense of credibility among the prospective investors that the company might have stable financial prospects. An effective model also helps in the timely acquisition of resources since its clear as to what the business wants to produce. It creates a competitive edge by empowering companies to take the first-mover advantage. It is a basic need for all businesses to create value for their customers, which can be attained through a well-designed business model.
According to the IBM Institute for Business Value’s biannual Global CEO study, since 2006, many senior executives across industries have regarded innovative business models as a major priority. Another follow-up research in 2009 confirms that 7 out of 10 organizations are actively engaging in business model innovation, and 98% are changing their models to some extent.
THE NEED TO BE COMPETITIVE
Why is maintaining a competitive edge and looking out for competitors so crucial? Well, the straightforward reason is survival of the fittest. Businesses constantly keep track of the activities and performance of their competitors. Competition is the catalyst for change and new ideas. It enables the business to stand out, enhance their services and provide differentiated products unique from their competitors. This, in turn, builds USP and brand loyalty. It facilitates market planning and research, which forms the core of any business model. Research helps understand the target customers and bridge the gap between needs and satisfaction.
CREATING COMPETITIVE EDGE
The role of a business is to add to the value of the product so that the customers prefer it in relation to the competing products and decide to purchase it. This process is called value creation. Without that, any unique product or service will be seen as just another commodity in the eyes of the target audience. Creating value convinces people to pay more for one particular brand’s product than its competitors selling the same product. It is the base for bringing about the differentiation of products.
The famous business magnate Warren Buffett once said, “In business, I look for economic castles protected by unbreachable moats.” One immediately thinks of castles and palaces, which defenders strongly protected with moats from invaders. Likewise, an economic moat is a business’s ability to sustain a competitive advantage to preserve its long-term profits and market share from its competitors. There are two types of competitive advantages: Differential and comparative.
This happens when a firm’s services or products are superior in quality to their rivals. It taps the existence of technology, trademarks, patents, and brand name in the market. Many companies like Coca-Cola set high prices like no other competitor to capture customers as many believe higher prices reflect higher brand quality. It has over 3300 diversified products. Since it already enjoys a widely established market, it continues to invest in brand and infrastructure programs.
Here, the main focus is the efficiency of procurement and production. It is the ability to produce goods at a lower opportunity cost than others in the same line of business. For example, when we compare rice production, Tamil Nadu (TN) is one of the states famous for it, as opposed to Punjab. This is due to the humid and tropical weather conditions seen in Tamil Nadu. It can exploit the opportunity of climate and geographical location to beat other states and utilize its full potential. This becomes a competitive advantage for Tamil Nadu and leads to a lower cost of production due to the abundant supply of rice. Hence TN can successfully reap the benefits of cost and achieve economies of scale. Unlike differential advantage, it’s important to note that comparative advantage doesn’t improve the product’s quality but instead makes it available at cheaper costs.
BUSINESS MODEL AND COMPETITIVE ADVANTAGE
Maintaining a competitive edge closely links to a business model that comprises various strategies aimed at achieving the preset goals of an organization. IKEA’s strategy was a low-cost model to attract the middle-income group of the US. It increased their volume of sales as well as the long-term profits. Maruti Udyog led the small car market by recognizing the need for affordable vehicles amidst rising fuel prices in India. They were able to adapt to the uncertain environment, laid out a suitable business model, and outshone their competitors. Undoubtedly, how firms create value through their models is undergoing a paradigm shift worldwide. While a model may seem viable alone, it might not deliver the expected value in the real market. An effective model considers dynamic external factors that create a virtuous cycle, undermining competitors.
STRATEGIES FOR CREATING COMPETITIVE ADVANTAGE
Five major forces determine competition intensity.
Based on the above factors, there are three generic competitive business model strategies: cost leadership, differential, and focus strategies.
The Cost Leadership Strategy
This strategy basically means increasing profits by minimizing costs. Most firms involved in heavy production processes adopt this strategy to reach economies of scale. However, the price charged to customers will patently be higher than costs to cover minimum profits. The main aim is to reduce raw materials and labor costs, not selling price. Amazon offers maximum value at the lowest price, making it a reliable online shopping portal for customers.
Firms can handle market price fluctuations effectively by responding to demand and supply forces.
Competitors with high-price strategies struggle against low-cost leaders. Losing means heavy losses as their prices are already high.
The Differentiation Strategy
This is where actual innovation and individuality stand out. The strategy involves coming up with ideas that make a firm’s products appeal differently to the consumers than competitors. It entails thorough market research, including SWOT and PEST analysis, to understand customers and revamp marketing strategies significantly.
This strategy convinces consumers that there’s no close substitute for the product due to its differentiation.
Better quality products always pave the way for higher profit margins and market share expansion.
The Focus Strategy
This is based on the idea of niche markets. It represents a specific subsection of a larger market that we categorize by its unique demands and preferences. The strategy involves understanding the niche dynamics and providing unique goods and services tailored to customer wants. But, this cannot work independently but will require the culmination of either differentiation or cost leadership. A suitable example would be Pepsi when they introduced Pepsi Black to especially those looking for healthier beverages.
This strategy connects closely with the customer base, improving brand loyalty, recall, and ensuring the organization’s long-term survival and satisfaction.
A company can operate with limited capital, charge premium prices by customizing products to meet niche market needs.
An organization following this strategy can enjoy some monopoly-like benefits, difficult with many opportunistic competitors.
In the future, business models will experience cutting-edge innovations with increasing demand for AI-driven technologies. To conclude, change is the only constant. As the saying goes, ‘Change is inevitable, Growth is optional. It is up to each organization to be astute and realize the need of the hour to prosper.