(upbeat music)
-: Businesses need some sort of competitive advantage
to help them continue to grow profitably.
Choosing the right generic strategy linked
to either differentiation, or low cost is an important
starting point in gaining a competitive advantage.
classifying and understanding the type of strategy
an organisation uses now will help you determine
whether it needs to change its approach
and also whether it can change
to a different strategy without failing.
Differentiation and low cost are essentially the two
different categories that we use to describe strategies.
Although it makes sense that every company
should look to have a differentiated
value proposition for their customer,
some companies also recognise that they can be a leader
in their industry by delivering simplified products
or services and by focusing on having cost leadership.
This means they have the lowest cost structures
when making and delivering items for sale,
and is normally the result of having less complex
or differentiated products.
However, it does not automatically mean
it is competing on low prices.
While a cost leader must compete effectively
with low prices, because they have the lowest cost base,
this is not the overriding focus.
We can expand on the two categories
by splitting them based on whether they compete
in a large industry or market or if they focus
on a very narrow or specified niche
within a particular market.
When a business chooses a narrow part of an industry,
we call this a focus strategy.
This can be a cost focused strategy
or differentiation focus strategy.
This simply means that the organisation
has built a differentiation strategy
around a niche product or customer segment,
so that it meets a specific need better than competitors.
Companies that work in this space
don't have as large a revenue pie,
but they can often get significant market share
of what's on offer.
Now let's look at some examples,
starting with the airline industry in Australia.
Qantas is the National carrier
and uses a differentiation strategy.
It uses marketing communications to evoke
the national spirit and it prides itself
on service and safety.
It relies heavily on its brand name
as a leader in the industry.
At the other end, are Jetstar or Tiger Airways,
who promote themselves as having flights
at the cheapest possible prices.
They provide very little service or features
like inflight entertainment and rely on
the online distribution channel rather than travel agents.
They aim to be low cost leaders.
Then there is Virgin Airlines, which is an interesting case.
They established themselves in Australia in 2000
as a low cost carrier and by 2006
had over 25% domestic market share.
Qantas reacted by creating Jetstar,
its own low cost carrier.
This allowed Qantas a way of competing
without damaging its premium differentiated brand.
Jetstar and Virgin then entered a price war
which cost both of them hundreds of millions of dollars.
As virgin was no longer able to be the lowest cost operator,
they made a strategic direction decision
and in 2012, they decided to compete with Qantas directly.
They targeted the lucrative business travel market
and invested in lounges.
They now have food including the ticket prices.
The product Virgin now provides is completely different
to what it was when it started,
but the most important thing
to remember with a differentiation
or low cost approach is not to get stuck in the middle.
It could be argued that, that is exactly
where Virgin are right now
if they don't get the transition from low cost
to differentiated right.
In addition to Qantas, Jetstar and Virgin
who are competing in the broader industry,
there are also airlines who pursue a focus strategy.
Regional Express or Rex flies to regional areas
rather than focusing on the main cities
of Sydney, Melbourne, and Perth.
Rex promotes its customer service and focus on employees
as important parts of business and values
and may be classified as having
a differentiation focus strategy.
So let's recap.
There are two key types of strategy
an organisation can take, differentiation or low cost.
If you're going to be a low cost leader
then you need to excel at operational excellence
because in the end, the low cost approach
is rarely sustainable over time as other competitors
attempt to take your place.
An organisation then decides how to pursue its strategy
in terms of the market or industry it will be supplying
either the whole market or with a focus
on a particular niche.
The focus strategy works where the organisation
can find a narrow customer market
and provide them with superior value to competitors.
They often do this by offering only a few products or
services, but at a higher quality or uniqueness.