Avoid Business Stagnating: How to Create a Competitive Advantage

To ensure long-term success, a company needs to create a clear and sustainable competitive advantage. This means choosing between two fundamental strategies: cost leadership or differentiation.

Each of these approaches has practical implications that must be considered to ensure the company's viability in the market.

Cost Leadership

Being the most cost-efficient producer allows offering products or services at competitive prices while still maintaining healthy profit margins. This is achieved through process optimization, large-scale production, and waste reduction. However, this strategy requires significant initial investments in technology, machinery, and economies of scale to operate more efficiently than competitors.

• Example: IKEA maximizes efficiency by offering quality furniture at affordable prices, thanks to mass production and optimized logistics processes.

• Implications: High investment in technology and infrastructure is necessary to ensure operational efficiency. The company needs to focus on cost reduction in all areas without compromising the minimum quality that the market demands.

   

Differentiation

Differentiation allows a company to stand out by offering something unique, whether in terms of quality, innovation, or customer service. The goal is to create a product or service that customers value more than competitors' and are willing to pay a premium price for. However, differentiation requires strong investments in innovation, research, development, and marketing to maintain the perception of superior value.

• Example: Apple stands out for innovation in the design and functionality of its products, thus justifying a higher price.

• Implications: Differentiation is expensive. The company must continuously invest in research and development to stay ahead of the competition and ensure that its product or service continues to be seen as unique.

   

The Risk of Falling into Stagnation

Companies that try to follow both strategies—cost leadership and differentiation—risk falling into a type of “business stagnation” due to not being clearly in one strategy or the other, or in its original form, "stuck in the middle," as mentioned by Porter (1985). These companies end up being neither competitive in price nor unique in value, resulting in a mediocre, unattractive proposition for customers.

How to Avoid This Stagnation?

Define a Clear Strategy: Choose between cost leadership or differentiation and align the entire company around that strategy.

Niche Focus Strategy: An alternative to avoid getting stuck in the middle is to focus on a niche market. Instead of trying to compete across the entire industry, the company can concentrate on a specific group of customers with particular needs and adapt its offering to that segment.

• Cost Focus Example: Ryanair focuses on a specific audience seeking low-cost flights, offering a basic service.

• Differentiation Focus Example: Rolls-Royce targets an audience looking for exclusivity and premium products, standing out for the quality and personalization of its cars.

   

Continuous Innovation: Companies that choose differentiation must continuously invest in innovation to maintain their advantage. Whether through new products, process improvements, or superior services, innovation must be constant.

Control Costs in the Right Areas: Even companies following a differentiation strategy can reduce costs in areas where the customer does not directly value. This helps ensure that resources are used efficiently.

Conclusion

To stand out in the market, your company needs to define a clear competitive advantage, whether through cost leadership or differentiation. By avoiding being stuck between the two, the company ensures that its value proposition is clear and attractive to the market. With focus, innovation, and strategic investment, it moves toward building a strong and sustainable position in the long term.