STRATEGIC POSITION
We noted (in Chapter 5) that competitive advantage is based on the difference between
the perceived value a firm is able to create for consumers ( V ), captured by how much consumers
are willing to pay for a product or service, and the total cost ( C ) the firm incurs to
create that value. The greater the economic value created ( V 2 C ), the greater the firm’s
competitive advantage. To answer the business-level strategy question of how to compete,
managers have two primary competitive levers at their disposal: value ( V ) and cost ( C ).
A firm’s business-level strategy determines its strategic position —its strategic profile
based on value creation and cost—in a specific product market. A firm attempts to stake
out a valuable and unique position that meets customer needs while simultaneously creating
as large a gap as possible between the value the firm’s product creates and the cost
required to produce it. Higher value tends to require higher cost. To achieve a desired
strategic position, managers must make strategic trade-offs —choices between a cost or
value position. Managers must address the tension between value creation (which tends to
generate higher cost) and the pressure to keep cost in check so as not to erode the firm’s
economic value creation and profit margin. A business strategy is more likely to lead to a
competitive advantage if it allows firms to either perform similar activities differently, or
perform different activities than their rivals that result in creating more value or offering
similar products or services at lower cost. 4
GENERIC BUSINESS STRATEGIES
There are two fundamentally different generic business strategies— differentiation and cost
leadership. A differentiation strategy seeks to create higher value for customers than the
value that competitors create, by delivering products or services with unique features while
keeping costs at the same or similar levels. A cost-leadership strategy , in contrast, seeks
to create the same or similar value for customers by delivering products or services at a
lower cost than competitors, enabling the firm to offer lower prices to its customers.
These two strategies are called generic strategies because they can be used by any
organization—manufacturing or service, large or small, for-profit or nonprofit, public or
private, U.S. or non-U.S.—in the quest for competitive advantage, independent of industry
context. Differentiation and cost leadership require distinct strategic positions in order
to increase a firm’s chances to gain and sustain a competitive advantage. 5
Because value
creation and cost tend to be positively correlated, there exist important trade-offs between
value creation and low cost.