Competitive Advantage in Mass Markets (AQA A Level Business Paper 1: Example 25 Mark Essay)
Last updated 7 Jun 2017
In this example essay we explore a possible response to a question about whether operating a lowest cost is essential to competitiveness in mass markets.
The essay question is:
To what extent is it essential that a business operates at the lowest cost in an industry in order to be competitive in a mass market?
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In this essay I will explore the importance of being a low-cost operator in mass markets in order to be competitive and whether an alternative - differentiation - might be a viable alternative to a low cost strategy in some contexts.
One reason why it is essential that a business operates at the lowest cost to be competitive in a mass market is that consumers are increasingly choosing to buy based on the lowest price available rather than other factors. In order to attract customers in mass markets where demand is price-elastic, firms need to adopt strategies focus on maximising efficiency and productivity which therefore allow them to offer selling prices that customers find attractive, but where their unit costs are low-enough to make such low pricing profitable. In mass market industries such as airline travel and health clubs the competitive success of low-cost firms such as Ryanair and Pure Gym has shown how, by stripping out unnecessary costs and operating very high levels of capacity utilisation, it has been possible to gain large market share profitably - a good sign of being competitive. The largest "low-cost" firms have also benefited from economies of scale which have helped push unit costs down which in turn has helped them sustain their price advantage over less efficient and smaller firms in the market. Increasing use of automation, for example in mass markets such as automation and the delivery of online services such as insurance, has also enabled businesses to compete at lower cost than competitors that have not invested so heavily in automation. Of course there are some mass markets where having the lowest cost may not be a guarantee of being competitive, particularly if consumers place value on factors other than price (such as quality). A mass market operator with very low costs but a poor reputation for product quality will soon find that there is a competitor with similar costs but better quality that is more competitive. Low costs - on their own - are unlikely to be enough.
To develop a counter-argument, a reason why operating at lowest cost is not essential to being competitive in a mass market would be where a business is able to effectively differentiate its product from the competition, leading to competitive advantage even if the business is not the lowest cost operator. As Porter argued (generic strategies) differentiation can be a powerful source of competitive advantage, even in mass markets where there are likely to be many competitors chasing the many consumers. A differentiated product in a mass market can offer something in addition to a low price that customers value. For example a smartphone might gain market share as result of leading-edge features, or a new car model outshines the low-cost competitors due to strong environmental and/or safety features. Where strong branding is part of the marketing mix, a strategy of differentiation can be particularly effective because customers may place a higher perceived value on a mass market product or business they trust or aspire to owning. As Bowman suggested in his Strategic Clock a position of 4 (differentiation) or 5 (focused differentiation) can be also be effective in giving a business a competitive market position. Building a reputation for quality is particularly important to sustain such as position. As mass market leaders like Apple and Nissan demonstrate, a high quality product with strong brand awareness and loyalty is a powerful way of delivering the added-value that a differentiation strategy requires. Of course there is no guarantee that a strategy of differentiation will be successful in achieving competitive advantage in a mass market. Many mass market leaders (e.g.Nokia) suffered because their competitive advantage was eroded by rivals who are able to offer similar or better value-added at a lower price. The success of a differentiation strategy depends to a large extent on the ability of a business to continually innovate, invest in a brand and sustain high quality.
Overall, in my judgement, whilst operating at low cost in a mass market is often important, it is not essential in order to be competitive. I justify this view because of the strength of the evidence from my counter argument - that a strategy of differentiation can be highly effective in many mass markets. Most mass markets do not involve products that are "homogenous" (i.e. the same and incapable of differentiating from one another). There will nearly always be a way to differentiate a product that is widely demanded in some way, particularly through the power of branding alongside other ways to add perceived value (e.g. quality & design). By way of balance it is worth pointing out that in some mass markets it is the "low-cost" operators that have been the most successful (and therefore competitive) recently. In some cases, like low-cost airlines and gyms, this has led to an increase in the overall size of the market as new customers have been able to afford a much lower-priced and simplified product. However, the main reason I come to my judgement is the existence of mass market leaders such as Samsung, IKEA, Honda and others who compete successfully through a combination of differentiation and low prices. This suggests that, whilst important, having the lowest costs is not essential to success.