2 2 A competitive advantage can be achieved through low-cost or through differentiation.

Which of these types of competitive advantage is it easier for a UK business to maintain? Justify
your view. [25 marks]

Within Porter’s generic strategy, there for universal strategies, which could be applied to
different industries. These strategies include los cost strategy, differentiation strategy, focused
low cost, focused differentiation. Differentiation is an approach where a product stands out due
to its quality whereas low cost approach implies that business tries to reduce its costs to
minimum so that it could be possible to set the lowest price.

Differentiation may become a key competitive advantage of well-established UK companies,

which can be maintained though promotion and advertising. Most of UK businesses (just like
lots of Western companies in general) are known for their high quality and stylish design. This
quality is possible to offer due to high level of technological development in most of UK
companies coupled with professional and well educated human capital. The synergy of
technology and human resources enables UK companies to produce innovative products with
better quality and better design. This is the reason why lots of customers would prefer the UK
products over those made in China or other Asian countries even if the price for these UK
products is higher. So, UK businesses with premium goods appeal to lots of customer in the UK
(due to high living standards in the UK, lots of British people can afford these products) and
affluent people worldwide, which ensures stable demand. A good example here is Rolls Royce
which managed to expand its customer base worldwide by focusing on unique selling points
(handmade, high quality, luxury design). An established brand with strong foothold, Rolls Royce
uses differentiation to compete with other brands. Differentiation approach is supported by heavy
investment in advertising and other promotional activities. Thus, this brand is associated with
celebrities and luxury, which adds to brand recognition and brand loyalty. As a result, affluent
people across the globe are happy to acquire Rolls Royce products which make them feel
elitarian. Another example of successful differentiation is FreshFare, one of the UK’s leading
supermarkets. While expanding in China, it opted for differentiation due to an increase in the
demand for private label goods from Western retailers. Chinese affluent customers believe that
Western brands provide reassurance and quality that these customers desire. Thus, the product
portfolio of FreshFare boils down to premium and high quality products. All in all, since any
label from UK is initially associated with high quality, UK companies which choose
differentiation will find it easy to persuade their customer base in the high quality of their
products. So, differentiation strategy would be more efficient than other strategies in generating
more sales, profit and increasing market share. However, differentiation may only be an efficient
strategy for well-established companies with strong brands i.e. high brand loyalty and good
reputation across the globe. It means that UK start-ups may struggle to succeed if they choose
differentiation strategy.

Low-cost strategy is another option for UK businesses. At first glance, it is almost impossible for
UK businesses to achieve low cost competitive advantage. Average labour costs in the UK are
much higher than those in China or Bangladesh. Yet, big UK companies can outsource their
operational activities to countries with cheaper labour, bringing their production costs to
minimum. This enables them to offer lower price while compromising quality. In spite of high
living standards compared to the rest of the world, the UK still has lots of citizens who cannot
afford premium products. At the same time, these people have enough money to spend on lots of
cheap goods i.e. Fast Fashion garments. A good example of efficient low-cost strategy is Primark
with sales revenue about 7,8 bln pounds. On its official site Primark says that they “are proud of
our low prices”. They can set such a low prices due to bulk buying and small advertising costs.
Primark follows the latest trends in fashion but without expensive tags or labels. Transportation
and packaging costs are also brought to minimum. For example, suppliers are asked to pack t-
shirts so they are ready to go straight on shelf. Thus, benefiting from high expectations from UK
companies and low cost strategy, Primark managed to penetrate the UK market first to expand in
Europe later. This strategy appeals to a wide range of customers with low and middle income,
enabling the business to generate lots of sales revenue and to benefit from the economies of
scale. What is more, given the current difficult economic situation in the UK and other
Europeans countries, the average income level may go down and unemployment can go up,
which will help Primark to reduce labour costs and to attract even more customers seeking for
the lowest price. However, low cost competitive advantage may be highly difficult to maintain,
To begin with, the market in the UK and Europe is already highly saturated and it may take lots
of effort to keep its market share. If some customers of Primark switch to competitors (such as
New Look), Primark may lose purchasing economies of scale (no bulk buying any more) and
other economies of scale (financial, marketing), Therefore, it may become impossible for
Primark to offer lowest price.

Overall, both strategies (differentiation and low cost) are quite difficult to maintain.
Differentiation should be maintained through promotional activities (ad with celebs, product
placement, PR) whereas low cost competitive advantage could be maintained if there is a
possibility to minimize costs and use economies of scale. However, the choice of the strategy
depends on a number of factors. Firstly, it depends upon the brand value. Well-established strong
brands like Rolls-Royce and Burberry should stick to differentiation as people in the UK and
abroad would still be ready to pay a high price for their goods. If these brands are really strong,
these UK businesses will manage to keep their competitive advantage. But when it comes to
young start-ups in the UK, it may be challenging for them to gain and to maintain differentiation
competitive advantage. Secondly, it depends on the type of the product and the targeted market
segment. Low-cost competitive advantage can only be maintained when economies of scale can
be used (focused is an exception but it only related to few businesses). But if the market is highly
saturated, the business may lose economies of scale and, therefore, its competitive advantage.
Differentiation approach can only work if the source of differentiation can be protected (no fake
products). Finally, it depends upon economic situation. If the world (including the UK) will slide
down into global economic recession, market segment for premium differentiated goods may
become too small and low-cost strategy would more suitable for UK businesses.