As concluded Michael Porter of Harvard Business School, when you boil it all, there are only two strategies companies : differentiation and low cost. For many companies, adopting the low-cost approach is very attractive. Managers understand that profit is the difference between price and cost, and then you can choose to compete in low-cost base with the idea that will make a healthy profit. Of course, the basic assumption is that a cheap product will be sold.
The problem is that the products and services that have minimal costs for production are generally produced with some differentiating characteristics (other than price). Customers who perceive this usually opt for the product or service with the lowest price. Because there can be only one company with the lowest cost, the company tends to be the winner of a competition on price. So if a company is the low cost leader, competing on the basis of low cost is a great idea.
However, if a company does not have the lowest costs and adopt a low-cost strategy, you should expect lower profits and low customer satisfaction . That situation is this the first is the head of IBM Lou Gerstner Called "from hell commodity". When the products of a company are very similar to all the others it is that they seem to be goods. When the products are not differentiated a company must have a low price in order to sell items. If a company is selling a commodity and can not match the low price of the competition, then the company is in a weak position.
Fortunately, companies should not compete with the products and services of raw materials; Instead, they can differentiate themselves. Differentiate I: media by vBulletin companies can use from barely perceptible differences (JNDS) to offer customers Reasons to buy: more than just a low price shoes. Ideally, these JNDS meet the needs of a specific target market. Crafting innovative solutions for a niche market means more customer satisfaction and less price competition. In fact, if each customer group declares that there is only one product that truly solves a particular problem, then the company that produces it has a virtual monopoly within that specific market.
The companies that want to avoid price competition and who want to reduce the negative effects of price competition need to learn to meet the needs of customers better than competitors through the best offer. This is why most businesses need to innovate. Companies with innovation processes and employees with innovation skills are more able to offer products and services that command a reasonable price and ensure the long-term profits.
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