There are basically two strategic approaches a firm can adopt for competing in the marketplace: cost advantage and benefit advantage. A firm pursuing a cost advantage strategy is strives to achieve the lowest cost structure in its industry. This can be accomplished through a unique configuration of the firm’s value chain so that total costs are minimized. A benefit strategy, on the other hand, is where a firm chooses to offer unique value to the customer that commands a price premium. A benefit strategy results in higher costs to enable the benefits being offered – higher costs that are more than offset by the price premium that can be charged.
Benefit advantage providers are not exempt from reducing costs. Just because a firm offers unique benefit which incurs higher costs, and higher prices, this does not mean that such a firm should neglect its costs structure. On the other hand, benefit advantage providers must be very focused on costs.
Benefit advantage providers can erode their margins and profitability by incurring costs that are not directly related to the benefits being offered. Often, such costs are masked by the higher price premiums benefit advantage providers can extract from customers. This results in the firm’s average cost of production curve being higher than it need be, reducing overall profitability.
Firms pursuing a benefit advantage strategy should evaluate and assess their cost structures to make sure that all costs incurred are driving or supporting the benefits offered. Such cost assessments should be done across the entire value chain, including all primary and secondary (supporting) processes. Activity-based analyses can help trace costs to activities, allowing the firm to evaluate the relationship of the activity to benefits offered. Activities that do not have a high correlation to benefits offered should be reduced or eliminated.
Benefit advantage providers can have their benefit provision eroded by competitors who offer similar benefits, but at lower cost (and therefore, price). It is therefore extremely important for firms pursuing this strategic approach to pay close attention to their cost structures.