What Is Competitive Strategy?

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It can be difficult to find the right competitive market in today’s saturated business landscape.

So, how does a business survive in this highly competitive world of niche markets and constant innovation? By implementing a competitive strategy — This is especially important for businesses working in oversaturated markets that are overflowing with unique options for the consumer.

Key Takeaways:

Competitive strategy is long-term development and marketing plan designed to gain an edge over competitors.

The 4 competitive strategies developed by Michael Porter are cost leadership, differentiation, cost focus, and differentiation focus.

Michael Porter’s strategies are broken into 2 categories: leadership and focus.

Creating barriers to competitor imitation is crucial to an effective competitive strategy.

A competitive strategy should consider their competitor’s capability and the dynamics of the industry.

A competitive strategy is a long-term product development and marketing plan with the goal of gaining a competitive advantage over direct competitors.

Employing a competitive strategy based on a thorough market analysis can help businesses attract customers, survive a competitive market, and earn a heightened position in the market they serve.

More market share can lead to more profit. If a business hopes to survive, it will need to continue growing its profit share.

The most well-known competitive strategies are those defined by Michael Porter.

Michael Porter is a professor at Harvard Business School and is considered to be one of the most cited scholars in both economics and business. It was over thirty years ago, in 1980, that he published his first book focusing on competitive strategies.

Those strategies and his philosophy are still followed and implemented today:

Cost leadership strategy. With cost leadership, the product is produced in high volume at a low cost. There is a distinct emphasis on cost reduction without reducing quality. The goal here is to gain market share by underpricing competitors.

Often called low-cost provider strategy or low-cost strategy, the business will manufacture standardized products with low per-unit costs. Mass production allows for lower prices, giving them an advantage against their higher-priced competitors.

Margins may be narrower than with other methods, but the larger quantities help to even out the numbers producing high revenue streams.

Differentiation strategy. As the name of this strategy suggests, differentiation is about differentiating yourself from the competition. Creating a unique product offering that is difficult to copy or reproduce helps to draw customers and allows for premium pricing.

The attributes used to differentiate from the competition must be of value to the customers. Otherwise, there would be no need for customers to choose this product over another or accept the higher cost.

Cost focus strategy. Unsurprisingly, the cost focus strategy focuses on the cost of the product being sold. Sometimes referred to as the best-cost strategy, this strategy puts emphasis on lowering the cost of the product.

The goal is not necessarily to be the lowest-priced item in the niche market being served because pricing at the low end often leads to a belief that the item is also low quality. Instead, the pricing should be moderate and offers high convenience or high quality as a motivator.

Differentiation focus strategy. Differentiation focus relies on differentiation at both the market level and the product level. The company will serve a niche market and produce a unique product, or service, within that market.

Unlike cost focus, differentiation focus may not necessarily lead to lower-cost products. In fact, the uniqueness provided may lead to much higher pricing compared to other products in the same niche.

Though they may serve a significantly smaller audience, the premium pricing makes up the difference.

To understand Porter’s four generic strategies, it helps to divide them into two camps of leadership and focus. Then, each camp is related to cost or differentiation:

Leadership (broad market). These strategies focus on the strength or core competency of the business. The goal here is to stand out from competitors, meeting a demand that others can’t achieve.

The two leadership strategies defined by Porter serve a broad market scope. Broad-scope businesses will produce products that appeal to a wider spectrum of customers by offering individual products that serve a wide audience or offering several products within one vertical.

Focus (narrow market). These strategies push an emphasis on market segmentation, narrowing the market scope. The company chooses an industry or niche with a narrow competitive scope. The strategy relies on tailoring a specific focus or segment and serving them exclusively.

A niche can be found through geography, buyer group or demographics, product attributes, or it can simply be a focus on one particular line of products within a larger market. For instance, selling only athletic sneakers in the larger footwear market.

When you put this all together, Porter’s competitive strategies will have an emphasis on either market leadership (broad market) or market focus (narrow market) and, the strategies are implemented through either product cost or product differentiation.

This is often depicted as a 2×2 box with columns identified as broad market and narrow market and rows identified as differentiation (or uniqueness) and cost.

This is helpful because it makes the competitive strategies generic. The four types of competitive strategies identified by Porter are considered generic due to their ability to be applied to any business or organization, regardless of company size or industry served.

As mentioned above, the main goal of employing competitive strategies is to gain a competitive advantage.

Industries and competitive markets are hardly stagnant, though. The competitive edge gained through the implementation of the competitive strategies can only be maintained for so long.

The ultimate goal is sustained competitive advantage, which is defined as earning a higher than average (for the industry or niche) profit over several fiscal years.

The amount of time the competitive edge can be maintained is dependent on a variety of factors. These factors should be considered during the planning phases as a company determines the competitive strategy it will employ.

It is important to take strategic measures to sustain the competitive advantage once it has been achieved. These measures should be taken before even implementing the competitive strategies above.

In addition to the factors below, there are building blocks to the competitive advantage that should be considered as well; they are efficiency, quality, innovation, and customer responsiveness.

Efficiency helps to lower costs, while higher quality allows for higher pricing. With positive customer responsiveness and superior innovation, premium pricing can be achieved.

The factors that can help determine and sustain competitive advantage are:

Imitation. They say “imitation is the sincerest form of flattery”— or at least Oscar Wilde did. The full quote is, actually, “Imitation is the sincerest form of flattery that mediocrity can pay to greatness.” Like many great sayings, we repeat ad nauseam; the full phrase changes the meaning entirely.

If a company can create a product or service that is a step above the rest, differentiating themselves from their competitors, it wouldn’t be long before others come in and copy the effort. Competitors will always try to imitate a company’s resources and capabilities.

Resources are much easier to imitate than capabilities. Tangible resources are also simpler to imitate than intangible resources, like patents or marketing techniques.

If you want to sustain your competitive advantage, you will need to create barriers that prevent competitors from truly imitating you. Their imitations will be cheap knock-offs that will only minimally damage your market share.

To do this, you should create a mix of unique capabilities, tangible resources, and intangible resources. Since the capabilities are so much more difficult to imitate, you will want to use these as the foundation to distinctive competence.

In one or more areas, distinctive competence is an absolute necessity when building and maintaining a competitive advantage.

Competitor capability. Another thing that should garner heavy consideration is your competitor’s capabilities. How capable or willing are they to imitate your distinctive competency?

Their way of doing business, their manufacturing practices, and more can all determine how easily they will be able to imitate the product. A competitor will not change their entire way of doing business simply to imitate someone else.

The changes would be gradual, meaning that the competitive advantage will be sustainable for a significantly longer period of time.

Industry dynamism. Is the industry, or niche, being served innovative, ever-changing, and ever-evolving? The software industry, for instance, is constantly evolving with innovations made in leaps and bounds.

Industry dynamism will certainly play a large role in your ability to sustain a competitive advantage. Competitive advantages will be short-lived in industries with a high rate of innovation.

In addition to the above factors, sustainable competitive advantage can be built through:

The development of distinctive competencies

The institution of business strategies that allow for continuous learning and improvement

Determining and implementing best practices

Maintaining a clear understanding of the market being served as it is currently and projected to grow and change

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Author

Samantha Goddiess

Samantha is a lifelong writer who has been writing professionally for the last six years. After graduating with honors from Greensboro College with a degree in English & Communications, she went on to find work as an in-house copywriter for several companies including Costume Supercenter, and Blueprint Education.