Competitive Strategy: Definition, Types, and Execution
Planning for the fast-approaching future allows companies to act against short-termism and biased perspectives. In this way, they are better able to identify, recognize, and seize opportunities and innovations.
Although it seems challenging to rationally evaluate the future effects of current decisions, developing a suitable competitive strategy is a good way to steer an organization in the right direction.
In this article, we define competitive strategy, list the different approaches, and provide a step-by-step guide to building a plan.
Table of Contents
- What Is a Competitive Strategy?
- Types of Competitive Strategies
- How Do You Implement a Competitive Strategy?
- The Bottom Line
What Is a Competitive Strategy?
A competitive strategy is simply a company’s long-term action plan of how to gain an edge over its rivals. The management weighs a firm’s strengths, weaknesses, and unique features against those of its competitors to draft a winning course of action. In a way, this is an instrument for outperforming competitors.
In business, being above average or superior means having a competitive advantage, which you gain by implementing a proper competitive strategy. So, the main goal lies in strengthening a business market position rather than maintaining the current one. Companies that offer similar products to customers do require such a long-term plan of action to thrive.
Most importantly, a competitive strategy should be unique—no other competitor in the market should be able to copy it. A company with an easy-to-replicate plan does not hold an edge.
Types of Competitive Strategies
Since there is no universal approach to attracting customers and keeping the engines running, companies often use one or more of the following.
- Offensive strategy
- Defensive strategy
- Low-cost strategy (cost leadership)
- Predatory pricing
- Differentiation strategy
Companies that employ offensive strategies directly target competitors from which they want to capture market share. This is an active, even aggressive competitive business strategy typically involving large investments to stay ahead of the curve.
Defensive strategies, on the other hand, are a counteract to offensive approaches. They focus on offering high-quality products and services, building brand loyalty, and retaining valuable customers that can potentially be taken away by competitors.
Cost Leadership Strategies
A cost leadership strategy entails having the lowest cost of production in the industry to establish a favorable position. A firm can use it defensively (to protect its market position) or offensively (to gain market share).
Either way, being the most cost-efficient business gives you the chance to dictate the market and charge lower prices than the rest of the competition. Generally, firms that follow a low-cost competitive strategy must have tight cost controls and efficient operating and reporting systems.
Predatory Pricing Strategies
Predatory pricing is an extreme variation of the low-cost strategy. That is, prices are set so low that it drives out the competitors. At first, this aggressive strategy seems beneficial for customers because they buy products cheaper.
But once the predator company drives out the competition, it increases its prices and generates even higher returns than it did before, with customers having nowhere else to go. Fortunately, this practice is often illegal. Yet, such competitive business strategies can be seen in many industries.
Differentiation involves making your products or services distinct and more attractive than those of your competitors. This could be in the form of additional features, functionality, support, and brand image. In practice, successful differentiation works wonders! Of course, one needs to properly match the cost with the client’s perceived value.
The following is an example of how this competitive strategy works in practice.
Suppose you are a coffee shop owner. Your coffee and bagels are the finest catch in town. You pick the ingredients with attention to detail and rely on top-notch quality. However, your production cost is steep: $40 per order. So, you sell a Brazilian coffee + bagel for a total of $70 per set.
How many people, do you think, will stop by to grab a bite and a cup of coffee from you on their way to work? Not many… Most of them will probably prefer the polite uncle working at the local Deli whose prices are thrice as low as yours.
How Do You Implement a Competitive Strategy?
Every organization follows a few basic steps when developing its competitive strategy. They concern the scope and range of a business as well as its vision and products.
Below, you can find the main phases a company goes through to build a competitive strategy:
1. Define a firm’s business purpose.
It is crucial to identify what the firm does to contribute to consumers’ lives and experiences. This is the reason why customers buy its products or services.
2. Outline core competencies.
Next, define the unique tangible and intangible attributes of a company. These can be the speed of last-minute product and service delivery, staff expertise, product design—anything that makes a client choose you over your rivals.
3. Determine the primary business growth method.
Next, business owners must decide on a growth strategy and a business direction. Obviously, an acquisition will require a different competitive strategy than a market expansion.
4. Establish key market priorities and products.
At this stage, companies determine the products and market segments that contribute to revenue significantly and identify what is still to be improved and revised on that front.
5. Specify goals for the future.
Goals should describe the things a company strives to achieve, with its mission and vision duly considered.
6. Identify potential obstacles.
Companies must be proactive enough to foresee future problems and solve them promptly when the time comes. In this way, they can estimate their competitive strategy’s compatibility with a certain obstacle in the long run.
7. Revisit existing marketing strategies.
The firm’s market concentration and current objectives should align with its competitive strategy. Otherwise, they must be revised.
8. Use the power of competitive intelligence.
A rather modern concept, competitive intelligence involves gathering data about competitors and analyzing it internally. Note that this will mostly include publicly available information that’s in line with data protection policies. Running through your rivals’ Annual reports, for example, will help evaluate their market and financial positions.
The Bottom Line
Whatever competitive strategy a firm chooses, it all comes down to building brand loyalty, increasing profits, and making a difference for consumers. Some may opt for a combination of existing strategies, while others develop their own. Ultimately, the goals remain the same; it’s the uniqueness of the approach that brings about the change and effective implementation.
The topic is covered extensively in Michael E. Porter’s Competitive Strategy: Techniques for Analyzing Industries and Competitors—a must-read for every finance professional. You can also read our summary of Porter’s Five Forces Model. And to learn how to create a winning competitive strategy, take our Introduction to Business Analytics, Corporate Strategy, and Marketing Strategy courses.
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