What are the 4 major competitive strategies?

Competitive Strategy is a long term plan of a particular company which is created in order to gain competitive advantage over its competitors in the industry using levers like cost, differentiation etc.. It is aimed at creating defensive position in an industry and generating a superior ROI (Return on Investment). Such type of strategies play a very important role when industry is very competitive and consumers are provided with almost similar products. One can take example of mobile phone market.

Before devising a competitive strategy, one needs to evaluate all strengths, weaknesses, opportunities, threats in the industry and then go ahead which would give one a competitive advantage. Understanding competition, studying customer needs, evaluating their strengths & weakness etc. are all an important aspect of marketing strategy. Companies can study & evaluate on the basis of their market share, SWOT analysis etc., which would eventually help them drive business & sales revenue.

Importance of Competitive Strategy

In the race to bring products which meet the customers' needs, the companies devise a lot of strategies in terms of product improvement, pricing, values, benefits etc. but the reality is that the competitors start coming when the market segment becomes lucrative and viable. At that time, a company needs a well devised competitive strategy to stay a front runner and earn profits. Now to do that a company can do a lot of things. They can offer products which are cheaper than the competitors. They can offer products which provide value which no other competitor is providing. There are 4 types of such competitive strategies which a company can use to gain that edge in the market full of competitors. 

Working on the product or service without a proper competitive strategy is not a sustainable way of working as eventually at some point a competitor would start offering same features at a lower cost or offer more features at the same cost. Hence a well planned competitive strategy is very important to stay strong in the market. There are many types of strategies.

4 Types of competitive strategies by Porter

According to Michael Porter, competitive strategy is devised into 4 types:

1. Cost Leadership

Here, the objective of the firm is to become the lowest cost producer in the industry and is achieved by producing in large scale which enables the firm to attain economies of scale. High capacity utilization, good bargaining power, high technology implementation are some of factors necessary to achieve cost leadership. e.g Micromax

2. Differentiation leadership

Under this strategy, firm maintains unique features of its products in the market thus creating a differentiating factor. With this differentiation leadership, firms target to achieve market leadership. And firms charge a premium price for the products (due to high value added features). Superior brand and quality, major distribution channels, consistent promotional support etc. are the attributes of such products. E.g. BMW, Apple

3. Cost focus

Under this strategy, firm concentrates on specific market segments and keeps its products low priced in those segments. Such strategy helps firm to satisfy sufficient consumers and gain popularity. E.g. Sonata watches

4. Differentiation focus

Under this strategy, firm aims to differentiate itself from one or two competitors, again in specific segments only. This type of differentiation is made to meet demands of border customers who refrain from purchasing competitors’ products only due to missing of small features. It is a clear niche marketing strategy. E.g. Titan watches

Without following anyone of above mentioned competitive strategies, it becomes very difficult for firms to sustain in competitive industry.

Examples of competitive strategy

There can be several examples based on the four parameters given by Michael Porter. Some examples are given below:

1. Cost leadership: Micromax smart phones and mobile phones are giving good quality products at an affordable price which contain all the features which a premium phone like Apple or Samsung offers

2. Differentiation leadership: BMW offers cars which are different from other car brands. BMW cars are more technologically advanced, have better features and have got personalized services

3. Cost focus: Sonata watches are focused towards giving wrist watches at a low cost as compared to competitors like Rolex, Titan, Omega etc.

4. Differentiation focus: Titan watches concentrates on premium segment which includes jewels in its watches. 

Hence, this concludes the definition of Competitive Strategy along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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In today's fast-paced world, everybody is trying to get ahead by beating the competition, and brands are no different. Every industry faces fierce competition, from the beverage industry to the sports apparel industry. Once a brand loses its ground in the race, another brand is ready to pounce on it. For companies, it has become essential to plan and execute competitive strategies; this explanation will dive deep into this topic.

Competitive Strategy Definition

Factors such as globalization and the advancement of information technology have opened new avenues for brands to market their goods and services. There is tough competition across all industries. Companies need to have competitive strategies in place to beat the competition and gain a competitive advantage in the market. The question is, what exactly is a competitive strategy?

A competitive strategy is a comprehensive plan of actions a company develops to defend its market position and gain a sustainable competitive advantage in the industry.

Most industries are competitive, and brands are vying for the upper hand in concentrated markets. From product quality to superior customer service, companies are fighting each other for every inch in the race. A competitive strategy is developed by assessing your competition's strengths and weaknesses and identifying opportunities and threats in the market. Marketers conduct these analyses with the help of market data about the competitors and the target audience.

Porter's Competitive Strategies

There are four main types of competitive strategies proposed by Michael Porter.

1. Cost leadership strategy

Businesses that follow this strategy sell products/services at the lowest prices in the industry. Small-scale businesses cannot afford to follow this strategy because it requires them to produce and offer products and services at a lower price in the long term. They make less profit on one unit of a product, but as products are sold at a lower price, consumers demand large volumes of their products, thus learning to a large volume of sales and high revenues. A business needs to have an efficient operation and various distribution channels. Being a low-cost provider leads to a competitive advantage.

Walmart is an example of a cost leadership strategy. It focuses on cutting costs during operations and offers low-priced branded items.

2. Differentiation strategy

Companies that want to gain a competitive advantage by having a unique identity in the market follow this strategy. It allows them to stand out among competitors. There must be a unique selling point (USP) that a company could use to attract more customers and charge premium prices.

In the automotive industry, Tesla has surely made a name for itself. It offers cars that are energy sustainable, high-tech, and environment friendly.

3. Cost focus strategy

It is like a cost leadership strategy, but the difference is that it focuses on a specific market segment. It is used to offer low-priced items to a particular target market. Companies assess the target segment's needs and offer them the goods or services at a lower price. Since it focuses on specific markets, it could increase customer satisfaction and brand awareness.

An IT service provider could offer its services to a market like India, where this industry is growing exponentially.

4. Differentiation focus strategy

Companies that focus on a specific market while maintaining a standout position in the market follow this strategy. The strategy involves offering goods and services to a niche market and helps the company keep its USPs intact.

Two marketing consultants, Michael Treacy and Fred Wiersema explained competitive strategies from a customer-centric approach. They suggested that companies can gain a competitive advantage by delivering superior value to customers. They called these strategies "value disciplines".

• Product leadership – is about giving customers superior value through innovative products. Companies that follow this strategy must work hard on product development and innovation. It could be costly as it is a research and development-intensive strategy.

• Customer intimacy – This discipline creates customer relationships through superior customer service. Companies offer a wide range of solutions to customers that are tailored to their needs. They try to gain customers' trust, which is their competitive advantage.

• Operational excellence – This discipline is about making operations efficient by reducing waste and production costs and improving distribution channels to provide convenient and economical products to customers.

A market leader is someone who has the largest market share. Such companies lead the way in terms of product development and innovation. They must remain on constant watch as market challengers will push them hard at every opportunity. There are three competitive strategies that market leaders can use.

Expanding market size (Demand)

When the market size expands, market leaders gain the most advantage. Companies can expand the market size by developing new users, new uses, and more product usage.

To create new users, marketers can focus on promotions to raise awareness about the product in a specific market or enter a new market to target prospective customers.

To create new uses, companies can conduct market research for their products. It will give them clarity on how customers are using their products. Based on their research, they can develop new uses for the products. For instance, a milk brand could introduce the use of the product with coffee.

To ensure more product usage, companies need to promote their products extensively.

Protect market share

When the size of the market expands, it presents new opportunities for not only the market leaders but also for challengers.

The leader needs a proactive approach to protect its market share from the competition. Leaders must work on their weaknesses so that their competitors cannot take advantage of them. They must also deliver value that matches customer expectations. A market leader must continuously innovate to stay ahead of its competition. It must also make its operations efficient to produce at low costs. This approach will enable them to provide more value to customers by offering them products at low prices.

The rivalry between Coca-Cola and Pepsi is not new. These two brands have been competing for non-alcoholic beverage industry market share. According to Statista, Coca-Cola is the market leader in the USA market.

Expand market share

Market leaders can grow by expanding their market share. Usually, increased market share will lead to increased profitability. Therefore, it is vital to execute competitive strategies effectively.

Types of Competitive Strategies: The criteria for differentiation

Let's now take a look at the types of competitive strategies used for differentiation. For a company to differentiate itself from its competitors, it is essential to communicate and provide value to the customers. For instance, value could take the form of product quality or superior customer service. Companies differentiate to gain a competitive advantage. Here are some of the common aspects used for differentiation:

• Product – This type of differentiation is based on the product's overall quality. It is based on the product’s design, performance, or features. A company that uses this differentiation approach aims to communicate in-depth information regarding the product to the customers.

• Service – This differentiation approach is based on providing superior service to the customers. Key factors such as speediness and convenience are often associated with superior customer service.

• Channel – Companies could also use their effective channel strategy as a differentiator. It involves making the product/service more accessible to customers.

• People – This type of differentiation involves hiring the right people and training them well in customer-facing roles. These employees act as the company's 'face', and thus can directly provide value to the customer in terms of handling their queries, providing tailored solutions, and building good relationships with them.

Let's not take a look at some competitive strategy examples.

Competitive strategies: McDonald's

McDonald's is a fast food industry giant, focusing on a cost leadership strategy. It provides fast delivery of food to its consumers through optimised operations. Additionally, it owns the facilities that produce ingredients for its products, reducing production costs. Therefore, it can offer food to consumers at lower prices than its competitors.

Competitive strategies: Harley Davidson

Harley Davidson is one of the oldest motorcycle manufacturers in the US, focusing on a differentiation strategy. The unique design and sound of the motorcycle make it stand out from competitors. It has a strong brand image and a loyal customer base. People feel honoured to be a part of Harley Davidson's family. It also has its theme restaurants in many places; one of them being Las Vegas.

Competitive strategies - Key takeaways

• Companies need to have competitive strategies in place to beat the competition and gain a competitive advantage in the market.
• A competitive strategy is developed by assessing your competition's strengths and weaknesses and identifying opportunities and threats in the market.
• Cost leadership, differentiation, and focus strategies are Porter's competitive strategies.
• Companies can gain a competitive advantage by delivering superior value to customers.
• The three value disciplines are product leadership, customer intimacy, and operational excellence.
• Market leaders' three competitive strategies are market size expansion, market share protection, and market share expansion.

A competitive strategy is a comprehensive plan of actions a company develops to defend its market position and gain a sustainable competitive advantage in the industry. 

Porter's four competitive strategies are cost leadership, differentiation, cost focus, and differentiation focus strategies.

The following competitive forces urge companies to develop and shape their strategies:

• Competitive rivalry
• The threat of new entrants
• Threat of substitutes
• Bargaining power of customers
• Bargaining power of suppliers

Competitive pricing is the process of strategically selecting price points for your goods or services based on competitors' pricing in the market.

The 4 types of marketing strategies are: 

• Market Penetration Strategy,
• Market Development Strategy,
• Product Development Strategy,
• Diversification Strategy.

Question

Companies do not need to have competitive strategies in place to beat the competition and gain a competitive advantage in the market.

Answer

Question

Define competitive strategy. 

Answer

A competitive strategy is a comprehensive plan of actions a company develops to defend its market position and gain a sustainable competitive advantage in the industry. 

Question

Can superior customer service be used as a competitive advantage? 

Question

A competitive strategy is developed by assessing the strengths and weaknesses of your competition coupled with identifying opportunities and threats in the market.

Answer

Question

Name Porter's four types of competitive strategies. 

Answer

Cost leadership, differentiation, cost focus, and differentiation focus strategies.

Question

Define cost leadership strategy. 

Answer

Selling goods and services at the lowest price in the industry.

Question

Companies who want to gain a competitive advantage by having a unique identity in the market, follow ___________ competitive strategy

Answer

a differentiation strategy

Question

___________is used to offer low-priced items to a specific target market. 

Answer

Question

Name the three value disciplines. 

Answer

Product leadership, customer intimacy, and operational excellence.

Question

____________ discipline is all about creating good relations with customers through superior customer service.

Answer

Question

___________________ discipline is about making operations efficient by reducing waste, and production costs, and improving distribution channels to provide convenient and economical products to customers. 

Answer

Question

Market size expansion, market share protection, and market share expansion are the three competitive strategies for market leaders. 

Answer

Question

Market size can be expanded by developing new users, new uses, and more usage of a product.

Answer

Question

When the size of the market expands, it presents new opportunities for not only the market leaders but also for challengers.

Answer

Question

 A market leader does not need to continuously innovate to stay ahead of its competition.

Answer