Competitive Strategy: Definition, Type and Importance

Competitive Strategy: Definition, Type and Importance

Competitive Strategy: Definition, Type and Importance

What are competitive strategies?

The more competitive a sector becomes, the more tricky it becomes for companies to keep up. As simple as that. Indeed, to establish a profitable business in today's competitive world, one must raise the bar. If not, businesses won't be able to outperform their competitors. Businesses must thoroughly examine their competitors' and rival companies' strengths and weaknesses. Aside from that, they must conduct extensive research into their potential customers' necessities, desires, and sticking points. That's where a competitive strategy comes in handy. It enables a company to gain a competitive advantage, beat the competition, and win the hearts of its customers. 

A competitive strategy is a collection of rules and regulations a company uses to gain a market advantage. Identifying and carrying out actions enables a company to help enhance its competitive position. Businesses can employ various competitive strategies to increase the worth of their goods and offerings for customers, investors, and employees. They also use these strategies to generate long-term revenue streams.

Companies are competing for every inch in the race, from quality products to superior customer service. Marketing companies conduct these analyses using market data about competitors and target audiences. Two factors creating and safeguarding the competitive advantage are considered when analyzing a firm's competitive strategy within a particular business sector. It is said that either a proactive or reactive competitive strategy leads to the development of a competitive advantage, which is divided into two categories:-

  1. performance enhancement - competitive strategies inside the same game
  2.  game rule modification - new game competitive strategy

Forming a completely new (nonexistent) business area, expanding the geographic reach of the business center (cross-market competitive strategy), and expanding the company scope are the final types of competitive strategies currently being looked at.

Competitive Strategy vs Business Strategy

A business strategy is a comprehensive plan created to assist an organization in achieving particular objectives. It is created by middle management, concentrating on what is most crucial for the organization to accomplish the desired goal. The business strategy outlines the market opportunities the company wishes to investigate, the steps to follow them, and the resources needed.

A business strategy includes a broader range of activities. It sums up all of the steps and tactics that the company would use to compete. It also includes the strategies by which organizations will confront strategic issues. A business strategy is the plan of action that a company would take to establish an edge over competitors - using the company's resources and differentiating factors. It addresses strategic challenges like decoding 'how to compete' with increasing competition. After all, if a business is to sustain itself in the market, it must tackle these problems effectively. A company's ability to outperform rival companies determines its success. 

To obtain a competitive advantage in the eyes of their target audience, businesses adopt a competitive strategy over the long term. A competitive strategy, on the other hand, is simply the company's plan of action for offering quality value to the target market while preserving the competition at bay. A company's ability to establish, improve, and take advantage of one or more competitive advantages depends on these strategies.

The business strategy looks at competitive advantages, whereas competitive strategy concentrates on allocating money, risk, and returns across an organization. While making strategic decisions, leaders must consider various variables, including resource allocation, organizational structure, investment management, and trade policy. To learn more about how business strategies differ from competitive ones, one should learn from experienced mentors about India's leading business schools.

The Importance of competitive strategy in Business

Companies devise various strategies to bring products that meet the needs of their buyers, such as innovation, pricing, values, and perks. Still, the truth is that competitors begin to arrive when that part of the market becomes profitable and viable. At that point, a company requires a well-planned competitive strategy to maintain its lead and earn profits. A company can do a variety of things to accomplish this. 

  1. They can focus on offerings that are less expensive than competitors.
  2. They can offer deals that provide value that no other competitor does.

Collaborating on the product or service without a competitive strategy is not a financially viable approach. It is so because, at a certain point, an opponent would begin offering the same attributes at a lower price or offer more elements at the same cost. As a result, a well-planned set of strategies is critical for remaining strong in the market.

A competitive strategy ensures the organization stays within its vision and mission. It helps keep the organization focused on its objectives. When a product is in a plain or smooth phase of its life cycle, there is no expansion and no degrowth. Throughout this phase, the process needs a push and a planned competitive strategy to help it skyrocket past the competitors and increase market sales, which will, in turn, increase market survival. 

Thus, competitive strategy is critical for the product's survival in the market. It becomes extremely important whenever a firm experiences reformation for rebranding a specific product, the overall product design, or even the entire company. Having the right strategy to outperform the competition by branding or redesigning their items allows the business to make more money and establishes a new reputation in the industry. Leveraging a competitive strategy has other benefits, such as:

  1. the search for new possibilities
  2. the maintenance of client loyalty through improved goods and services
  3. Innovation to keep up with market technology developments

Different types of competitive strategy

Finding and creating innovative concepts for goods and services that the firm can provide requires a competitive strategy. Businesses may make better-informed judgments and continuously enhance their goods or services with a well-thought-out competitive strategy. Academic and economist Michael Porter of the United States classified competitive tactics into four categories. Let us look at the strategies below:

1. Cost leadership strategy: It is perfect for big businesses that can produce many goods cheaply. This is the same reason why Walmart adopted this strategy. It means that businesses that use a cost leadership strategy have the lowest prices on the market. As an outcome, to make a profit, the expense of a product should be low. This is made possible by vast production, high resource utilization, and a wide range of distribution channels. The lowest price grants an edge to the businesses in all their competitive strategies. For example - The online store Archibald Products sells various household items, and to keep shipping costs for their consumers low and production prices competitive, they employ a cost leadership strategy. To supply its items to clients rapidly, the business buys vast amounts of them.

2. Differentiation leadership strategy: The prime reason for the differentiation leadership strategy is identifying product attributes distinct from the industry's rivals. When a product can distinguish itself from comparable items or services on the market through greater brand quality and value-added features, it can start charging premium prices to compensate for the high cost. For example - Apple, Clif Bar and Company, Ben & Jerry's, and T Mobile are some businesses that have successfully differentiated their brands.

3. Cost-focus strategy: The cost-focus approach is comparable to the cost leadership strategy, but the cost-focus strategy requires catering to a specific market. This strategy still includes being able to offer the lowest price, but it attempts to target a specific market segment with particular preferences and needs. When a company uses a cost-cutting strategy, it can more easily establish brand awareness within a particular geographic market. For example - Wrando is a clothing store that advertises to working parents with young children as part of a cost-cutting strategy. It sells reasonably priced clothing for parents and small children.

4. Differentiation focus strategy: Both the differentiation focus and differentiation leadership strategies aim to draw attention to differentiated product features and attributes. The differentiation focus strategy involves attracting a particular market niche, in contrast to the differentiation leadership strategy, which may involve appealing to a wider market. Although it tries to emphasize how a firm's offerings differ from its competitors, this strategy often doesn't focus on a company's cost and its products. For example - An island resort called Windy Skies Resorts offers lodging, swimming areas, and thrilling activities like zip lines. It implements the differentiation focus plan by promoting its services to adult couples without kids. This marketing technique enables them to stand out from competing resorts that serve extended families in the area.

Limitations of competitive strategy

Numerous complaints have alleged that Porter's generic techniques lacked flexibility and specificity. Porter maintained that a corporation must adopt a single strategy or be "caught in the middle" and suffer. This argument is based on differentiation, which will cost the firm money and go against the low-cost plan. Moreover, standardized items with comparable features could not be well-liked by many consumers, and this will prevent differentiation. As a result, differentiation and cost leadership will be more compatible.

Particularly, many businesses have entered a market as niche players before steadily growing and expanding, which directly opposes Porter's competitive strategy. A hybrid strategy, which is a mixture of two or more approaches, the Porter, has been effectively applied by many businesses. This contradicts the central part of the Porter Strategy, which states that only one organization should employ one strategy at any given moment.

These businesses are seen to perform better than those who are sticking to a single tactic that goes against Porter's competitive strategies. Porter also said that a company might not be able to follow a single strategy because of the constant changes in the market if it sticks with it and implements it for the duration of the business. A few of the difficulties mentioned previously include:

  1. Economies of scale decrease product unit cost as actual volume per period rises. The new businesses must choose between entering on a massive scale and risking harsh reactions from established enterprises versus entering as a local company and facing financial disadvantages in its initial journey.
  2. Product differentiation provides an entry barrier, but it costs a lot of money to break through customer satisfaction to the existing rival. It follows that if the technique fails, it could result in start-up losses, which are not recoverable.
  3. Costs associated with switching may include personnel retraining, the purchase of new equipment, the price and time associated with testing new techniques, product redesign, and other expenses. For example, a car maker who depends on purchasing wheels from a specific vendor can find it challenging to switch due to incompatibility of the designs.
  4. A capital demand is necessary, particularly for unrecovered advanced advertising and research and development. Even when capital is available, using it for most first entry-level investments carries a significant risk.

How to choose the right competitive strategy for your business?

For marketing to succeed, a strategy is essential; therefore, choosing the right one is a wise move. After all that we've discussed in our blog, an entrepreneur can be completely prepared to determine which competitive strategy is appropriate for their business after a thorough competitive study. Experimenting and analyzing the company's competitive strategy may be necessary. However, developing a combination of strategies to land the right competitive strategy might take a lot of work for many companies.

The hunt for an appropriate strategy frequently resembles a negotiation between the stakeholders of a business. There could be a need for more data and analysis, with a surplus of experiences and guesswork. The unfortunate outcome is frequently a competitive strategy that provides no genuine advantage. Nevertheless, things don't have to be that way. There are ways to improve the process and make it more successful. What we suggest is as follows.

  1. Size of the company: To target more specialized markets, a smaller company can choose one of the differentiating strategies.
  2. The commodities a business utilizes at its disposal: If a company has the resources to create a lot of stuff, it might use one of the cost-saving measures.
  3. The company's current reputation: When attempting to enter new markets, a well-known conglomerate can consider employing one of the diversification techniques.

There is competition in every market. Businesses must develop strategies to stay one step ahead of their rivals to become successful. Often, it is simpler to say than to accomplish, and there is no quick fix for how to outperform the rivals. Smart businesses counteract the effects of rivals to gain market share. It's never been more crucial or challenging to choose the correct approach to selecting competitive strategy in a corporate environment that is changing quicker and getting more unpredictable and complex practically every day.

Excellent Illustrations of Competitive Strategy

Companies have several strategies for product improvement, price, values, advantages, and other factors in their race to produce goods that satisfy customers' expectations. Based on Michael Porter's four criteria, there are several examples. These are a few instances:

  1. Apple: Apple has a unique position as a developer and distributor of electronic items like smartphones, audio players, tablets, and more. How? The answer is through its competitive strategy! Its competition in the industry is killed by the company's regular habit of creating new items, superior pricing policy, and the capacity to make products work well together. Apple provides top-notch goods with marked differences and charges high prices that create a sense of "worth", all while keeping huge profits.
  2. The Grocery Store Aldi: Interestingly, Aldi has grown in the grocery retail sector. The industry employs "lean production" to reduce the resources needed to transfer goods and services. The idea also involves minimizing waste and utilizing fewer resources and labor, all of which reduce production costs. Aldi makes significant investments in its employees. Each employee must complete extensive training, equipping them with the necessary skills. They are, therefore, able to work much more effectively.
  3. Nike: Due to their low-cost structure, Nike appears to retain its competitive strategy. They have an incredibly low cost-to-create ratio compared to the prices they sell all their products for. Also, they have a huge target market for the things they provide. They work in a sector of the economy they founded. In addition to working with Gucci, you can buy their clothing at Walmart. 
  4. Gucci: Gucci employs several techniques to gain a competitive edge. Gucci employs several key tactics to keep one step ahead of the competition, including Providing a unique and opulent product: Gucci is renowned for providing high-end, luxurious, distinctive, fashionable products. This has aided them in differentiating themselves from the competition and drawing in clients willing to spend more for their goods. Customer service is the main focus: Gucci has prioritized customer service, and it shows.

The Bottom Line

As an entrepreneur or a professional, one can make better decisions, outsmart the competition, and gain a larger portion of the market by learning to develop a competitive strategy from the best in the industry. The right knowledge about designing competitive strategies will support business expansion, enhance brand recognition, and broaden your audience.


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