Any company exists in a dynamic market environment and constantly interacts with various competitors. Entrepreneurs fight for customers, market share and profit.
The winners are usually those companies that can correctly analyze the market, their competitors, identify and use the strengths of their business processes. And on the basis of this information, select and create the most optimal behavior model. All this is connected with the creation of a competitive strategy.
In this article, we will take a closer look at what competitive strategies are. We will analyze what types experts distinguish and how to choose them correctly. In addition, we will learn what to consider when developing a competitive strategy that will help your company stand out from its competitors and achieve its goals.
What is a company’s competitive strategy?
A competitive strategy is a carefully developed long-term plan of action and a business model that is aimed at achieving a leading market position. Simply put, a company chooses its development path and a set of potential priorities that allow it to maintain competitiveness.
An organization usually operates according to a certain pattern or chooses a model of behavior:
- emphasis on product quality and service;
- emphasis on production volume;
- emphasis on the uniqueness of a product or service;
- policy of maximum cost reduction, etc.
The priority tasks are to ensure the company’s stable position in the market, increase its attractiveness to consumers and increase profits.
Michael Porter’s Types of Competitive Strategies
In the late 70s of the last century, the concept of “competitive strategy” was introduced by the American economist, the founder of competitive analysis – Michael Porter. It was he who introduced the first classification of types of competitive strategies, which is considered especially relevant today.
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The researcher made several observations and identified one pattern. The results showed that firms that were successful and achieved leading positions in their industry relied on one of three types of strategies: cost leadership strategy, differentiation strategy, and focus strategy.
How industry influences strategy choice
The choice of a particular strategy to combat competitors will depend on the characteristics and attractiveness of your industry in terms of generating profits in the long term. The more profitable the niche, the more comfortable the management and business will feel. However, not all industries have equal opportunities, tools and conditions.
There are obstacles in the markets that prevent companies and their partners from developing quickly and without problems. Porter found that there are 5 “competitive forces” in each industry. These are factors that have a significant impact on the company. Because of this, management changes.
Cost Leadership Strategy
The main goal and focus of this strategy is that the company tries to reduce production and operating costs to a minimum level. This allows for a reduction in cost, increased efficiency and the ability to offer customers a product at a lower price than competitors. At the same time, due to minimal costs, the manufacturer receives a normal profit.
An important condition for implementing this competitive strategy is the availability of the necessary resources in one company, as well as unique conditions. They allow optimizing costs better than competitors in the industry:
The main task is to analyze each section of the value chain and minimize costs in all strategic links, which contributes to the growth of the company’s competitiveness.
Broad differentiation strategy – unique product
The product differentiation strategy is based on the company’s desire to gain a competitive advantage by creating a unique, distinct product. Such products have their own distinctive characteristics that competitors do not have. These make them more preferable for a certain group of consumers.
In this case, the price is not so important. Customers are ready to buy such products at an inflated price, since they have a special consumer value. Let us emphasize that we are talking about broad product differentiation. This means that the company can focus on an entire market or even several related areas.
Focusing
Focusing is the third type of strategy proposed by Porter. It involves a firm concentrating its efforts on one specific market segment or a very narrow group of consumers.
The main difference is that here the company marketing services that every business needs to use focuses only on a part, and not on the whole market or even several markets, as in the examples above. That is, the business does not focus on quantity and variety, but on a narrow focus of production capabilities. Focusing can be of two types:
Companies that focus on a broad specialization may not serve some customers with specific preferences well. For them, such a product will not be suitable.
Then buyers, in order to satisfy their needs, turn to specialized firms that are ready to produce the necessary order for them. Often the focusing strategy is oriented towards special, best materials, hand-made products.
Often, focused strategies are preferred by companies that do not have a lot of resources. They realize that it will be difficult to enter a large market and compete with competitors, so they strive to take their position in narrow areas within certain financial and other restrictions. However, this is not always the case.
What other basic strategies exist?
In addition to Porter’s classic approach, there are other types of strategies whose effectiveness has been proven many times. Let’s look at the most common competition strategies.
Ansoff’s Competitive Strategy
The Ansoff matrix or grid is a strategic planning tool that helps companies determine development directions based on two parameters: products and markets. The strategy, the methodology was proposed by economist Igor Ansoff and has become an important tool in strategic management.
Kotler’s Competitive Strategies
This concept was developed by American economist Philip Kotler. The researcher came to the conclusion that strategies should be implemented depending on the organization’s position in the market relative to its competitors.
1. Leader of its niche . With this unique phone number mx strategy, the company occupies a leading position in the market by increasing sales volumes, expanding sales geography, and other methods. The two main tasks of the leader are to expand and strive to maintain first place with all their might.
2. Contender. In this case, the company tries to push the leader by increasing its market share and an active, aggressive competitive strategy. Contenders usually try to dump, launch advertising campaigns, and improve product quality. They often look for weak points in leaders and try to surpass them in these aspects.
Other competitive strategies of the firm
In fact, there are many variants, classifications, subtypes of competitive strategies. Let us briefly list several more popular areas of company development.
- “ Cream skimming.” A strategy in which a company initially sets high prices for a new product to maximize profits from a narrow market segment that is willing to pay more. Then gradually lowers the price to reach a wider range of consumers .
- “Market penetration”. The strategy involves a rapid increase in market share by aggressively reducing the cost of goods, often below the cost price . That is, dumping . The main goal is to attract as many customers as possible, increase competitiveness and take the first positions in the market.
How to Choose a Competitive Strategy
Each organization has its own goals, priorities, unique structure, external environment, and special internal structure.
Let’s look at the main factors that can influence the choice of competitive strategy and other strategic decisions.
1. Current and long-term business development goals. The strategy is developed for a period of 3-5 years.
2. Specifics of your industry. Each industry has its own characteristics that affect the competitive environment and, in practice, determine the set of available strategies. For example, now in highly competitive industries, where goods and services are easily replaced by analogues, many companies resort to a successful strategy of minimizing costs.
3. Technologies, competitive advantages, company resources. Some basic competitive strategies require significant investments in marketing, technologies, infrastructure. If a company has limited resources, it should choose a strategy that matches its capabilities.
Let’s sum it up
Development strategy is not just a formal plan for the sake of a plan on paper. It is a vital document that should fully define the logic of behavior and principles of the company’s development in the long term. The development and selection of a competitive growth strategy is one of the key aspects that determines the success of an enterprise in the market.
That is why its compilation should be approached with all importance and professionalism. Regardless of the size and priorities of the business. It is necessary to invite experts, carefully analyze the internal and external environment of the organization at the present moment and in the future.
