Competitive strategy refers to a plan devised by a business to gain an advantage over its rivals in the marketplace and to defend against competitive forces successfully. The strategy is a set of planned actions and decisions that help a company differentiate itself, attract and satisfy customers, and achieve its business objectives.
There are typically four types of competitive strategies:
Cost Leadership
Cost Leadership is a competitive strategy that businesses use to gain a competitive advantage. As the term suggests, cost leadership involves a company aiming to become the lowest-cost producer or provider in its industry or market.
Businesses can achieve cost leadership in a variety of ways:
- Economies of Scale: This is achieved when a company produces goods on a large scale, where the cost per unit decreases with the increase in production. It is often achieved through a high volume of production.
- Efficiency: A business can improve efficiency by streamlining its operations, reducing waste, and improving supply chain management. Companies may invest in modern, high-tech, or more efficient equipment that can produce goods more quickly and with less waste.
- Product Design: Simplifying the product design or using cheaper materials or components can also reduce costs. This does not necessarily mean reducing the quality to the extent that it becomes unacceptable to customers but finding the right balance to provide a functional product at a lower cost.
- Negotiation with Suppliers: Companies can negotiate better deals with suppliers to reduce the cost of raw materials or components. This often requires buying in bulk or long-term agreements.
- Experience and Learning Curve: Over time, companies can find ways to reduce costs as they learn more about and improve upon their processes.
It’s important to note that a cost leadership strategy is not without risks. Companies must ensure that in their effort to reduce costs, they do not compromise on the quality of their products or services to the extent that they no longer meet the needs or expectations of their customers.
Also, a cost leadership strategy can lead to price wars in highly competitive markets. Multiple companies pursuing a cost leadership strategy in the same market can reduce profits for all involved.
Furthermore, technological advancements can change the dynamics of cost leadership. A new technology can make older production processes obsolete or enable competitors to achieve lower costs.
A successful cost leadership strategy can result in high market share and profitability. Companies like Walmart in retail and Ryanair in the airline industry have used this strategy effectively.
What is a Cost leadership strategy | Explained with Examples
Differentiation
Differentiation strategy is a competitive approach where a company seeks to distinguish itself from competitors through the quality of its products or services. The primary goal is to create a product or service that is perceived as unique in some manner, and this uniqueness allows the company to charge a premium price.
The ways a company can differentiate its products or services include:
- Superior Quality: A company can distinguish itself by providing higher-quality goods or services than its competitors. Quality can be enhanced through durability, reliability, or other similar features. For example, Apple is known for its superior product design and user experience.
- Innovation: Innovative products or services that offer unique features can help a company to stand out. This could be through technological advancements or creative product design. Google differentiates itself with innovative algorithms and products.
- Customer Service: Excellent customer service can give a company a competitive advantage. This could include after-sales service, in-store or online shopping experiences, etc. Companies like Zappos have built their reputation on superior customer service.
- Brand and Reputation: A strong brand reputation can differentiate a company from its competitors. Customers often trust well-known brands and are willing to pay a premium for the brand’s perceived value. For example, luxury brands like Gucci or Louis Vuitton differentiate themselves through brand reputation.
- Customization: Offering tailored or personalized products or services can also lead to differentiation. Companies that meet a customer’s specific needs can create a unique value proposition.
- Access to unique resources or capabilities: If a company has access to a unique resource or capability, it can differentiate its products. For instance, a wine producer may have access to a vineyard with a prestigious reputation, allowing them to charge a premium for their wines.
However, differentiation also comes with challenges. Costs are associated with distinguishing a product or service, which must be different from the price customers are willing to pay. Additionally, companies must ensure that their points of differentiation continue to provide value over time, as competitors may seek to imitate them, or consumer preferences may change.
A successful differentiation strategy allows a company to create a niche for itself in the market and to cater to a particular customer segment, potentially commanding higher prices and thus increasing profitability.
Product differentiation Strategy in marketing with types & examples
Cost Focus
Cost Focus is a competitive strategy where a company seeks to become the lowest-cost producer in a specific, narrow, or niche market segment. It’s a combination of cost leadership and market segmentation strategy.
Instead of competing throughout the entire market, the company uses a cost-focus strategy, targets a specific market segment, and offers the lowest prices within that segment. The aim is to exploit the cost behavior in some market segments and use cost advantage to fight off competition.
There are several ways to achieve a cost focus strategy:
- Understanding the segment: By understanding the specific needs and behaviors of a niche market, a company can find ways to reduce costs that do not compromise the value for customers within that segment.
- Simplifying offerings: The company might offer fewer products or more straightforward products, thus reducing the cost of production or delivery.
- Operational efficiency: This could include more efficient production processes, reducing waste, or better supply chain management. This might be easier to achieve in a niche market, as the company can concentrate all its efforts on one segment.
- Lowering overheads: A company can reduce overheads by focusing on a specific segment. For example, marketing costs might be lower as the company needs to reach a smaller, more specific group of potential customers.
Like any other strategy, the cost focus strategy is not without risks. The success of the strategy is heavily dependent on the chosen segment. The company might struggle if the segment is too small or if demand decreases. Also, there’s always a risk that competitors might find ways to enter the segment and challenge the cost advantage.
A successful cost-focus strategy requires a good understanding of the segment, effective cost control, and ongoing monitoring of market conditions and competitor activity. For example, a regional airline might use a cost focus strategy, offering lower prices on specific routes not well-served by larger airlines.
What is strategic cost management?
Differentiation Focus
Differentiation Focus is a competitive strategy where a company seeks to distinguish itself with unique attributes valued by a specific, narrow, or niche market segment. It’s a combination of differentiation strategy and market focus strategy.
The aim here is to serve a particular niche to such a standard that other competitors cannot compete. This is usually achieved through a deep understanding of that niche segment’s unique needs and desires, which allows the company to tailor its product or service accordingly.
Here are several ways to achieve a differentiation focus strategy:
- Unique Product Features: Offering unique product attributes that cater specifically to the preferences or needs of the niche market. For example, a company might offer a specially designed product for left-handed people.
- Superior Customer Service: Providing exceptional customer service specifically tailored to the niche market. This might include providing services in multiple languages for a specific ethnic group or personalized services for luxury consumers.
- Specialized Expertise: A company might develop deep expertise in a specific area, which allows it to provide a unique product or service that caters to the niche market. For example, a company could specialize in producing gluten-free or vegan food products.
- Strong Brand Identity: Creating a solid brand identity that resonates with the niche market. This could involve values, culture, history, or lifestyle elements that attract the niche audience.
- Customization: Offering customizable products or services that meet the unique needs of the niche segment can also create differentiation. This might involve tailor-made products, personalized experiences, or the ability for customers to “build their own” product.
A differentiation focus strategy also has its risks. The company might struggle if the niche market becomes too small or if demand decreases. Also, there’s always a risk that competitors might enter the niche with similar offerings. It’s also possible that larger companies could decide to cater to this niche, using their more significant resources to offer a similar or better product.
A successful differentiation focus strategy requires a deep understanding of the niche segment, continual innovation to maintain differentiation and monitoring of market conditions and competitor activity. For example, Tesla initially used a differentiation focus strategy by offering high-end electric vehicles to a niche market of environmentally conscious affluent consumers and built a strong brand around innovation and sustainability.
Niche marketing strategy: Explained with examples
