What Is a Competitive Strategy? (With 4 Common Types)
Updated March 10, 2023
Competitive strategy is common in many economic structures, including capitalism. Companies can use competitive strategies to continue to generate and increase their profits and expand their operations. Learning about competitive strategy may help you implement specific types of it within your teams.
In this article, we describe what a competitive strategy is, why it's important and some common types of competitive strategies.
What is a competitive strategy?
A competitive strategy is a set of policies and procedures that a business uses to gain a competitive advantage in the market. It's the process of identifying and executing actions that allow a business to improve its competitive position. Businesses may use various competitive strategies to raise the value of their products and services for consumers, investors and employees. They also implement these strategies to gain sustainable revenue streams.
Why is competitive strategy important?
Competitive strategy is important because it affects the overall strategies of a business. If a business doesn't have a competitive strategy, it may not find a unique advantage against its competitors. A competitive strategy is crucial in finding and developing new ideas for products and services that the company can offer. Other advantages of implementing a competitive strategy include:
The exploration of new opportunities
The retainment of customer loyalty with better products and services
Innovation to stay current on technological changes in the market
4 types of competitive strategy
Here are four types of competitive strategy and an example for each:
1. Cost leadership strategy
A cost leadership strategy keeps prices for products and services lower than competitors to encourage customers to purchase the lower-priced products to save money. Businesses use a cost leadership strategy in industries with high price elasticity, such as energy and transportation. This strategy is most effective for companies that can produce a large volume of products for low costs. These businesses often have large-scale production methods, high-capacity utilization and various distribution channels with which to work.
Example: Archibald Products is an online retailer of various household goods and uses a cost leadership strategy to maintain lower shipping costs for their customers and competitive production costs. The company purchases large quantities of the products it sells so that it can distribute them quickly to customers. It also keeps its overhead costs low by training a few employees to handle every step of the distribution process so that it can order large quantities and compete with other online retailers.
2. Differentiation leadership strategy
Businesses may use the differentiation leadership strategy to differentiate their products from competitors by emphasizing specific features of their products. This strategy might involve the design or function of a product. A company that's been in operation for a while may use this strategy to show that an original offering is better than newer products. Alternatively, a newer company may use this strategy to show that a new invention is more beneficial than existing offerings. The goal is to appeal to more customers through unique features and quality while keeping competitors from obtaining a larger market share for products.
Example: Lowdo is a search engine that uses a product differentiation strategy to appeal to certain customers through its products and services. For Lowdo searches to be successful, it uses tailored, personalized search filtering based on its customers' needs. This allows the company to keep its customers loyal and prevent them from using other search engines.
3. Cost focus strategy
The cost focus strategy is similar to the cost leadership strategy, but the cost focus strategy involves catering to a specific market. This strategy still involves trying to offer the lowest price, but it attempts to target a unique market segment with specific preferences and needs. When a company implements a cost focus strategy, it can establish brand awareness more easily within a specific geographic market.
Example: Wrando is a clothing store that uses a cost focus strategy to generate sales by advertising to working parents with young children. It sells affordable clothing for parents and young children. The company experiences success because it lowers its costs by purchasing clothing items from manufacturers in large quantities and outsourcing its distribution process so that it can keep all its employees dedicated to serving customers at its stores. Parents can shop for themselves and their children in one location, and they can access affordable clothing that other department stores in the area may sell for higher prices.
4. Differentiation focus strategy
The differentiation focus strategy is similar to the differentiation leadership strategy in that both attempt to highlight unique product attributes and features. The difference between them is that while the differentiation leadership strategy may involve appealing to a broader market, the differentiation focus strategy involves appealing to a specific market segment. This strategy typically doesn't prioritize the price of a company's offerings, as it attempts to highlight how a company's offerings are unique compared to those of its competitors.
Example: Windy Skies Resorts is an island resort that has hotels, swimming pools and adventure activities like zip lines. It decides to implement the differentiation focus strategy by advertising how it serves adult couples without children. This advertising strategy helps it distinguish itself from other resorts in the area that cater to large families. At Windy Skies Resorts, adult couples can enjoy their stays and make friends with other couples. They can enjoy their vacations without having to worry about a loud, noisy environment disrupting their relaxation.
Factors to consider when choosing a competitive strategy
Deciding on which competitive strategy for a company to implement may require experimentation and careful thought. Here are some factors to consider when choosing a competitive strategy:
The business' size: A smaller business may prefer one of the differentiation strategies to appeal to more localized niches.
The resources a company has available: You can consider recommending one of the cost strategies to a business that has ample resources to produce large quantities of products.
The existing reputation of a company: A company with a long-established reputation may consider implementing one of the differentiation strategies as it attempts to expand into different markets.
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