When more than one company sells the same product, the firm that offers customers a benefit such as a lower shipping cost or lower price will often earn more revenue than its competitor. Competitive strategy is the methods one business uses to gain an advantage over another company or a group of rivals. Several competitive strategies are common in the business world.
A differentiation strategy develops when a company decides to diversify the number of features or characteristics of a product to provide more choices to the consumer. Executives usually make this decision after conducting sufficient market research to determine the needs and desires of their customers or clients. To make a profit, the cost of adding a new feature must be affordable and there must be a reasonable expectation that customers will pay a higher price for the redesigned product. For example, if three companies sell mobile phones and one of them offers a phone with a tracking device that works even when it's turned off, that company has created a differentiation that provides a competitive advantage.
Low Cost Strategy
Sometimes the most effective competitive strategy is to provide the lowest cost for a product or service. This creates an advantage over competitors because many consumers first consider the cost of a product or service when deciding what to buy. A low-cost strategy requires developing ways to reduce production costs without sacrificing quality. Customers will not purchase an inexpensive but poorly made product or poorly delivered service. Manufacturers can reduce costs by using new technology to reduce the price of production equipment, and finding suppliers with cheaper prices.
A niche strategy focuses on a specific group of consumers or clients that a company believes its competitors are failing to serve. Rather than trying to appeal to a large segment of consumers, a niche strategy seeks to provide outstanding service to a small group to create brand loyalty and consistent profits. For example, a clothing company that caters exclusively to men over 7 feet tall is employing a niche strategy. However, creating a new product or service isn't the only way to apply a niche strategy. If a town has four computer stores but none of them sell tablet computers, a new store that opens and sells only tablet computers would be using a niche strategy to market its products.
Each type of competitive strategy carries a risk. In a differentiation strategy, a company may lose money if its market research data was inaccurate and customers do not find any value in the additional features or characteristics of the new product. With a low cost strategy, the danger is that a company might trigger a price war with its competitors or end up attracting another company into the marketplace that can offer the product at an even lower price. A company employing a niche strategy runs the risk that its consumer group may be too small to generate a profit or may lose interest in the product and favor something new.