Businesses use five basic strategies of cost setting and product differentiation to compete for customers.
Starting a business is a time of big dreams, excitement and high hopes for future success and meaningful impact on the marketplace. While branding, marketing and leadership style are buzzwords in almost every industry magazine and book, the success of your business is also highly dependent on how well you stand out from the crowd. Whether you choose to be a cost competitor, differentiation competitor, focus on the entire market or focus on only a portion of it will influence the success and direction of your company significantly. Choose your competitive strategy wisely and be aware of the five basic competitive strategy options available to you as a business owner.
What Is a Competitive Strategy in Business?
In order to thrive and succeed in the marketplace, businesses must have a strategy for handling the competition and standing out from the crowd. They must know what makes their company special, and in order to know that, they must be clear on their vision and values. The vision and values of a business drive the competitive strategy that will allow them to stand out from the crowd and grow at a sustainable pace.
To formulate a competitive strategy for your business, start with the vision. This is the big goal you have for where you ultimately want your business to be, what problem it solves for consumers and how you want it to operate. Look at your vision and work your way backward from there to where you are. What big goals will you need to meet along the way to get where you are going? What baby steps and smaller goals will help you reach those larger goals? What daily routines can help to automate the process of reaching your goals? Put your answers into your business plan and vision boards so they are in front of you day in and day out as you clarify the direction of your company and your competitive strategy.
Many of the small goals you set as part of your business plan will help you clarify what needs to be the competitive strategy of your business. For instance, a business looking to have the least-expensive products in a given category will compete very differently from a business focused on fair trade and providing customers with the opportunity to make a purchase with a purpose. The competitive strategy of a cost competitor entails securing the least-expensive manufacturing options, cutting operating costs in stores and buying in bulk as much as possible and then appealing to customers who need to make the most of their money. The competitive strategy of the fair trade business will entail building relationships with artisans in developing nations, providing them with access to materials to make their goods, importing the goods and marketing them in a way that gives customers a feeling of relationship and impact with the artisan. The vision of each company leads them to develop a very different competitive strategy that results in business growth and longevity.
As you consider your company's competitive strategy, remember to keep your competition in mind. Are there other cost competitors or fair trade businesses in your area? Why will people shop with you instead of with them? Perhaps other cost competitor businesses pay their people at the minimum wage while your business has found a way to pay people a livable wage. Your brand is now the ethical cost competitor, the business that offers low cost without sacrificing morals. It could be that other fair trade businesses in the area leave the customers wishing they could better know the artisans. Perhaps your artisans include a hand-signed personal note with each of the specially crafted pieces. Maybe there is a way for customers and artisans to exchange notes in a pen-pal arrangement or specially organized tours for customers who want to visit artisans overseas. Your customers are now building real relationships and are likely to choose your business over the competing fair trade business because it feels more meaningful.
What Are the Five Generic Competitive Strategies?
The five generic competitive strategies were introduced by Michael Porter of Harvard Business School in 1979, and they offer different ways of thinking about how your business will maintain long-term success given its strengths and weaknesses. Your chosen competitive strategy should play up your strengths while minimizing the negative impact of your weaknesses.
- Low-Cost Provider Strategy: The low-cost provider strategy seeks to create prices that are so low that competitors cannot meet or exceed consumer savings for goods or services of the same quality. Low-cost providers can sometimes gain the lion's share of the market, resulting in large profits from loyal consumers who return time and again to make purchases. Walmart loves to offer prices on goods and access to a variety of goods with which nobody else can compete. Amazon takes a similar place in the online marketplace. On the other hand, price wars with competitors can cut into the bottom line and create profit margins that are not sustainable or that land your business in the red instead of the green.
- Broad Differentiation Strategy: The essence of a broad differentiation strategy is to fully understand the psychology, needs and emotions of the mass consumer in order to create a product that specifically meets those needs in ways that nobody else is meeting. Businesses with a broad differentiation approach can charge higher prices for their products, which sometimes results in a higher profit margin and loyal customers who cannot get their needs met in the same way by any other business. For instance, Nordstrom is known for customer service and their incredible shoe department. On the other hand, other companies may copy your offerings, customers may not be excited by what you offer or you may exceed consumer needs, such that they are not willing to pay a premium price tag for your offerings. When these unexpected bumps in the road arise, it can be easy to overspend on advertising and erase your profit margins.
- Focused Low-Cost Strategy: The focused low-cost strategy seeks to offer low prices to a particular segment of the marketplace rather than trying to capture the entire marketplace. Instead of trying to offer low prices on something that you hope captures the attention of all people everywhere, you hone in on your potential customers to nail down their age range, economic bracket, gender, interests, values and/or geographic location. By focusing on a smaller group of consumers, it can be easier to anticipate and meet customer needs. For instance, an ethical, low-cost grocery store like Aldi is known for paying a livable wage, offering organic foods and quality fresh produce. They appeal to ethically minded, financially savvy consumers, especially parents and young families who want to feel like they can buy low-cost items without sacrificing their morals and values.
- Focused Differentiation Strategy: The focused differentiation strategy seeks to offer different product or service features to a particular segment of the marketplace rather than trying to appeal to the entire marketplace. Apple markets the iPhone, which has fewer bugs, intuitive usability and unique security features as compared with other phones on the market. They know that trendy young people and business owners will discover things they can do with an iPhone that they cannot do with any other phone on the market and that they are likely to win customers for life.
- Best-Cost Provider Strategy: The best-cost provider strategy chooses a focused market and appeals with a low cost and a lower cost. This competitive strategy exceeds the customer's expectations for both cost and features. Most consumers enjoy feeling like they are getting a steal of a deal on an upscale product with posh features. In order for this strategy to be solid and successful, you need to become an expert at finding the lowest-cost manufacturers within the values of the company. These manufacturers must pay attention to detail and offer the same quality product as competing high-end brands but at a lower cost, empowering you to offer comparable goods to the customer at a lower cost. Quality control and manufacturing relationships are key to making this happen.
What Are Competitive Tactics?
Once your business is clear on which competitive strategy it wants to embrace, you will need competitive tactics that will help that plan succeed. Competitive tactics are the action steps that put your competitive strategy into motion. These are the actions that will put you ahead of your competition in the marketplace to ensure that you capture the market in a way that they cannot duplicate. Competitive tactics address pricing and products and need to be both long term and short term.
- Long-Term Tactics: Long-term competitive tactics look several years into the future as your business lives out its vision. This could include hosting planned quarterly sales that correspond with the seasons or holidays. It might entail offering an annual "meet the artisan" event where customers get to video conference with the artisans who make the goods they purchase. It could entail planning a 10-year anniversary celebration or an annual merchandise blowout sale to prepare for completely new stock in the new year.
- Short-Term Tactics: Short-term competitive tactics seek to outmaneuver the competition this week, this month or this year without looking far into the future. When the blankets you ordered in August still have not sold and it is now December 15, you could offer an immediate blanket sale with prices so low your customers cannot say no. It might also entail hosting a book signing by a fair trade author at your store this weekend because you know it will draw customers into the store, and it is something your competition cannot duplicate.
- Tactical Pricing Decisions: Tactical pricing decisions are the decisions that business management makes in order to ensure the best possible pricing for consumers while still respecting the bottom line. The key is to undercut the price of your competition without sacrificing quality. Tactical pricing decisions can include choosing manufacturers, hiring practices and employee pay. It can also include things like charging only for cost on an item like an air cleaner or razor system but then charging premium prices for replacement air filters or razor blades.
- Tactical Product Decisions: Tactical product decisions are product decisions that increase ease for customers while also increasing the bottom line for your business. If you sell nail products that require a heater or lamp as well as special remover for proper use, you can bundle these items together at a slightly lower cost so that your customer can get everything she needs to get started in one single purchase. She will continue to buy the individual components of the bundle as they run out or wear out.
- University of Cambridge Institute for Manufacturing: Porter's Generic Competitive Strategies (Ways of Competing)
- Business News Daily: Porter's Five Forces: Analyzing the Competition
- nibusinessinfo.co.uk: Price Your Product or Service
- SAGE Publications: Modeling Tactical Product-Mix Decisions: A Theory-of-Constraints Approach
- Forbes: Walmart's Low-Price Strategy Breaks Down Online
- Forbes: Amazon's Pricing Strategy Makes Life Miserable For The Competition
- Forbes: Inside Aldi's $5 Billion Plan To Become The Third-Largest Grocer In The U.S.
- Springer: Explaining Apple’s iPhone Success in the Mobile Phone Industry: The Creation of a New Market Space