What Are the Four Major Types of Competitive Strategies?
Without a competitive strategy, your business will have a tough time attracting customers. But unfortunately, there’s no one-size-fits-all strategy that you can implement, because every business faces different challenges within different markets. However, Harvard professor Michael Porter, identified four major types of competitive strategies that businesses often implement, to varying degrees of success. Although your business may not use every element of these strategies, understanding their core principles can help you evaluate the effectiveness of your existing competitive strategy.
Cost leadership is a tough strategy for small businesses to implement, because it requires a long-term commitment to selling your products and services at a cheap price. The challenge, however, is that you also have to produce these products and services at a low cost, otherwise, you lose your profit margin. Large businesses that can make their products cheaply and sell them at a discount while still generating a profit, can drive competitors out of the market by consistently offering the lowest prices.
Identifying an attribute or characteristic that makes your product or service unique is the driving factor in a differentiation strategy. For example, a company that produces dental drills that make no sound could market itself to dentists as a silent drill that helps reduce the fear that patients have when they hear that drill sound. If your business is able to differentiate its products or services in the minds of buyers, it can reap the rewards of higher sales volume based on the perceived value, which your business offers, but your competitors do not.
A cost focus strategy is similar to a cost leadership strategy, but the major difference is that in a cost focus strategy your business targets a very specific segment of the market and offers that market the lowest prices available. For example, a company that sells energy drinks could target a city that has a high percentage of people that compete in extreme sports and sell those drinks at a much lower price than its competitors could. The fact that this segment of the market is much more likely to buy energy drinks is a major factor in the company deciding that lowering its prices would be advantageous.
Like the cost focus strategy, the differentiation focus strategy targets a very specific segment of a market, but rather than offering the lowest prices to the buyers in that market, a business offers something unique that competitors aren’t offering. For example, a boutique that sells clothes for people that are four feet tall or shorter would be pursuing a differentiation focus strategy by catering to a very narrow and unique segment of the clothing market. Instead of spending money on making clothes for everyone, the boutique would be able to focus on designing clothes that are only suited for very short buyers.