A company’s competitive strategy addresses the areas of interest that enterprise plans to compete in including how it intends to strengthen its market share, please its clients, respond to the actions of competitors and react to the changing market conditions to achieve a competitive advantage. Different companies employ unique competitive strategies to remain competitive. The key differentiating factors of a competitive strategy are the nature of the market and if a company is pursuing a low cost or differentiation strategy (Gamble, Thompson & Peteraf, 2018). Companies engage in creative strategies with the aim of winning the support of its customer. Their objective is to outsmart competitor’s actions by meeting the needs of their markets. An enterprise achieves a competitive advantage over its rivals whenever it has an edge in attracting new customers and coping with the competing forces. Michael Porter identified five competitive strategies that companies can pursue to obtain a competitive advantage over their customers. The success of a company's ability to employ the five competitive strategies depends on the strategy itself and its applicability in different conditions and industries.
Michael Porter came up with three competitive strategy options in 1980 that can be pursued by business around the world to gain an edge over the competition. However, Gamble, Thompson & Peteraf (2018) expanded the three strategies into five competitive strategies that include low-cost provider strategy, broad differentiation strategy, focused low-cost strategy, focused differentiation strategy and best cost provider strategy. The five strategic options are shown in the figure below.
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Low-Cost Provider Strategy
Being a low-cost provider in the industry is an approach employed by companies that operate in a market with price-sensitive buyers. An enterprise achieves this strategy by being the lowest cost provider in the industry. The ability to achieve low-cost strategy arises from providing meaningfully lower costs compared to competitors. Managers, therefore, strive to include unique features that are desired by the consumer. Companies can decide to employ low-cost edge with the intention of under-pricing competitors to attract customers who are price sensate therefore benefit from economies of scale and increasing the total profits. Companies can also decide to maintain the current price and retain their current market share but generate more profit per unit by using their lower cost edge. The second option can improve the return on investment and enhance the overall earnings for the company.
Managers can use two approaches in their efforts to achieve low-cost leadership. The success of low-cost leadership implies that the company must maintain lower increasing cost in its value chain. Such a move can be achieved by enhancing value chain activities and striving to make the lowest price possible. Similarly, a company can revamp the entire value chain to eliminate some actions that increase the costs in the value chain (Gamble, Thompson & Peteraf, 2018). According to David (2011), cost leadership can be achieved using two strategies. The first emphasizes on offering products to a wide range of price-sensitive customers. The second technique is the best value approach that involves serving a wide range of customers using the current best price value in the market. The second approach offers the customers a wide range of products at the lowest price compared to competitor’s prices.
Broad Differentiation Strategy
The strategy is usually employed if the needs of the buyers are diverse to be met by standardizing products. Managers must, therefore, understand customers’ needs and behaviors to determine what is of value to the customers and the price tag they place on that value. The company will then use the desired features to differentiate its activities from its competitors. A firm that distinguishes can benefit from premium pricing, increased unit sales, and customer loyalty Gamble, Thompson & Peteraf, 2018. The authors further note that a firm that distinguishes itself from the competition can realize increased profitability as long as the extra price outweighs the additional cost for differentiating. However, differentiation as a strategy can fail if customers are not attracted to the unique features of the product. Similarly, the strategy can fail if a competitor easily copies the approaches employed by a firm.
A company can differentiate from its rivals using different approaches like the taste, enhanced features, wide selection, superior services, and availability of parts, performance, luxury, reliability, quality production, technological innovation, a range of services and a complete product line (Gamble, Thompson & Peteraf, 2018). Companies should select approaches that are difficult to copy or one that requires substantial investment. However, competitors over time can copy an attribute, product or features. Companies should, therefore, try to establish complex intangible characteristics that are difficult to replicate. A company, for example, can enhance its reputation, develop strong relationships with the customers and build its image over time. A company can also differentiate by creating switching costs that tie the customer (Hitt, Ireland & Hoskisson, 2016). Differentiation, therefore, has the potential to create a profitable and long-lasting competitive advantage especially if it is based on innovation, quality, superior technology, reliability, and unique competitive abilities. Buyers perceive the above attributes as having value and the competitors are less likely to copy and therefore cannot offset the profitability of the company.
Differentiation can vary from one industry to the other and depends on research and development capabilities, engineering skills and creativity. Similarly, companies must be able to develop innovative marketing capabilities and be motivated by their innovations. According to Gamble, Thompson & Peteraf (2018), differentiation works best when the needs and uses of a product are diverse. The product or service should be differentiable in many ways that create value for the buyers. Similarly, few competitors should be pursuing the same strategy. The technology should change rapidly, and competitors outdo each other by producing evolving product features.
Focused/Market Niche Strategies
This approach concentrates on a small market share that can be determined by unique product attributes or geographical uniqueness. A small or medium sized company, for example, can focus its ambitious effort on a niche market since it lacks adequate resources needed to serve a broader market. A company can pursue a focused low-cost strategy by serving the target market at a lower price compared to the competitors. Similarly, a company can use a focused differentiation strategy that aims at selling uniquely designed products with the intention of appealing to the needs and preferences of a well-defined customer base (Gamble, Thompson & Peteraf, 2018). According to David, (2011) the success of a focus strategy depends on the size of the market segment and its potential to grow. The selected market should not be critical for the success of competitors. Companies can engage in activities like market penetration and development that creates focusing advantages.
Focus strategies are ideal if consumers have unique preferences that can be met by a company’s products and the competitors are unwilling to concentrate on the same market. A company that is pursuing a focus strategy can target a group of customers, a product line or a geographical market. The objective is to meet the needs of a well defined yet narrow market. The strategy is appropriate if the target market is large, growing and profitable (Wheelen & Hunger, 2012). The market must not be crucial to the industry leaders or if it is too costly to meet the needs of the market. The market can also have several niches that companies can select and focus their efforts. The existing competitors should not be attempting to specialize in the segment.
Focused Low-cost Strategy
It is a strategy that tries to secure a competitive advantage by offering low price products to customers in a niche market. A company can capitalize on this approach if it can significantly lower its cost by selecting a market segment with unique attributes (Gamble, Thompson & Peteraf, 2018). A company pursuing this strategy aims at keeping the price at its bare minimum. The strategy is highly used by companies that deal with unique products like private labels.
Focused Differentiation Strategy
This strategy aims at providing unique products that appeal a market segment. The customers, in this case, are usually well defined as opposed to a differentiation strategy that focuses on many customer groups as well as market segments. The strategy tries to meet the needs of a buyer segment that is willing to pay a higher price for the most exceptional items available creating an opportunity for companies to differentiate and focus on this market segment. A fashion food retailer, for example, can target individuals at the top of the market pyramid by offering unique products that met their needs (Gamble, Thompson & Peteraf, 2018). The target market, in this case, must be substantial to make economic sense to invest in such a market. The competitors should also not compete in this segment, and the associated costs are too expensive.
Best Cost Provider Strategies
These strategies are a hybrid of differentiation and low cost. The objective is to satisfy the expectations of the buyers using quality attributes while exceeding customer expectations on price. Companies that pursue this strategy target a sizeable mass of value-conscious customers seeking high-quality products at economical prices. This strategy aims to offer the customers of a company greater value for the price they paid for a product or service. The intention is to satisfy the desires of each customer while charging them relatively lower prices for the attributes in the products which otherwise charge more by competitors (Gamble, Thompson & Peteraf, 2018). A company can capitalize on this strategy by incorporating attractive attributes at a relatively lower cost than what competitors can supply. A company must, therefore, possess a superior value chain that excludes non-value adding activities. Similarly, it must maintain unmatched efficiencies to manage the value chain and have core competencies that ensure that the differentiating attributes are incorporated at an affordable cost.
Porter’s Five competitive strategies offer an opportunity for a business to pursue a course of action that creates a competitive advantage and enhance its long-term growth. Companies seek competitive advantages depending on their market coverage. They can choose a low-cost provider strategy, broad differentiation strategy, focused low-cost strategy, focused differentiation strategy or the best cost provider strategy. Companies must understand that the different approaches cannot be used uniformly in all industries. Similarly, they must know that the market conditions, the activities of their rivals and nature or products or services determine the effectiveness of each strategy selected. A clear understanding of the different requirements and applicability of each strategy will determine how successful a company will be in the long run. Similarly, strategies must be implemented sparingly while considering the response of the target market towards the selected approach.
References
David, F. (2016). Strategic Management: Concepts and Cases (13th ed.). Upper Saddle River, New Jersey: Prentice Hall.
Gamble, J., Thompson, A., & Peteraf, M. (2018). Essentials of Strategic Management: The quest for competitive advantage (6th ed.). New York: McGraw-Hill Education.
Hitt, M., Ireland, R., & Hoskisson, R. (2016). Strategic Management . Boston, MA: Cengage Learning.
Wheeler, T., & Hunger, J. (2012). Strategic management and business policy: Towards global sustainability (13th ed.). Boston: Pearson.
