There are three competitive strategies that you can implement across your business: Cost-leadership strategies, differentiation strategies, and focus strategies.
Note: This is the second article in a series on competitive strategy from FrogDog. To read the first article, click here.
Once you’ve analyzed your competition, you can develop a powerful competitive strategy for your business that you can sustain over the long term.
To help you assess what route might be best for your company, let’s look at three valid options for competitive strategies:
Cost-Leadership Strategies
Large businesses use cost-leadership strategies to achieve the lowest possible production and distribution costs through economies of scale. Firms that pursue cost-leadership strategies tend to have strengths in purchasing, manufacturing, and distribution, which help them manage their costs. Companies with this strategy typically target value-seeking customers with no-frills, basic products and penetration pricing.
This is the easiest competitive strategy to copy, meaning that other large competitors may be able to set lower prices to capture more market share. However, cost-leadership strategies can help large businesses fight off challenger companies and brands that may not have the operational strength and size needed to drive prices to their lowest points.
Differentiation Strategies
Companies using differentiation strategies target quality and value-seeking customers with premium offerings and strong brand equity. Their competitors cannot offer what they offer.
To pursue a differentiation strategy, you might focus on a smaller part of the current offerings. Whole Foods and its strategy to offer a large variety of organic products—rather than one shelf or aisle, like most grocery stores—provides an example of this strategic option in play. Also, Whole Foods exclusively sells a number of organic products.
Focus Strategies
Some businesses choose to focus on one or more narrow market segments to protect themselves from competition. A focus strategy helps companies with limited resources compete.
The first type of focus strategy is to become the cheapest offering in a highly targeted market segment. For example, you might focus on having the lowest priced coffee in a particular geographic area. This is similar to a cost-leadership strategy, but more highly specialized.
Another focus strategy is to target niche market segments with specialized product lines. As with the difference between cost-leadership and a price-centered focus strategy, a niche-market focus differs from a differentiation strategy by its specialization on highly customized offerings that target specific market subsets.
Need help refining your competitive strategy? Contact FrogDog.
This article is the second in a series by FrogDog about competitive strategy. To read the first in the series, click here. Our next article in the series discusses how to choose the right competitive strategy.
Image credit: Image courtesy of watiporn/FreeDigitalPhotos.net
Posted: Apr 29,
2014
Updated: Aug 11, 2020
The ability of a company to outperform its competitors
What is Competitive Advantage?
Competitive advantage refers to the ways that a company can produce goods or deliver services better than its competitors. It allows a company to achieve superior margins and generate value for the company and its shareholders.
A competitive advantage is something that cannot be easily replicated and is exclusive to a company or business. This value is created internally and is what sets the business apart from its competition.
Key Highlights
- A competitive advantage is what sets a company apart from its competitors, in the eyes of its consumers.
- These advantages allow a company to achieve and maintain superior margins, a better growth profile, or greater loyalty among current customers.
- A competitive advantage is often referred to as a “protective moat.”
- Strong and repeatable competitive advantages can create sustained success for a business and attract capital more readily and cheaply.
Examples of Competitive Advantage
Competitive advantages come in many shapes and sizes. They include, but are not limited to, some of the following:
- Access to natural resources not available to competitors
- Highly skilled labor
- Strong brand awareness
- Access to new or proprietary technology
- Price leadership
Components of Competitive Advantage
For a competitive advantage to be established, it is important to know the following:
- Value Proposition – A company must clearly identify the features or services that make it attractive to customers. It must offer real value in order to generate interest.
- Target Market – A company must establish its target market to further engrain best practices that will maintain competitiveness.
- Competitors – A company must define competitors in the marketplace, and research the value they offer; this includes both traditional as well as non-traditional, emerging competition.
To build a competitive advantage, a company must be able to identify its value proposition that will be sought after by the target market, which cannot be replicated by competitors.
Building a Competitive Advantage
Michael Porter, the famous Harvard Business School professor, identified three strategies for establishing a competitive advantage: Cost Leadership, Differentiation, and Focus (which includes both Cost Focus and Differentiation Focus)[1].
1. Cost Leadership
The goal of a cost leadership strategy is to become the lowest cost manufacturer or provider of a good or service. This is achieved by producing goods that are of standard quality for consumers, at a price that is lower and more competitive than other comparable product(s).
Firms employing this strategy will combine low profit margins per unit with large sales volumes to maximize profit. Companies will seek the best alternatives in manufacturing a good or offering a service and advertise this value proposition to make it impossible for competitors to replicate.
2. Differentiation
A differentiation strategy is one that involves developing unique goods or services that are significantly different from competitors. Companies that employ this strategy must consistently invest in R&D to maintain or improve the key product or service features.
By offering a unique product with a totally unique value proposition, businesses can often convince consumers to pay a higher price which results in higher margins.
3. Focus
A focus strategy uses an approach to identifying the needs of a niche market and then developing products to align to the specific need area. The focus strategy has two variants:
- Cost Focus: Lowest-cost producer in a concentrated market segment
- Differentiation Focus: Customized or specific value-add products in a narrow-targeted market segment
Competitive Advantage in the Marketplace
Three notable examples are:
- Walmart: Walmart excels in a cost leadership strategy. The company offers “Always Low Prices” through economies of scale and the best available prices of a good.
- Apple: Apple uses a differentiation strategy to appeal to its consumer base. It provides iconic designs, innovative technologies, and, therefore, highly sought-after products; this ensures that consumers are willing to pay a premium for Apple devices.
- Whole Foods Market: Whole Foods Market’s advantage relies on a differentiation focus strategy. The company is a leader in the premium grocery market and charges more premium prices because its products are unique. This is appealing to a niche market with higher disposable income.
Importance of Competitive Advantage
A competitive advantage is what sets a business apart from its competitors. It is essential in order for a business to succeed, whether it’s by ensuring higher margins, attracting more customers, or achieving greater brand loyalty among existing customers.
Higher margins, a better growth profile, and lower customer churn tend to also be very popular among both investors and creditors – making capital more readily available (and cheaper) for firms that are able to maintain a strong competitive advantage among their peers.
Video Explanation of Competitive Advantage
Watch this short video to quickly understand the main concepts covered in this guide, including the definition of competitive advantage and how companies create it using various business strategies.
Other Resources
Thank you for reading CFI’s guide to Competitive Advantage. To keep learning and advancing your career, the following resources will be helpful:
- Absolute Advantage
- Opportunity Cost
- Monopoly
- Law of Supply