It is difficult for a business to survive without competitive strategies in place. This is particularly the case if the company is contending in markets overflowing with alternatives for consumers.
This article discusses the following topics 1) what is a competitive strategy?, 2) types of competitive strategies, 3) how to develop a competitive strategy, and 4) case studies.
WHAT IS A COMPETITIVE STRATEGY?
A competitive strategy may be defined as a long-term plan of action that a company devises towards achieving a competitive advantage over its competitors after examining the strengths and weaknesses of the latter and comparing them to its own. The strategy can incorporate actions to withstand the market’s competitive pressures, attract customers and assist in cementing the company’s market position.
TYPES OF COMPETITIVE STRATEGIES
Classification according to Michael Porter
Michael Porter is considered a top authority on competitive strategy and the economic development and competitiveness of regions, states, and nations. Porter’s classification of generic competitive strategies includes differentiation, cost leadership, differentiation focus, and cost focus.
This strategy aims at developing a competitive advantage by way of making available and marketing a unique product or service – a product or service that is different in some way to what a rival or competitor is offering. For this, you may have to spend a lot for research and development, which you may not be able to afford if yours is a small business. A successful differentiation strategy has the potential to lower price sensitivity and better brand loyalty from customers.
The intention behind a cost leadership strategy is to be a lower cost producer in comparison to your competitors. There are two traditional options for businesses to increase profits – decreasing costs or increasing sales. In a cost leadership strategy, the concentration is on acquiring quality raw materials at the lowest price. Business owners additionally need to use the best labor to convert these raw materials into valuable goods for the consumer. Thus, this strategy is especially beneficial if the market is one where price is an important factor.
Focus – Differentiation Focus and Cost Focus
If the business realizes that marketing to a homogenous customer niche would not be an effective line of action for a particular product the business is selling, it can adopt the focus strategy. This strategy involves the business tailoring its marketing endeavors and service to one or more select customer segments and excluding the other segments.
There are two variants of the focus strategy. In cost focus, the aim of the business would be to have an advantage over its competitors with respect to cost in its target segment. Thus, an electronics store may have the aim of being the cheapest electronic store in a particular town but not essentially the cheapest overall. A differentiation focus strategy takes advantage of the special needs of consumers in specific segments and seeks differentiation by way of marketing its product as unique in certain respects. For example, a company may bring out a product specifically designed for left-handers.
Classification according to Michael Treacy and Fred Wiersma
Michael Treacy and Fred Wiersma are the authors of The Discipline of Market Leaders, a book published in 1995 which tells people what it takes to become a market leader and stay one. In their book, the authors describe three value disciplines or generic competitive strategies namely operational excellence, product leadership and customer intimacy. The authors’ main theory or argument is that companies should select and then achieve market leadership in any one discipline and also ensure acceptable performance in the other two.
The objective of this strategy is to achieve cost leadership. The strategy focuses on automating work procedures and manufacturing processes so as to streamline operations and bring down costs. The approach that is adopted by such well-known names as IKEA, McDonald’s, Southwest Airlines, Walmart, and FedEx, lends itself to standardized, transaction-oriented and high-volume production that hardly requires much differentiation.
Operational excellence is an ideal strategy for markets where customers prefer cost to a choice. This is frequently the situation with respect to commoditized, mature markets where cost leadership offers a medium for continued growth. Businesses that excel in this strategy have a rule-based, standardized operation and strong organizational discipline. They are also effectively centralized. Disciplines such as SCM, TQM, and Six Sigma are fostered in a volume-oriented business model.
The intention behind this strategy is to develop a culture that continuously introduces superior goods to the market. Product leaders are aware that brilliance in creativity, teamwork, and problem-solving is crucial to their success. These leaders are able to accomplish first-class market prices owing to the experience they develop for their customers. Included among the corporate disciplines they cultivate are research portfolio management, product management, talent management, teamwork, and marketing.
Product leaders work towards leveraging their expertise across organizational and geographical boundaries by achieving expertise in disciplines such as knowledge management and collaboration. Apple, BMW, Fidelity Investments, Pfizer and many other companies in the consumer electronics, automotive, fund management and pharmaceutical industries adopt a product leadership strategy.
As the term suggests, customer intimacy is about intimacy or closeness to the customer. It is about precision in segmenting and targeting markets and customizing offerings to perfectly match the demands of those markets. Companies practicing successful customer intimacy blend comprehensive customer knowledge with operational flexibility to quickly respond to practically any need, from product personalization to meeting special requests. So essentially, product development, executive functions, administrative focus and manufacturing should all be aligned around the requirements of the individual customer.
The solutions that materialize from a customer intimacy strategy are rarely the cheapest or the most original for the customer but are rather considered “good enough.” Lexus, Amazon.com, IBM, and Virgin Atlantic are some examples of companies that pursue this strategy.
HOW TO DEVELOP A COMPETITIVE STRATEGY
Some questions to help you define or develop your competitive strategy
What is the intention of your business?
Purpose delineates the reason for your organization’s existence. According to management guru Peter Drucker, a business’s purpose should lie outside of itself and in society. Thus, his argument is that the only convincing definition of business purpose is to generate a customer.
What are its core competencies?
Recognizing these competencies of your company and leveraging them is helpful to achieve a competitive advantage. Core competencies are those organizational competencies which are either exclusive to your company or which your company carries out better than your rivals and which create a considerable cost advantage or largely contribute to customer perceived value. Organizational competencies are the functional competencies and experience a company possesses in terms of how it combines and integrates individual employee skills to accomplish outcomes. A few examples of such competencies are:
- Experience in putting together and programming computer managed cutting machines
- Experience in the design, manufacture and testing of miniaturized solid-state electronic parts
- Experience in budgeting, planning and controlling costs
- Experience in fulfilling difficult customer delivery schedules
When listing out core competencies, you can include those skills that present the product characteristics, intangible features and service features that persuade your customers to buy your good or service instead of that of a competitor.
What is your business today?
You can use your answers to previous questions to define your business. This definition of your business as it is currently will provide the focus required to make your present operations effective.
What is your primary method of growth?
Do you plan to grow by acquisition or internal expansion? Whichever be the method you choose; it calls for a distinctive competitive strategy. If you opt for acquisition, delineate your acquisition criteria.
What are your product and market priorities?
To answer this question, you can think along the lines of:
– which market segments are of top priority and the goods or services you offer to these niches,
– which specific markets and/or goods:
- get routine priority,
- are being abandoned,
- receive decreased effort and resources,
- are in the process of creation, for the future.
What are your goals for the future?
List your aims that delineate the outcomes you wish to accomplish. Your goals should cover all activity that adds to the achievement of your vision. This includes operating, financial, social and other conditions that are required to bring your vision to fruition. Decide on the indicators that you can utilize to measure goal performance. Specify the qualitative or quantitative values of those indicators that would describe goal achievement.
What obstacles do you need to overcome to achieve those goals?
Try to spot the major obstacles to accomplishing each of your business goals. You may notice that because obstacles or barriers are to do with system relationships or root causes, they are comparatively few. Just one barrier can hamper multiple goals. It is up to your business to overcome the considerable barriers associated with your industry’s competitive structure.
Which strategic approach would you utilize to overcome those obstacles?
Decide on the strategic approach you intend to adopt (offensive, defensive or guerilla) to handle the obstacles to goal achievement and the strategies you use or would use to accomplish a competitive advantage.
- An offensive strategy would be suitable if it is possible to overcome, neutralize or alter some chief barriers by the application of available resources.
- A guerilla strategy would be suitable if it is possible to eliminate, minimize or circumvent the chief barriers by reducing the scope of your operations.
- A defensive strategy would be suitable when neither of the above conditions is satisfied.
What is the scope of your products, services, and markets?
Consider what the main area of concentration of your marketing strategy is. You may want to concentrate on your current markets, or you may want to develop fresh markets. In the former case, you may have to come up with new goods or services to keep your existing markets happy. In the latter case, you would probably be increasing the penetration of your existing goods and services by taking them to new markets. If your marketing endeavors lack focus, they would only be weakened and their effectiveness decreased.
How competitive intelligence helps
Competitive intelligence involves continuously collecting and studying information about a business’s competitors, customers and industry in a legal and ethical manner so as to achieve a business edge over the competitors. As the information collection must be done lawfully, it should be taken only from publicly available sources. The intelligence gained can include the competitors’ strengths and weaknesses, their competitive strategy, their response to changes in the external environment and any new moves they would possibly make.
By becoming aware of such things as what the competitors are doing or may do in future and the areas where they are weak, a business can countervail the latter’s progress by devising a suitable competitive strategy and making calculated business decisions based on the information gathered. The business would also be able to achieve a sustained competitive advantage.
Competitive intelligence tactics can include deeply studying the rivals’ annual reports to get a clue of their plans and strategies, perusing trade journals that speak of their achievements and plans, or using various online tools to find out such things as their chief keywords and number of website visitors.
Here is a look at two companies – Amway and Aldi and some of the competitive strategies they adopted to take their business forward.
Amway is an American company that utilizes multi-level marketing strategies to sell a range of products chiefly in the beauty, health and home care market. The company also offers a range of third-party solutions.
Amway’s good utilization of market research has helped the company foretell occurrences within markets and to bring out new ideas that takes advantage of opportunities and decrease any related problems. By way of competition analysis, marketers within Amway are able to determine how well products are fulfilling customer requirements and which areas of competitor brands are pleasing to customers.
Market development is concerned with taking existing products into totally new markets. One technique Amway adopts for market development is to widen the ways by which individuals can be associated with the Amway business. The company created a structure termed the IMC model which helps with exactly that. The letters I, M and C each represent a different kind of involvement or association.
- I stands for Independent Business Owners (IBOs)
- M stands for Members
- C stands for clients of the IBOs
Members are a new kind of customer who directly deal with Amway. They are permitted to purchase products at a price comparable to that paid by IBOs. However, they do not take part in the Amway Sales and Marketing Plan.
Aldi is a principal global supermarket chain with more than 9000 stores in more than 18 countries and a revenue of €53bn (2009). For Aldi, operating in a productive manner means reducing expenses in all aspects of the business. Some of the chief areas where Aldi is able to keep costs low are by saving space, time, energy, and effort. Aldi’s manner of achieving this is to manage its business around the theories of lean thinking. Lean production is about getting rid of waste and therefore, utilizing fewer materials, labor, time and space which in turn decreases costs.
Aldi’s focus on lean thinking means that while other food retailers have complicated displays and additional promotions and services that attract customers, Aldi’s main purpose is to deliver quality and value to its customers by being efficient and fair in all they do. Aldi passes over their savings from lean thinking to their customers so that the latter benefit from value for the money.
One example of how Aldi applies a time-based management approach in its lean thinking is this. With respect to its supply chain, up to 60 percent of the supermarket chain’s vegetables and fruits are sourced locally wherever possible, thereby bringing down the need for expensive and long delivery journeys.
Competition needn’t be dreaded but rather welcomed with open arms. Show your business to be extraordinary and a cut above the rest with well-thought-out competitive strategies.
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