Which Competitive Strategy is Best for My Business?

When a company enters a market, they must decide how to compete. They must decide how they want to differentiate themselves from their competitors.

In 1985 in 'Competitive Advantage: Creating and Sustaining Superior Performance', Michael Porter introduced his three generic strategies for companies who want to compete in their market: low-cost leadership, differentiation, and focus.

You can use the following matrix to help you decide which strategic approach suits your business best. It helps to consider who is doing well in your industry—who has the most unique product or service? Who has the highest market share? What niched segments are being looked at by you or your competitors?

If you want above average returns Porter recognised you can only operate in one the of the three strategies, trying to be a master of two or more is bad for business.

You can use the model to ascertain the advantages of moving from one strategy to another. The traditional path is low cost to focused differentiation, to broader differentiation in the mass market.

What is Competitive Advantage?

In business, the term competitive advantage refers to a company's ability to provide products or services that are more valuable than those of its competitors.

For example, if a company has a competitive advantage in its pricing model, it will charge less for its products than its competitors because it is able to produce them at a lower cost. The company then uses that lower price as a way of attracting customers and increasing sales volume.

However, competitive advantage is not always about lowering costs and prices; sometimes it can be about providing an experience that the customer can't get anywhere else or providing something that no one else offers.

What is Market Scope?

Market scope refers to the size of a market. It is used to understand how much of a product or service consumers are looking for, and whether or not your business can fill that need.

If you want to know if your business idea has potential, you should first understand what market scope means. The more people who are interested in purchasing your product, the better!

While effective marketing strategies are essential, it's also critical to understand your product's standing in the market. Explore this concept further in our related post on Why Is Product Market Fit So Important?

The 3 Generic Strategy Types Are:

Cost Leadership

Cost leadership is a way of competing in the market by offering customers the best value for money. To be cost leaders, companies have to have lower costs than their competitors so they can offer cheaper products and services. This means that they need to find ways to reduce costs. For example, they might use technology or economies of scale to increase efficiency or lower their overheads.

Differentiation

Differentiation is a way of competing in the market by offering customers something different than your competitors do. Companies that differentiate themselves from their rivals may do so through unique product features, better offers or superior customer service. For example, they might offer goods at a premium price because they offer some feature that competitors don't provide (such as luxury) or produce goods with superior quality compared to others on the market (such as organic food).

Focus

Focus is a way of competing in the market by offering customers exactly what they want from you and nothing more than that. Companies that focus on one area can do it better than anyone else in the industry and so will attract customers who want this particular service or product. For example, if a company focuses on offering only high-end designer clothing, then it will attract high-income consumers.

Takeaway:

In conclusion, it is important for companies to decide how they want to compete in their market. If you do not compete in a way that is clear and distinct from other competitors, you will have difficulty standing out and gaining customers.

If you need help with Strategic and Tactical Planning please do get in touch, Adam Payne our founder is a specialist in this area having decades of experience in this very subject – contact Adam here.

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