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What are the top four competitive strategies in business? Which of these strategies is right for your operation?
A competitive strategy is a tactic businesses use to gain an advantage in the market. Even within a niche market, there may be hundreds or thousands of markets to compete with, so having a good strategy can make your business more attractive to consumers.
We’ll look at the four most common competitive strategies in business and explain how each of them can put you on top.
1. Cost Leadership Strategy
The first competitive strategy in business we’ll discuss is the cost leadership strategy—setting the lowest market prices for your products and services while reducing operational costs. In Competitive Strategy, Michael Porter explains that this strategy attracts price-sensitive customers, safeguards against more expensive substitute offers, and makes it difficult for both existing and new competitors to expand their market share.
To implement this strategy, Porter suggests that you identify areas to reduce operational costs without compromising quality or customer satisfaction. Achieve this by:
- Streamlining operational procedures: Simplify and optimize internal processes to eliminate inefficiencies, reduce waste, and improve productivity.
- Negotiating favorable supplier contracts: Secure more advantageous terms, such as lower prices, extended payment terms, or volume discounts.
- Capitalizing on economies of scale: Maximize cost advantages through increased production or expansion, benefiting from bulk purchasing, efficient resource utilization, and spreading fixed costs over larger output volumes.
It should be noted that this strategy works best for large-scale operations, such as chain stores. Small businesses likely can’t afford to reduce operating costs while also upscaling production. Large businesses like Walmart can take this risk because a high volume of sales is almost always ensured.
For instance, Walmart’s founder Sam Walton believed that lower prices brought in more customers. Even though a lower markup meant lowered profits, they could more than make up for it with higher volume.
- In Sam Walton: Made in America, Walton repeatedly mentions bins of “ladies’ panties, three for a dollar.”
- Some popular items like makeup and antifreeze are sold at cost, drawing in customers who buy marked-up (but still cheap) items.
Advice on Reducing Operational Costs
Josh Kaufman (The Personal MBA) adds to Porter’s advice by explaining that the best way to reduce costs is to make sure that your business operations are as efficient as possible. The more efficient your operations, the more time and money you save running your business—and the more financially viable it is to charge low prices without compromising on quality or customer satisfaction.
According to Kaufman, to optimize your operations, you first need to understand all of the tasks that your business relies on. Consider your product or service and write down all of the steps it takes to:
- Create it: This includes designing, manufacturing, and ensuring quality control.
- Market it: This includes your branding and media campaigns.
- Process orders: This varies depending on whether you deal directly with your customers or use intermediaries to handle your orders.
- Deliver it: This depends on the nature of your product or service and whether you rely on distribution channels to fulfill your orders.
- Follow up on it: This includes providing customer support and troubleshooting problems.
Once you’ve outlined all of the tasks involved in running your business, consider how you can make incremental improvements to save time, effort, and money. Kaufman suggests considering ways to:
- Streamline tasks: This might include automating some of the tasks or eliminating unnecessary tasks.
- Cut costs while maintaining quality: This might include cutting intermediaries out or changing suppliers.
- Improve processes: This might include investing in resources such as equipment or more employees.
Finally, Kaufman suggests prioritizing the improvements that will make the biggest difference to your efficiency and profits.
2. Differentiation Leadership Strategy
The second competitive strategy in business is the differentiation leadership strategy—offering something unique to the market. According to Competitive Strategy, the main advantage of this strategy is that it acts as a defense against buyers looking for the cheapest deal. This is because, without comparable alternatives, buyers have no choice but to purchase from you—even if your prices are high. Additionally, offering something distinctive captures customer attention and cultivates loyalty among those who value uniqueness and are willing to pay premium prices for it.
To implement this strategy, Porter recommends that you invest in innovation and conduct market research to identify opportunities for setting your business apart from the competition. This can involve differentiating your branding, your packaging, your product or service features, or the way you interact with customers.
How to Effectively Differentiate Yourself
William Luther (The Marketing Plan) expands on Porter’s advice by identifying two ways to establish your unique position in the market:
1) Define your brand’s personality: Consider how you want your customers to perceive your business. What will influence them to choose you over competitors and remain loyal to you? For example, if you intend to target eco-friendly consumers, you can appeal to them by ensuring that all of your operational procedures are as environmentally friendly as possible.
Then, look for ways to bolster customer perception by engaging in activities that will garner positive publicity. For example, eco-friendly consumers are more likely to buy from and remain loyal to companies that publicly show their support for environmental programs and sustainability projects.
2) Reinforce your marketing message: Focus your marketing message on the unique benefits that you’re offering in a way that appeals to your target market. Aligning your message in this way ensures two things: that your target audience will pay attention to your marketing message, and that they’ll immediately understand why your offer is superior to others in the market.
Once you’ve defined your marketing message, target the media that your potential customers engage with the most often, and ensure that all of your marketing materials reinforce the same benefits. Reinforcing your message this way guarantees that customers will automatically associate your product or service with the fulfillment of their needs—thus forgetting your competitors.
3. Cost Leadership Strategy
You’ve got a product that provides unique value, but you need to price it right. Blue Ocean Strategy by W. Chan Kim and Renée A. Mauborgne recommends a three-step competitive strategy in business for selecting your price and ensuring the profitability of your product.
Like the cost leadership strategy, the cost-focus strategy wants to provide the lowest price to customers. The difference between the two is that the cost-focus strategy hones in on specific market segments, rather than relying on the broader market to reduce the risk that comes with the cost leadership strategy.
Step 1: Identify Your Price Range
Kim and Mauborgne recommend cataloging the price of your customers’ alternatives and using this data to establish a range of prices that will be competitive with these alternatives. They say this will help to maximize your customer base, and thus your revenue.
Step 2: Choose a Price Within the Range
Once you’ve identified your price range, Kim and Mauborgne advise you to select a price in that range based on two characteristics:
- Defensibility: The harder it will be for your competitors to imitate your product (due to patent protection, trade secrets, or other unique advantages that your company has) the higher you can set your price.
- Scale: The greater the economies of scale (how much the cost per unit decreases with increasing volume) and the greater the network effects (how much the usefulness or attractiveness of your product increases as the user base grows), the lower you’ll want to set your price, to stimulate broad adoption.
Step 3: Manage Costs to Achieve a Profit Margin
Once you have your strategic price, Kim and Mauborgne advise you to calculate your target cost by deciding what profit margin you want and then applying it to your chosen price. They argue that you must not let costs dictate prices, nor should you lower your product’s benefits to match its costs, because doing so will jeopardize mass adoption. If you cannot reduce your costs to a level that allows for adequate profit, then they say your idea won’t work and you need to go back to the drawing board.
4. Differentiation-Focus Strategy
The last competitive strategy in business is the differentiation-focus strategy. This is similar to the differentiation leadership strategy because both attempt to sell a unique product. The biggest difference between the two is that the differentiation leadership strategy tries to appeal to a broader market, whereas the differentiation-focus strategy appeals to a smaller, more niche market segment.
The 4-Hour Workweek by Tim Ferris says it’s best to choose a market that you’re a part of or have a good understanding of so you know its needs.
- Think about what groups and organizations you’re part of, either professionally or personally. What products and subscriptions related to your market do you own? For example, when the author started his business, he was a student athlete, so he focused on that demographic.
- Additionally, your target market isn’t necessarily limited to the people who actually fit your demographic, they’re also people who want to fit that demographic. For example, iPod ads feature people in their 20s and 30s, but a lot of people want to feel young and cool, so people of all ages buy the iPod.
It’s important to choose a niche market specifically, because if your market is too broad, there’s a lot of competition and a lot of free information, and it’s expensive to advertise to such a big group. For example, the student athlete market is large and scattered. Ferris chose to focus on athletes in specific sports, martial artists, and powerlifters for his business.
It’s also important that there’s a way for you to reach your market. If you’re going to be advertising your product in magazines, so do some research:
- Of the markets you’ve brainstormed, which of them have interest-specific magazines? Look at bookstores or in Writer’s Market to get a sense of the magazine options.
- Call these magazines’ ad departments and ask for their rates, readership, and samples. Look in the back issues for ads by direct-to-consumer sellers. If you find that these sellers often take out ads in this magazine, that means that they’re making money from advertising in this specific magazine, and you can too.
Before moving on to the next step, confirm your chosen market meets the following criteria:
- You’re familiar with it.
- A full-page ad in its magazine costs less than $5,000.
- The magazine has a readership of at least 15,000.
Final Words
The great thing about these competitive business strategies is that you don’t have to pick just one. You can implement two or more of these strategies at once in your business plan to stay at the top of your game. Just make sure you don’t overestimate your abilities; even big businesses can take big hits from time to time, so it’s important to know your limits as you try to remain a worthy opponent to your competitors.
Which of these do you think is the most effective competitive strategy in business? Let us know in the comments below!
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