Competitive strategy refers to how your business competes in a particular sector. Competitive strategy is concerned with how a company can gain a competitive advantage through a distinctive way of competing.
Today's dynamic markets and technologies have called into question the sustainability of competitive advantage. Under pressure to improve productivity, quality, and speed, business owners have embraced tools such as TQM, benchmarking, and reengineering. Dramatic operational improvements have resulted, but rarely have these gains translated into sustainable profitability.
And gradually, these tools have taken the place of a well thought-out strategy.
Even when there is existing competition, the business owner is often focused more on addressing the need than on addressing the existing competitors but a failure to create a competitive strategy will eventually create a business failure. Small businesses are usually created when an entrepreneur spots a need that is not met in the marketplace and jumps in to meet that need. There is often no significant competition at first for the entrepreneur's innovative idea, and a new category of product or service is born.
However, as a successful new business grows, competition almost always intensifies. To remain a leader in its field, the small business must become increasingly adept at anticipating and responding to the actions of competitors, especially larger competitors with "deep pockets." In other words, leveraging competitive strategy becomes more and more important as a small business becomes more established. Michael Porter of Harvard Business School, a leading competitive strategy theorist, advocates competitive strategy based on one of three distinct approaches: differentiation, cost leadership, and focus.
Competitive Strategy - Differentiation
When a business differentiates its products or services, it is offering the marketplace something that is perceived as unique throughout the industry. For example, a business might differentiate itself with special technology, as Range Rover did with its advanced four-wheel-drive systems. Differentiation can also take many other forms, such as brand image, features, dealer network or customer service.
Small businesses often differentiate themselves in the earliest stages by filling a new marketplace niche. However, unless special protection like a patent is in place, even these new niches become quickly crowded with competitors. Said another way, niche differentiation by itself is rarely sustainable over the long term.
In contrast with simple niche differentiation, something as basic as customer responsiveness, a key aspect of customer serviceman remain a differentiating competitive advantage. For example, consider this typical contrast between a small business and a larger competitor. Through frequent, direct and close customer contact, the typical small business has relatively immediate access to the customer's thoughts about the business: likes and dislikes, recommended changes, and so forth. In contrast, the typical larger competitor is highly departmentalized, with many employees insulated from direct customer contact. It can compensate with market research, but this is a more time consuming effort than the immediate contact readily available to small businesspeople.
Astute small businesses continually solicit customer feedback. In this way, it becomes easier for them to stay a step ahead of larger competitors in providing the most desirable products or services. As small businesses continue to make rapid marketplace adjustments, they automatically differentiate themselves from less responsive competitors.
Customer responsiveness is just one way in which the small business can use differentiation to competitive advantage. It would he well worth your time to consider how this approach, or another practical form of differentiation, could benefit your small business.
A business pursues a focus strategy by tailoring its products or services to a particular consumer, segment of a product or service line, or geographic market. Within the context of this narrowly defined market, the focus-driven firm may also achieve differentiation and/or low cost leadership. However, it does not do so from the perspective of the entire market since it is serving only a small subset of this market. In essence, the focus-driven firm does what it does better than anybody else in its very select target market.
There are two classic competitive situations in which focus can become a desirable small business strategy. The first situation is one in which a business wishes to provide a product or service that is relatively unattractive to larger competitors. For example, Illinois Tool Works grew as a small business by manufacturing fasteners that are custom-designed for each purchaser. While this is a profitable undertaking, the extensive retooling effort and low production quantities make this venture unattractive to most potential competitors.
The second situation in which a focus strategy can be desirable is in "owning" a segment of the market where competitors are weak. For example, Porter Paint has chosen to market its paint to professional painters rather than the do-it-yourself market dominated by larger paint competitors. The company provides free paint-matching services, rapid worksite delivery and free coffee rooms for painting professionals visiting its factory stores.
No matter where you live, you are probably surrounded by small businesses that deal exclusively with the local market. For example, there may be a nearby firm that provides advertising services just to your town or city; or a catering company that prepares and delivers food on a local basis only; or a retail store that sells only memorabilia about your community. Whatever form these businesses take, they are all geographically focused.
Setting Prices for Services and Products
Small Business Secrets
Competitive Strategy - Products and Services
Try to describe the benefits of your goods and services from your customers' perspective. Successful business owners know or at least have an idea of what their customers want or expect from them. This type of anticipation can be helpful in building customer satisfaction and loyalty. And, it certainly is a good strategy for beating the competition or retaining your competitiveness. Describe:
- What you are selling.
- How your product or service will benefit the customer.
- Which products/services are in demand; if there will be a steady flow of cash.
- What is different about the product or service your business is offering.
'We offer great service', says the ad. So do the ads for each of the competitors. If every business offers great service how can I distinguish one from the other? Price? Location? A cheery face?
Customer expectations are on a rising curve. That trend will certainly continue into the next century. In our increasingly competitive climate we must go faster and faster just to stay in the same place. The key is doing the right thing at each customer contact including each step in the service, sales and marketing process.
To do that we must focus on what we do -- particularly what we do that our competitors do not. Then promote the differences that distinguish. Here are some things to look for:
No Problem! The business exists to fulfill customer's needs. The customer is the reason for being and should not be considered a nuisance or problem.
Qualify. Make sure you are doing business with those customers that fit your 'customer profile'. Some business you can live without.
Hire Employees that are customer oriented. If an employee does not like people they will not be able to give good service.
Have a Strategy that motivates employees to provide the level of service you want. Employees must have the responsibility, incentive and skills to go beyond doing tasks to generating solutions. Your strategy should include a way to make your customers glad to have contact with you each and every time.
Train employees in service delivery. This would include dealing with customers of diverse personalities and attitudes. It is also important that employees be able to solve customer problems on their own. Remember, employee intellectual capacity is what keeps customers happy.
Enough. Have enough employees to handle the job. 30 Customers cannot be handled at once by one employee.
Customer Benefits.Understand what they value most. What is involved in creating that value?
Cost-Effective. Make sure the services you deliver are profit-generating. If the services you offer do not provide profit or other benefits to your business why are you doing them?
Market Driven. Be market driven and not competitor driven. Move faster than your competitors, provide complete solutions and concentrate on satisfying end-user demands. You will find your business pulling away from your competition.
Enthusiasm.If you and your employees are not excited about your business why should your customers be? Enthusiasm has to be genuine to be effective. Consumers spend money where they feel good.
Expectations. Make sure your customers know what to expect from your product or service. If their expectations are too high they will never be satisfied. It is better to undersell and overdeliver.
Reliability. Be reliable, consistent and quick to respond.
Competitive Strategy - Ask Your Customers!
Survey, Survey, Survey. You must keep a close watch on your customer's changing needs. Watch for what they pay for and not just what they say. Ask the tough questions: are you satisfied with the value you receive from us? how well do we communicate with you? is there anything we should contact you about now? what is it you really want?
Superb customer service should make your customers so happy that they will sell you over and over again to others. At a certain point a relationship will be established that is so strong your customers will actually feel an obligation to do business with you. In the day of the non-loyal consumer that is a difficult level to achieve but that is when you truly know you have satisfied customers.
Porter five forces analysis is a framework for industry analysis and business strategy development. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit.
Three of Porter's five forces refer to competition from external sources. The remainder are internal threats.
Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models, have been able to make a return in excess of the industry average.
Porter's five forces include - three forces from 'horizontal' competition: the threat of substitute products or services, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers.
Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis, which he found not rigorous and ad hoc. Porter's five forces is based on the Structure-Conduct-Performance paradigm in industrial organizational economics. It has been applied to a diverse range of problems, from helping businesses become more profitable to helping governments stabilize industries.
Competition is a way of life. We compete for jobs, promotions, scholarships to institutes of higher learning, in sports-and in almost every aspect of your lives. Nations compete for the consumer in the global marketplace as do individual business owners. Advances in technology can send the profit margins of a successful business into a tailspin causing them to plummet overnight or within a few hours. When considering these and other factors, we can conclude that business is a highly competitive, volatile arena. Because of this volatility and competitiveness, it is important to know your competitors.
Questions like these can help you:
- Who are your five nearest direct competitors?
- Who are your indirect competitors?
- How are their businesses: steady? increasing? decreasing?
- What have you learned from their operations? from their advertising?
- What are their strengths and weaknesses?
- How does their product or service differ from yours?
Start a file on each of your competitors. Keep manila envelopes of their advertising and promotional materials and their pricing strategy techniques. Review these files periodically, determining when and how often they advertise, sponsor promotions and offer sales. Study the copy used in the advertising and promotional materials, and their sales strategy. For example, is their copy short? descriptive? catchy? or how much do they reduce prices for sales? Using this technique can help you to understand your competitors better and how they operate their businesses.
Successful Competitive Strategy
A successful competitive strategy focuses on assessing your unique strengths, identifying growth opportunities, collecting competitive intelligence, and responding to competitive threats. It will effectively support your company’s top-line growth objectives by helping you develop a differentiated and sustainable competitive position.
You must draw upon your experience and realize the following benefits:
- Development of a best practice process to:
Long-term cause / effect scenario planning.
- Assess your company's strengths
- Assess the competitive situation
- Formulate the appropriate response
Once you have identified the right marketing mix for your business, you then need to select a suitable competitive strategy to ensure its success. Competitive strategies allow businesses to maximise their potential and compete effectively in the market.
All business situations are different, so there is no single strategy that is a perfect fit for all. However, the following are three types of commonly used competitive strategies that could suit your micro-business:
- Cost leadership strategy – aims to provide products and services at a lower cost than any of the competition.
- Differentiation strategy – focuses on creating a highly differentiated product line and marketing program to become the class leader in a particular industry.
- Niche strategy – often used by micro-businesses and focuses on effectively serving a very specific market segment rather than dealing with the whole market.
Choosing the right competitive strategy will align your marketing activities with your objectives and enhance the effectiveness of your marketing mix..
An advantage that a firm has over its competitors, allowing it to
generate greater sales or margins and/or retain more customers than its
competition. There can be many types of competitive advantages including
the firm's cost structure, product offerings, distribution network and
Competitive advantages give a company an edge over its rivals and an ability to generate greater value for the firm and its shareholders. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage.
Competitive Strategy - Competitive Advantage
There are two main types of competitive advantages: comparative advantage and differential advantage. Comparative advantage, or cost advantage, is a firm's ability to produce a good or service at a lower cost than its competitors, which gives the firm the ability sell its goods or services at a lower price than its competition or to generate a larger margin on sales. A differential advantage is created when a firm's products or services differ from its competitors and are seen as better than a competitor's products by customers.
What Can Make Differentiation a Practical Strategic Tool?
Organization seeks innovation
Demonstrated ability to survey dynamic environment and develop new product/services to fit the changing environment
Frequently and continually innovating, developing, and testing new products/services
Competitors are uncertain about prospector’s future strategic decisions and actions
Searches for market stability
Produces only a limited product line for a narrow segment of total potential market
Seeks to protect its well-established business
Does whatever is necessary to aggressively prevent competitors from entering their turf
Can carve out and maintain niches within their industries that competitors find difficult to penetrate
Strategy of analysis and imitation
Thoroughly analyzes new business ideas before deciding to jump in
Watches for and copies the promising successful ideas of prospectors
Lacks coherent strategic plan
Simply reacts to environmental changes
Makes strategic adjustments only when finally forced to do so
Unable to respond quickly to environmental changes because resources/capabilities are lacking or are not developed or exploited properly
A strong Business Plan may not guarantee success; but it could certainly prevent failure!
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