Competitive strategy refers to a way of creating competitive advantage over competitors. It represents a greater value for the customer, created either by lower prices or by providing greater benefits and services that justify higher prices.

Generally speaking, there are four possible ways to differentiate a business – to become a cost leader (meaning that you become the lowest-cost producer in the industry) and to become a differentiation leader (meaning that you compete in areas other than price valued by customers), both in a narrow or broad scope of business’ activities.

Choosing the right competitive strategy is crucial strategy development step for the corporate, business unit and products and/or services success.

Cost strategy

Cost strategy is built on no-frills. Cost leadership strives towards cutting costs to a minimum possible levels in order to provide customers with lower prices and thus boost their savings. Cost strategy prerequisites normally relate to high technical capabilities and access to capital for the company to invest in technology and assure economies of scale.

In most of the cases cost strategy for first-movers lead to significant increase in market share and capacity utilization, that further drives down costs.

Building a strategy on minimizing costs requires a company to achieve:

• High productivity
• High capacity utilization
• Use of bargaining power to negotiate the lowest prices for production inputs
• Lean production methods (e.g. JIT)
• Effective production process
• Effective distribution channels

Leading cost leadership brands have obtained a major success by introducing revolutionary business models built on a single base – the lowest possible prices for a given perceived value.

Differentiation strategy

Differentiation strategy is built on a belief that one needs a clear and unique positioning. Differentiation leadership focuses in providing perks that add value for consumers, while higher prices are a sort of “make up” for their higher costs.

Building a strategy on a differentiation requires a company to continuously invest in and develop:

• Superior product quality (features, benefits, durability, reliability)
• Branding (strong brand recognition, desire and loyalty)
• Industry-wide distribution across all major channels (i.e. the product or brand is an essential item to be stocked by retailers)
• Marketing capabilities (advertising, sponsorship etc.)

Differentiation strategy could be further divided into:

• Purification (decrease in price; decrease in perceived value) – examples: EasyJet, Tata, Logan etc.
• Hybrid (decrease in price; increase in perceived value) – examples: IKEA (SCM optimisation), Loreal (new brands as a response to crisis) etc.
• Sophistication (increase in price; increase in perceived value) – examples: Mercedes (status), VW (reliability); Toyota (TQM)

Despite the fact that these brands pointed out above achieve significant economies of scale, they do not rely on a cost leadership strategy to compete. Strong marketing capabilities enable them to sell products for a premium and at the same time persuade customers to become brand loyal.

Focus OF THE strategy

Cost strategy as well as differentiation strategy could be narrow or broad. Small and medium sized companies are often forced to become focused, namely a niche player, since they are unable to compete against better-resourced broad market companies’ offerings. Only true understanding of the market dynamics and customers’ unique needs in combination with unique low cost or well-specified products and/or services eventually result in strong brand loyalty.

How to successfully differentiate your products and/or services in the market? Are your products and/or services uniquely positioned in the market? If not – follow the steps written below:

Step 1: Examine  existing positioning of the company and its products and/or services in customers’ minds

Step 2: Choose the competitive strategy (cost strategy vs. differentiation strategy) you think you should be following

Step 3: Analyze the competition and determine the industry standard

Step 4: Study market dynamics and search for market gaps

Step 5: Choose your most appropriate competitive strategy and look for potential practical solutions

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OTHER RECOMMENDED TOPICS TO COMPETITIVE strategy

You are kindly invited to read also about:

• leading views on industry analysis (Porter’s five forces model)
• selected strategic management tool (Balanced scorecard)

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The client is a small company, operating in the plastic industry, specializing in the next generation packaging solutions. The company works for prominent clients from cosmetic, chemical, food & beverage, pharma and medical industry worldwide. The company is about to expand its presence in the Latin America. As planned, strengthening the presence in the emerging markets would most likely result in the projected two digit growth rates and EBITDA margins.

The client has developed strategic partnership relationship with its indirect competition all over the globe. Intense cooperation resulted in cost synergies and sharing of a supplier-side know-how. The indirect competitor’s owner has experienced a serious financial problems and thus a decision to divest the business has been accepted.

Addressing the pain:

Firstly, the client has decided for a general overview of the indirect competitor’s past operations. Based on the preliminary findings, the client has decided to continue only with the acquisition process of the most valuable asset – the existing customer database.

Later on the advisor has prepared the client a revision of the competitor’s past projects and their profitability analysis. The findings served as a base for the determination of key variables and preparation of the financial projections, calculation of synergies and customer database valuation.

In order to be able to achieve the full potential as planned in the financial projections, the client has been advised to employ competitor’s key sales personnel.

Results:

The acquisition of the customer database and complementary activities are expected to result in significant revenue and cost synergies and geographic risk dispersion.

Client’s testimonial:

It is very important to be aware of the fact that valuing the customer database from the perspective of “as is” projections and from the perspective of our business (reflecting our business model) varies. It messages significant synergies. Furthermore, taking over customer database with key employees is “a must” – it is a good oportunity to gain new capabilities.

Advisor’s thought:

The client is about to gain short term and long term boost in its operations through new emerging market penetrations and risk diversification. Last but not least, fulfilling the sales capabilities gap will enhance the company’s position and its ability to compete with significantly larger global players.

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