What is Competitive Strategy?
It’s imperative for organizations to have a robust, battle-tested competitive strategy that guides their decision-making and resource allocation. A competitive strategy dictates how an organization can build a competitive advantage over competitors, creating a superior market position that enables them to perform better in the long term.
The foundations of competitive strategy are found in legendary academic Michael Porter’s 1980 book Competitive Strategy: Techniques for Analyzing Industries and Competitors. Forty years on, Porter’s thinking remains as influential as ever, acting as the North Star for competitive strategists all over the world.
Porter identified three key competitive strategies, each of which we’ll explore here. They are:
- Cost leadership
- Differentiation
- Focus
As industries become ever more complex––and competitive––the utility of this simple, tried, and tested framework provides clarity for organizations. A well-designed competitive strategy enables organizations to maintain a sustainable competitive advantage, leading to consistent profitability.
Fahrenheit’s competitive intelligence team uses Porter’s competitive strategy model as a foundational aspect of our consulting engagements. This model, along with several others, enables organizations to understand their competitive positioning, identify the key tenets of their competitive strategy, and design and execute strategies to build a sustainable competitive advantage.
What is Competitive Strategy?
Competitive strategy is the long-term action plan that an organization develops and executes to build and sustain a competitive advantage. The aim of a competitive strategy is to create a defensible position in the market that enables the organization to achieve a superior Return on Investment (ROI).
Building a strong competitive strategy is particularly important in highly competitive industries, such as the pharmaceutical industry, the insurance industry, or the consumer packaged goods industry.
Developing a competitive strategy is a relatively detailed process driven by significant analysis. Before settling on a strategy and planning execution, organizations must first conduct a comprehensive analysis of their competitive environment. This typically involves competitor analysis, market research, and competitive intelligence tools. It’s often best practice for organizations to work with experienced consultants to develop a competitive strategy, and to define an ongoing process to monitor their competitive landscape in great detail.
Exploring The Three Types of Competitive Strategy
Porter defines three types of competitive strategies: cost leadership, differentiation, and focus. The focus strategy has two distinct branches: cost focus and differentiation focus. All of these types of strategy are universally applicable, meaning they can be applied to product or service-based businesses in various industries.
Let’s explore each of these types of competitive strategy in more detail.
1. Cost Leadership
In pursuing a cost leadership strategy, an organization aims to offer the lowest prices in their market for a similar quality of product or service. To achieve cost leadership, organizations may need to make investments in their supply chain, labor force, or in technology.
A cost leadership strategy can be challenging for a small organization to implement, as lowering costs often requires great economies of scale. Greater scale often enables organizations to realize efficiencies in various operational aspects. There are several ways to achieve this, including:
- Maximizing asset utilization
- Lowering operating costs
- Vertical value chain integration or control
Examples of Cost Leadership Strategies: Walmart, Southwest, IKEA
2. DIFFERENTIATION STRATEGY
A differentiation strategy aims to ensure that an organization’s products or services are distinctly different from those of competitors. To reliably market products and services that are notably better than those of competitors, organizations have to invest in research and development (R&D) that enables them to deliver superior value to their customers.
There are a number of ways for organizations to differentiate themselves, and it’s important to provide a well-defined differentiator that customers can easily understand.
When an organization successfully differentiates their products and services from competitors, they unlock the ability to charge premium prices, generating superior financial returns. Pursuing a differentiation strategy requires a keen focus on customer needs, in addition to a comprehensive understanding of market trends and how they are predicted to develop.
Examples of Differentiation Strategies: Apple, Tesla, Whole Foods
3. FOCUS STRATEGY
When an organization adopts a focused approach to competitive strategy, they identify a few well-defined segments of the market and tailor their offerings to the specific needs and wants of these groups. Focus strategies are often employed by smaller organizations who lack the resources to pursue cost leadership or differentiation on the necessary scale.
There are two main forms of focus strategy: cost focus strategy and differentiation focus strategy.
Cost focus strategy is similar to a cost leadership strategy, but is focused on a small segment of the market where the organization is able to offer the lowest prices. Cost focus strategies are particularly valuable for organizations focusing on local geographic markets with very specific needs.
A differentiation focus strategy focuses on providing unique value to a small sector of the market. This is commonly achieved by conducting market research to understand the importance of various product features, and then closely tailoring product and service offerings to meet the needs of customers.
Building & Executing A Competitive Strategy for Your Organization
Organizations should only pursue one of these strategies. Those that try to employ all three of these strategies at once often end up with no strategy at all, and will fail to build any competitive advantage.
When determining which strategy to pursue, organizations must take a self-critical look at their core competencies, competitive positioning, and the perception consumers hold of their brand. It’s often helpful to work with external strategy consultants to lead this process, ensuring impartiality and a high level of analysis.
Executing a competitive strategy effectively requires a commitment to investing in competitive intelligence capabilities and technologies. This enables organizations to track their competitive positioning, closely monitor competitors, and understand market trends as they evolve.
At Fahrenheit, our team has experience providing competitive strategy consulting to leading Fortune 500 businesses across a variety of industries.
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Peter Grimm leverages his background in national security and experience as a strategy consultant and PE-backed CEO to help clients navigate rapidly changing environments. He is skilled in corporate strategy, market analysis, competitive intelligence, disruption planning, disruption preparedness, and organizational leadership.
Following service in the US Navy and as a counterterrorism analyst at a US government agency, Peter spent 8 years in the Strategy Practice of Deloitte Consulting. Peter then served as CEO of a PE-backed consulting and technology firm, leading the company through two successful exits. He’s helped middle market companies, Fortune 500 firms, and Federal agencies “see around the corner” and turn threats into opportunities.