What Is Competitive Strategy? 4 Types of Competitive Strategy

A competitive strategy is a long-term plan that a company uses to gain an advantageous market position over its competitors. Business leaders develop competitive strategies as part of strategic planning initiatives. These leaders look for ways to stand out from the competition using tactics like product differentiation, superior supply chains, and offering the lowest cost to consumers. Then, through a series of strategic decisions, they employ tactics to lean into their differences and stand out from the competition.

When you think of iconic brands, you may view their success through the lens of quality products or market saturation. But behind these front-facing attributes lies a competitive strategy that has guided such brands to the top of the market.

Harvard Business School professor Michael E. Porter has broken strategic management into four generic competitive strategies, each with its own tactics for gaining a competitive advantage. Here are the four strategies as described by Michael Porter:

1. 1. Cost leadership strategy: In this business strategy, a company utilizes economies of scale to gain a price advantage over its competitors. By offering a good or service at a lower price than anyone else, you become the low-cost producer of your particular industry, thus earning yourself a competitive edge. This option typically requires a large-scale business with robust supply chains and distribution channels. Such businesses can invest heavily in ramping up production and sourcing raw materials, which lead to low costs in the long run.
2. 2. Differentiation leadership strategy: In this competitive strategy, you gain a competitive advantage by having a product that distinguishes itself from the competition. Examples of product differentiation include extra features, exceptional quality, and enhanced functionality. Companies embracing a differentiation leadership strategy can often charge a premium price for their wares, leading to higher profit margins.
3. 3. Cost focus strategy: This approach utilizes the basic philosophy of the cost leadership strategy but with a specific focus on a particular market segment. By targeting a specific sector and developing a targeted marketing strategy to pursue this sector, you can advertise at a lower cost than your competitors. You can use this cost advantage to pass savings on to your customers.
4. 4. Differentiation focus strategy: The differentiation focus strategy offers a specialized product to a specific market segment rather than the entire marketplace. Think of a military contractor that only serves the armed forces or a parts manufacturer that only provides screws and ball bearings to a particular type of factory. These companies can only serve a limited number of clients, but they excel in their specialized fields.

Consider the following case studies of competitive strategies leading a business to success.

1. 1. Major retailers: Large retail chains, such as big box stores, which have appeared all over the country, are an example of cost leadership as a competitive strategy. By utilizing massive economies of scale, they can leverage their bargaining power over shipping routes, warehouse infrastructure, and logistics to drive their prices lower than their competitors.
2. 2. Gaming computers: With a large market for video game hardware, some computer builders have found a way to use differentiation leadership to focus on a particular segment of the market, such as those who are willing to pay premium prices for home computer gaming systems. These are often highly customizable and expensive, with brands using their quality and specialization to justify higher prices.
3. 3. Eco-tourism: Tourism is a massive worldwide industry. Some companies have taken to offering vacations that appeal specifically to customers who are seeking sustainability and who will pay a premium for this kind of getaway. By targeting a subgroup with a high-quality, specialized experience, these companies can use a focus differentiation strategy.

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