Competitive strategy in business organizations

Competitive Strategy

In a free economy, a multitude of firms compete for the business of the same customer segment. Therefore, if a firm is to succeed in attracting and retaining the maximum number of customers from the targeted segment, it must develop and successfully execute a strategy that has a distinct competitive advantage over its rivals. Thus, a competitive strategy is defined as a plan that attempts to define a position for the business, which utilizes the competitive advantages that the business has over its competitors (American Marketing Association, 2004).

Of course, it is important for any competitive strategy to focus on competitive advantages, which can offer customers greater value, either by means of lower prices or by providing a greater benefit or service that justifies a higher price. In other words, it is key that a competitive strategy is consumer centric. Developing a competitive strategy, therefore, involves closely analyzing the competitive forces within an industry and/or business segment, based on which it would then be possible to determine the type of competitive strategy that a firm may be in a position to follow. In fact, this is the method followed by Michael Porter, who based on his work analyzing the competitive forces within an industry, suggested four generic business strategies that could be adopted to gain competitive advantage. The four forms of competitive strategy are: differentiation leadership; cost leadership; differentiation focus; and cost focus. The leadership strategies are designed to seek competitive advantage in a broad industry, while the focus strategies are more appropriate for narrow industries and market segments (tutor2u, 2004).

Thus, if a business is operating in a broad industry or market segment, it can choose to build a competitive advantage by differentiating its product or service in a manner that fulfills buyer criteria far better than competition. If the business is successful in doing this, it will also be in a position to charge its customers a premium price, which is justified by superior performance or the extra value added features. This point is well illustrated by the example of Mercedes cars, a brand that has continuously been able to adopt a stance of "differentiation leadership," and thereby command a premium in a broad industry. If, on the other hand, a firm is operating in an industry where it is difficult to credibly differentiate a product or service, the better strategic option lies in adopting a cost leadership position (tutor2u, 2004). In fact, in today's increasingly competitive global economy, cost leadership and focus is seen as equally, if not more key, than differentiation especially since the latter is becoming harder to achieve. This is evident in examples such as the now famous Dell Computers business model.

Focus strategies are used to build competitive advantages when businesses operate in a more narrow industry or market segment. Here, a business has a choice between aiming to differentiate its product or service to just one or a small number of segments (if it is confident of fulfilling special customer needs), or it can choose to seek a cost advantage. Successful niche retailers such as "The Perfume Shop," or specialist holiday operators like Carrier are good examples of a differentiation focus strategy, whereas many small retailers who feature own-label or discounted label products exemplify cost focus (tutur2u).