An Overview Of Competitive Strategies And Theories

Introduction

So, what does it mean to be competitive and what is strategy? Well, the Oxford Dictionary says “Competitive: used to describe a situation in which people or organizations compete against each other” (Oxford Dictionary, n. d. ) and “Strategy: a plan that is intended to achieve a particular purpose” (Oxford Dictionary, n. d. ). In almost every aspect of life, you could employ a strategy. There is always some type of competing factor or competitor in whatever you do and having a strategy can give you the advantage you need to complete your task or competition to the best you can.

The greatest boxer of all time Muhammad Ali famously used strategy. When he went into the ring against George Foreman (yes, he of the George Foreman grill) in Zaire in 1974, he had a plan to win the world title back off his bigger more powerful opponent. Ali knew he needed an edge, a plan, a strategy so this is what he did. Ali stayed on the ropes and absorbed the punches of his adversary for several rounds and waited for him to tire or punch himself out. When Foreman did as Ali had anticipated and started to show fatigue, he seized his opportunity and knocked his opponent to the floor and in doing so he achieved his goal. A few minutes later his hand was held aloft in the center of the ring and he was world champion again. Ali later named this strategy “rope a dope” (Sports Illustrated, 2009). The strategy won the fight for Ali. If he had gone into the fight and tried to outbox Foreman, he would have lost because Foreman was far stronger and far more powerful than he was.

Business has always had strategies. Ever since the day two people entered the same marketplace there has been competitive strategies. Not every task is the same or as difficult as facing George Foreman in a roped-off square, but in business, every task should be analyzed, and an appropriate strategy should be created to achieve the best outcome for that task. Failing to do so properly can be the death of whatever the project is that you are facing. This paper will investigate and take a closer look at competitive strategies and the theories behind them.

Business Strategy

In business, you need to have a competitive strategy. Failing to do so will mean you will find it very hard to attract custom. You must choose the right strategy for your business. Not every business has the same product, competition, logistics or goals. There are so many variables and Martin Reeves of BCG Henderson Institute (a global think tank on strategy) and regular TedTalk speaker believes “One Approach To Strategy Does Not Fit All” (Reeves, 2014). That said Harvard Business School professor Michael Porter isolates three come four major competitive strategies. The strategies he outlines (listed below) will not fit exactly to any one business model, but they contain valuable lessons that can be used by most strategies.

Porter's Generic Competitive Strategies

Porter maintains that a company’s position inside its industry decides how profitable it is. The one thing that keeps a company in profit is a competitive advantage. Companies can choose to be either of two things to achieve this. They can either be low cost or they can have a differentiation model. When these factors are combined with the scope of the companies work, they point to three generic strategies that help attain better profitability. These break down into three categories strategies, one of which can be split into two. The strategies are Cost Leadership, Differentiation and Focus. The Focus Strategy can be divided to make Cost Focus and Differentiation Focus. (Porter, 1985)

Cost Leadership

When using the Cost Leadership strategy, a company sets out to be the number one low-cost firm in their field. This can be achieved in many ways such as having very large production and being able to bring down the unit cost. The company could own the technology required to produce their product meaning no requirement to pay a manufacturer. They could have cheap access to the raw materials required. (Porter, 1985)

With a Cost Leadership strategy, a lot of parts of the company have to run very frugally which can lead to lesser service in some parts of the business compared to competitors. A good example of this would be Ryanair.

Differentiation

In a Differentiation strategy, a company seeks to set itself apart from its competitors by making itself unique. They build a brand based around what the customer thinks is important in the product. They build a loyal customer base and can charge a higher price based on these factors. (Porter, 1985)

Cost can be high with this strategy but loyal customers and high margins are a good reward. Apple would be a good example of this.

Focus

The Focus strategy takes a narrower scope and focuses on a more niche market. There are two types of focus strategies, Cost Focus strategy (a) and Differentiation Focus strategy (b).

A Cost Focus strategy picks a certain market and provides a low-cost product to that market and does not look to trade outside of this market. A good example of this would be Claire’s (jewelry chain store). Claire’s target young women with low-cost jewelry.

The Differentiation Strategy also picks a particular market, but their product is not about being low-cost, it is about giving their niche market customers the quality that they want. A good example of this would be Lamborghini, they produce high-end sports cars, but they are only aiming at the super-rich customer. (Porter, 1985).

Porter's Five Forces

The tool was created by Harvard Business School professor Michael Porter, to analyze an industry's attractiveness and likely profitability. Since its publication in 1979, it has become one of the most popular and highly regarded business strategy tools.

Porter recognized that organizations likely keep a close watch on their rivals, but he encouraged them to look beyond the actions of their competitors and examine what other factors could impact the business environment. He identified five forces that make up the competitive environment, and which can erode your profitability. These are:

• Competitive Rivalry. This looks at the number and strength of your competitors. How many rivals do you have? Who are they, and how does the quality of their products and services compare with yours? Where rivalry is intense, companies can attract customers with aggressive price cuts and high-impact marketing campaigns. Also, in markets with lots of rivals, your suppliers and buyers can go elsewhere if they feel that they're not getting a good deal from you. On the other hand, where competitive rivalry is minimal, and no one else is doing what you do, then you'll likely have tremendous strength and healthy profits.
• Supplier Power. This is determined by how easy it is for your suppliers to increase their prices. How many potential suppliers do you have? How unique is the product or service that they provide, and how expensive would it be to switch from one supplier to another? The more you have to choose from, the easier it will be to switch to a cheaper alternative. But the fewer suppliers there are, and the more you need their help, the stronger their position and their ability to charge you more. That can impact your profit.
• Buyer Power. Here, you ask yourself how easy it is for buyers to drive your prices down. How many buyers are there, and how big are their orders? How much would it cost them to switch from your products and services to those of a rival? Are your buyers strong enough to dictate terms to you? When you deal with only a few savvy customers, they have more power, but your power increases if you have many customers.
• Threat of Substitution. This refers to the likelihood of your customers finding a different way of doing what you do. For example, if you supply a unique software product that automates an important process, people may substitute it by doing the process manually or by outsourcing it. A substitution that is easy and cheap to make can weaken your position and threaten your profitability.
• Threat of New Entry. Your position can be affected by people's ability to enter your market. So, think about how easily this could be done. How easy is it to get a foothold in your industry or market? How much would it cost, and how tightly is your sector regulated? If it takes little money and effort to enter your market and compete effectively, or if you have little protection for your key technologies, then rivals can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it.

Note:

According to Porter, these Five Forces are the key sources of competitive pressure within an industry. He stressed that it is important not to confuse them with more fleeting factors that might grab your attention, such as industry growth rates, government interventions, and technological innovations. These are temporary factors, while the Five Forces are permanent parts of an industry's structure.