Competitive Strategy: Four Types of Competitive Strategy

The competitive strategy consists of the business approaches and initiatives undertaken by a company to attract customers and to deliver superior value to them through fulfilling their expectations as well as to strengthen its market position.

This definition of Thompson and Strickland emphasizes on ‘approaches and initiatives’ of managers in defining strategy. This means that competitive strategy is concerned with actions that managers undertake to improve the market position of the company through satisfying the customers.

Improving market position implies undertaking actions against competitors in the industry.

Thus, the concept of competitive strategy (as opposed to cooperative strategy) has a competitor-orientation. The competitive strategy includes those approaches that prescribe various ways to build sustainable competitive advantage.

Management’s action plan is the focus of the competitive strategy. management adopts an action-plan to compete successfully with the competitors in the market. It also aims at providing superior value to customers.

The objective of competitive strategy is to win the customers’ hearts through satisfying their needs and finally to attain competitive advantage as well as out-compete the competitors (or rival companies.).

Four Types of Competitive Strategy: Michael Porter’s Four Generic Strategies

Michael Porter has identified four types of competitive strategies that can be applied in any business organization irrespective of the size and nature of products. Because of their susceptibility to common use by all business enterprises, they are labeled as generic strategies.

These are, in fact, basic types of competitive strategies.

In addition to these, there are also other strategies that a company can employ when deemed necessary, such as strategic alliance, collaborative partnerships, merger, acquisition, vertical integration, outsourcing strategies, etc.

Four Types of Competitive Strategy: Michael Porter's Four Generic Strategies

4 competitive strategy are as follows:

  1. Cost Leadership Strategy or Low-cost strategy.
  2. Differentiation strategy.
  3. Best-cost strategy.
  4. Market-niche or focus strategy.

Competitive Advantage: Ultimate Goal of Competitive Strategy

Competitive advantage is the special edge over the competitors. A question is often asked by managers: “What is the duration of competitive advantage?”

How long it will be sustained primarily depends on;

  1. barriers to imitation,
  2. the capability of competitors and
  3. the general dynamism of an industry’s environment.

‘Barriers to imitation’ create obstacles for the competitors to copy a company’s distinctive competencies easily. Competitors will always try to imitate a company’s resources and capabilities.

Evidence indicates that capabilities are more difficult to imitate than resources.

Of the resources, tangible resources (e.g., plant and machinery equipment, buildings) are easier to imitate than intangible resources (e.g., patents, goodwill, brand names, technological know-how, marketing techniques).

There is, thus, a need to build up distinctive competence based on unique capabilities rather than on tangible resources. This would help the company enjoy the distinctive competence for a longer period.

The capability of competitors to imitate a company’s distinctive competency needs to be given due consideration.

If the competitors are strongly committed to doing business in a particular way, they will not suddenly imitate a company’s innovation.

In such a situation, its distinctive competency will be sustainable for longer.

The third factor of sustainability of distinctive competency – that is, industry dynamism – is also an important determinant of competitive advantages.

Frequent product innovation makes an industry environment dynamic.

For example, the software industry, electronics industry, and PC industry are highly dynamic because of the high rate of innovation. In such industries, competitive advantages are short-lived.

How to sustain competitive advantage?

Since achieving and maintaining a competitive advantage is the primary aim of competitive strategies, managers should undertake measures to sustain competitive advantage once they are achieved.

Managers can build sustainable competitive advantage by adopting the following measures.

  1. Focusing on building blocks of competitive advantages.
  2. Developing distinctive competencies.
  3. Creating an environment of organizational learning.
  4. Instituting continuous improvement mechanism.
  5. Instituting best practices.
  6. Overcoming barriers to change.

A brief discussion of these issues follows;

Focusing on building blocks of competitive advantages

As stated earlier, a company has a sustained competitive advantage when it can maintain a higher than industry average profit rate over several years.

This becomes possible when the company emphasizes the four generic building blocks of competitive advantage, such as;

  1. efficiency,
  2. quality,
  3. innovation, and
  4. customer responsiveness.

Because of its focus on these building blocks, Apple Computer Company enjoyed sustained competitive advantage over a long period from 1987 to 1993.

These are called ‘generic’ because any organization can adopt them irrespective of its products (or industry in which it operates its business).

Superior efficiency enables a company to lower its costs; superior quality allows it both to lower costs and charges a higher price; superior customer responsiveness allows it to charge a higher price, and superior innovation can lead to higher prices or lower unit costs.

Together these four building blocks help a company create more value than the competitors.

Thus, a company can enjoy a sustained competitive advantage.

Developing distinctive competencies

Managers have to develop distinctive competencies to sustain a competitive advantage.

When distinctive competencies are developed, they help in improving performance in all the areas of four building blocks.

Distinctive competencies should be developed in all required areas – never in some areas at the cost of other important areas. Companies need to be balanced in their pursuit of distinctive competencies.

Creating an environment of organizational learning

Sustaining competitive advantage requires a congenial environment in the organization that promotes learning within the organization (commonly known as organization learning).

Learning organizations can keep themselves at the top of all competitors because they are always in search of knowledge.

In the process of seeking and disseminating knowledge, they learn from prior mistakes and improve their work-processes over time.

Instituting continuous improvement mechanism

Continuous improvement of the quality of both products and services (in fact, of everything that a company does) in sine qua non for sustaining competitive advantage over a longer period.

Managers need to devise dynamic ways to improve quality continuously.

Some organizations have been successful in their endeavor to improve quality through instituting total quality management (TQM) programs and business process reengineering.

Instituting best practices

The adoption of ‘industrial best practices’ helps in developing distinctive competencies and thereby sustaining competitive advantage.

Organizations can benchmark (search out) the successful business-practices of other competitors/companies in other industries and then adopt them after necessary fine-tuning.

Thus, they can build and maintain resources and capabilities – that are essential to achieve excellence in efficiency, quality, innovation, and customer responsiveness.

Overcoming barriers to change

Companies fail to sustain a competitive advantage because they are unable to adapt to changes in the organization.

They need to overcome the resistance to change so that they can maintain a competitive advantage.

Companies can overcome the barriers to change through providing effective leadership, necessary changes in organization structure, creating appropriate control systems and involving employees in decision making.

Distinctive Competency An Essential Requirement for Achieving Competitive Advantage

A business organization must have distinctive competency in one or more areas of its activities to be competitive in the marketplace.

Distinctive competencies refer to those strengths of the organization that allow it to attain a competitive advantage in the market.

These strengths are unique for the organization and they help it achieve superior efficiency, quality, innovation, and customer responsiveness.

It can be argued that PepsiCo has distinctive competencies in the case of manufacturing bottled drinking water – Aquafina.

Distinctive competencies have helped PepsiCo achieve lower costs and make product differentiation better than its competitors.

Thus, distinctive competencies have helped attain distinctive advantages through the achievement of superior efficiency and quality.

Unique organizational resources and capabilities constitute an organization’s distinctive competencies.

However, the resources of the organization must be unique (i.e., no other companies have these resources) to be regarded as distinctive competencies. The resources comprise physical, human, financial, informational, and technological resources.

An organization’s capabilities are the skills necessary to exploit the resources for productive use. Capabilities are intangible.

It may be noted that an organization may not need unique resources to establish a distinctive competence as long as no other competitors possess such resources. An organization can create distinctive competencies only when it simultaneously has unique resources and can use those resources effectively.

Successful strategies often either build on a company’s existing competitive competencies or help a company develop new ones.

Competitive Strategy Versus Business Strategy

Business strategy has a wider scope than a competitive strategy. The business strategy encompasses all the actions and approaches for competing against the competitors and the ways management addresses various strategic issues.

As Hill and Jones have remarked, the business strategy consists of plans of action that strategic managers adopt to use a company’s resources and distinctive competencies to gain a competitive advantage over its rivals in a market.

In doing business, companies confront a lot of strategic issues. Management has to address all these issues effectively to survive in the marketplace.

Business strategy deals with these issues, in addition to ‘how to compete.’ The competitive strategy, on the other hand, deals with “management’s action plan for competing successfully and providing superior value to customers.”