The seven competitive strategies acknowledge the unknowability of the changes businesses face now and in the future. Each strategy can provide a competitive advantage if handled adroitly. But, a strategy’s degree of effectiveness in improving corporate performance depends on the firm’s leaders receiving and heeding quality feedback. These seven strategies also center a company’s need to create profit by helping firms compete and deliver value in the most cost-efficient way. Each strategy covers a different way a firm can compete. Each one can increase a company’s capabilities and “the usefulness, benefit or satisfaction” that customers receive from its products or services.
Strategies Must Evolve into Actions
Strategies lead to profits when companies transform them into action. This transformation happens in four stages:
- Target “existing capabilities” – The company must launch or strengthen its capabilities in “sourcing, operations and selling.”
- Pinpoint “enabling practices” – Look for processes that will enhance the “structure, systems and culture” of your company.
- Develop “specific initiatives” – Enhance the firm’s capabilities with practices that become integral to its operations.
- Evolve from initiatives into “actions” – Draw on high-quality feedback that lets the company evaluate the effectiveness of its strategy and its actions.
Identifying the best strategy is a critical decision. Your choice must deliver competitive advantage and guide your firm’s future. Consider your target customers – who they are, what they want and which offerings will serve them best. Orient your activities to meet their important needs. Examine the operational changes necessary for each strategy, and weigh each strategy’s overall feasibility. Think of your introduction period in three stages that apply to all seven strategies. Choosing a strategy is phase one, the “cognition phase.” Then comes phase two, the “development phase,” when you evaluate various initiatives. This requires quality feedback. Phase three, the “embedded phase,” involves the changes you implement through “initiatives” that will become business as usual.
“The choice of strategy indicates what capabilities we need to develop and what structures, systems and culture would enable these capabilities to thrive.”
As you consider which strategy to use, bear in mind the general principle for strategic planning: Companies should restrict themselves to a single strategy at any one time. Under certain circumstances, however, firms can pursue two strategies simultaneously. For example, in a large corporation with multiple strategic business units (SBUs), it’s feasible for each SBU to pursue a different business strategy at the same time. In detail, the seven basic competitive strategies are:
Firms that specialize focus on a solitary product or a unified group of products. They make sure their products outperform their competitors’ goods. The specialization strategy requires looking for “demand segments” of your audience that will value your offerings strongly. Commercial growth depends on constant expansion into new markets.
“Managers have ‘agency’; they are able to affect what happens in the system, but they cannot determine the outcome of their actions.”
One company that has pursued this policy is WD40 household lubricant. The product is a standard item in 80% of American homes. WD40 provides in-demand benefits for homeowners, mechanics and aeroengineers. This remarkably popular product sells in upward of 160 countries. In April 2017, WD40’s market capitalization was $1.43 billion. It exemplifies a niche product and a niche company. It demonstrates that when a company handles specialization properly, it can pay big dividends.
Adaptive firms are agile. They excel at transforming themselves to meet their customers’ wants and needs. These firms’ leaders must be able to establish customer preferences in a dynamic marketplace, a difficult challenge. To succeed with an adaptive strategy, firms must be able to detect market changes at the earliest possible moment. Once they know a change is coming, these companies must be flexible enough to transform themselves to take advantage of new market realities and opportunities.
“The strategy process moves from a broad intention through to more specific initiatives and then to actions that start to shift the system.”
Fashion retailer Zara exemplifies a thriving, adaptive firm. Zara has a special ability to stay current and offer the latest fashion trends. The popular retailer markets only of-the-moment, in-demand fashions. The company is expert at minimizing its losses when its trend forecasts don’t work out as planned. Knowledgeable observers say that Zara requires only one week to design, manufacture and retail new fashion products, while its competitors require months for the same processes. Zara stays on top of what customers want by shipping new products to stores twice weekly.
- Low Cost
Low-cost firms manufacture and market products that are every bit as good as their competitor’s products, but cost consumers less. Firms that rely on low cost as a strategy do well when they are in markets characterized by long life-cycle products and when their customers don’t want change. To make a low-cost strategy economically viable, research and understand what your customers “really value” in your offerings. Armed with this knowledge, low-cost firms eliminate superfluous expenditures.
“It is feasible for any business to pursue any strategy. The degree of system change may, though, be more a change of emphasis…rather than a large-scale…change.”
Bavaria Yachts is one of the biggest, most profitable of the world’s top yacht manufacturers. The unconventional German company applies a singular approach that relies on “engineering precision, automation, use of robotics” and automotive industry manufacturing techniques modified for boat building to create high-quality yachts at appreciably lower costs than other yacht firms.
In markets where customer needs seldom change, innovative firms can do well when they provide products that meet clients’ predictable requirements in inventive ways. When they do, their customers will pay top dollar. Innovation normally requires extensive R&D, major technological breakthroughs and significant production expenses. In short, the up-front costs of innovation can be enormous. However, innovative products that break new ground can quickly become highly profitable bestsellers.
“One size does not fit all, and the way the future emerges is dependent on the…events and patterns of relationships and particular features of the local situation.”
Elon Musk’s high-profile firm SpaceX is an innovative leader. Musk wants his company to be able to provide customers with space flights to Mars. To accomplish this goal, it needs to develop a “reliable and reusable” rocket that will make space travel economically viable. SpaceX works hard on this lofty ambition. For example, it follows an innovative method to “vertically integrate its manufacturing of rocket engines, rocket stages, spacecraft, avionics and software.” Like most innovation leaders, SpaceX made a notable financial investment to reach its elevated position in the “affordable rockets” industry. To realize Musk’s ambition of commercial space travel, he and his engineers are well on the way to developing the world’s first reusable rocket.
Strategically excellent companies constantly try to improve their products. Their competitive advantage is that other companies can’t easily duplicate their advances and improvements. To attain distinction on this level, firms must develop exacting quality criteria and then base all their manufacturing activities on those high standards.
“The choice of strategy should drive the future evolution of the business.”
Auto maker Lexus is one such company. It focuses on “delivering superior customer-perceived value.” Lexus started out with no status at all in the luxury automobile marketplace. Few people even knew that Lexus was a Toyota division. However, Lexus now operates on a par with long-established European firms in this high-profile, big-ticket sector. Its achievements weren’t easy. Reaching this point required advanced manufacturing methods and high quality-control standards. Because Lexus was willing to pay an exceptionally high price for its “relentless pursuit of excellence,” it achieved world-class stature and prestige.
- No Frills
No-frills products aren’t necessarily low in cost. Companies competing on this playing field offer their customers simple, unadorned products free of options. No-frills firms deliver the “basic requirements at a competitive price.” To make this strategy work, firms may end up changing their customer profiles, their product lines and their manufacturing processes. Aldi, a grocery retailer, is the model of a successful no-frills firm. Aldi focuses on developing comprehensive market research data on the exact food products and price points its customers want. To meet its profit margins with a low-frills, low-prices strategy, Aldi strives to eliminate excess costs in its supply chains.
Firms that target concentrate on a “specific market segment.” They tightly focus on selected customers and products that perfectly match their specific needs. Targeting makes good business sense when the “market subdivides into segments of demand,” and each segment has separate needs and preferences. By meeting the desires of its buyer segments, a targeting company can find opportunities to charge premium prices. Long Tall Sally, a clothing retailer in the United Kingdom, excels at targeting. It serves only women who are 5 feet 8 inches [1.73 meters] tall or taller and those who wear size seven [EU size 38] or larger shoes. As a result, it has become the go-to clothing option for many tall women. As its marketing materials say, “Tall girls rejoice!”
Companies often move through a series of strategies as they establish and develop themselves. For example, many start-ups depend on an innovation strategy in their early phase of operations and then evolve. Responding to new opportunities in the marketplace, some start-ups initially rely on an adaptive strategy. As demand grows for the new firm’s products or services, it may switch to an excellence or low-cost strategy. And as innovative competitors challenge well-established firms, a no-frills strategy, a low-cost strategy or some other tactical approach may become more relevant and appropriate.
Strategizing and Management
Executives may try to impose their own management concepts on employees to improve their firms’ competitive posture. Unfortunately, these leaders often have things backwards. Many mistakenly think of their companies as machines with levers: Pull a lever and get a preferred outcome. However, too many external factors – including suppliers, customers and competitors – beyond an executive’s control can affect a company’s results.
“Many of the prescriptions offered to managers…are based on inappropriate assumptions about the way the world works.”
Before leaders settle on a strategy, they must analyze their firm’s current competitive situation and plan their managerial actions accordingly. This sensible suggestion isn’t a new idea. As far back as 1926, management expert Mary Parker Follett (1868–1933) argued that a company’s competitive situation – not its managers’ wishes and whims – should dictate the firm’s plans and actions. Your customers will determine how well you do in the marketplace. Companies must first pay attention to what their customers want and need and then evolve a competitive strategy to fulfill their preferences.