Strategy Library

Generic competitive strategies

Competitive strategies are the way a company seeks to secure its competitive advantage over competitors and to compete in the marketplace.

Description of generic competitive strategies

Competitive strategies are the way a company seeks to secure its competitive advantage over competitors and to compete in the marketplace. According to Michael E. Porter (1980), three basic types of strategy are distinguished:

Cost leadership

The cost leadership strategy aims to gain a comprehensive cost advantage within the industry, thereby offering products below the usual market price. Say, it is trying to gain market share by addressing cost-conscious and price-sensitive buyers. An example of a company that has successfully used this strategy for a long time is Aldi. Through the consistent use of economies of scale and the renunciation of branded products, Aldi has been able to maintain its image as the most cost-effective supplier for years.

Differentiation strategy

Companies that pursue a differentiation strategy offer products that are considered unique in the industry and for which customers are willing to pay higher prices. Instead of a cost leadership, therefore, a quality leadership is sought. For such a strategy to work, the feature must be hard to copy and imitate for competitors. Here innovation is required. A good example for the successful application of this strategy is Apple. The American computer and consumer electronics manufacturer continues to set new trends with its innovative products and has a loyal and strong buying fan base that truly reveres the brand.

Concentration strategy

The concentration strategy differs from the previous two in that it is not intended to serve the entire market but only a specific market segment. This can be a specific consumer group, product group or geographic region. The concentration strategy is often used by start-ups. The idea is that a company can operate more effectively and efficiently by focusing on a niche than a rival company that is more competitive. Within the market segment, in turn, cost leadership may be sought, or differentiation strategies pursued.

Porter originally believed that companies would have to uncompromisingly opt for either cost leadership or differentiation strategies, as it was not possible to simultaneously realize the lowest possible price and maximum value for the customer. In this case, he argues, there is a risk of getting stuck between the chairs for want of a coherent strategy ("stuck in the middle"). However, the postulate of the incompatibility of cost and differentiation advantages is increasingly called into question due to changed competitive conditions and modern production possibilities. Instead, hybrid competitive strategies (internal link to the encyclopedia article) are discussed, aiming at the simultaneous pursuit of cost and differentiation advantages.

Source

Porter, M.E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York: The Free Press.

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