Early in the process of crafting a strategy, company managers have to decide which of the four basic competitive strategies to employ—overall low-cost, broad differentiation, focused low-cost, or focused differentiation.
In employing a low-cost provider strategy, a company must do a better job than rivals of cost-effectively managing internal activities and/or it must find innovative ways to eliminate or bypass cost-producing activities. Low-cost provider strategies work particularly well when price competition is strong and the products of rival sellers are very weakly differentiated. Other conditions favoring a low-cost provider strategy are when supplies are readily available from eager-sellers, when there are not many ways to differentiate that have value to buyers, when the majority of industry sales are made to a few, large buyers, when buyer switching costs are low, and when industry newcomers are likely to use a low introductory price to build market share.
Broad differentiation strategies seek to produce a competitive edge by incorporating attributes and features that set a company's product/service offering apart from rivals in ways that buyers consider valuable and worth paying for. Successful differentiation allows a firm to (1) command a premium price for its product, (2) increase unit sales (because additional buyers are won over by the differentiating features), and/or (3) gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products). Differentiation strategies work best in markets with diverse buyer preferences where there are big windows of opportunity to strongly differentiate a company's product offering from those of rival brands, in situations where few other rivals are pursuing a similar differentiation approach, and in circumstances where technological change is fast-paced and competition centers on rapidly evolving product features. A differentiation strategy is doomed when competitors are able to quickly copy most or all of the appealing product attributes a company comes up with, when a company's differentiation efforts meet with a ho-hum or so what market reception, or when a company erodes profitability by overspending on efforts to differentiate its product offering.
A focus strategy delivers competitive advantage either by achieving lower costs than rivals in serving buyers comprising the target market niche or by offering niche buyers an appealingly differentiated product or service that meets their needs better than rival brands. A focused strategy becomes increasingly attractive when the target market niche is big enough to be profitable and offers good growth potential, when it is costly or difficult for multisegment competitors to put capabilities in place to meet the specialized needs of the target market niche and at the same time satisfy the expectations of their mainstream customers, when there are one or more niches that present a good match with a focuser's resource strengths and capabilities, and when few other rivals are attempting to specialize in the same target segment.
Deciding which generic strategy to employ is perhaps the most important strategic commitment a company makes—it tends to drive the rest of the strategic actions a company decides to undertake and it sets the whole tone for the pursuit of a competitive advantage over rivals.
Companies are able to supplement the four generic strategies with strategies that rely on valuable and rare resources possessed by the firm. Resource-based strategies attempt to exploit company resources in a manner that offers value to customers in ways rivals are unable to match. A company's resource strengths and competitive capabilities can contribute to an organizational competence, core competence, or distinctive competence. A distinctive competence is a competitively potent resource strength for three reasons: (1) it gives a company competitively valuable capability that is unmatched by rivals, (2) it can underpin and add real punch to a company's strategy, and (3) it is a basis for sustainable competitive advantage. Companies lacking important standalone resource strengths capable of contributing to competitive advantage may find advantage through bundled resource strengths or substitute resources.
Companies lacking key resource strengths or competences may also form alliances with enterprises having the desired strengths. Consequently, these companies form strategic alliances or collaborative partnerships in which two or more companies jointly work to achieve mutually beneficial strategic outcomes. Strategic alliances are formal agreements between two or more separate companies in which there is strategically relevant collaboration of some sort, joint contribution of resources, shared risk, shared control, and mutual dependence. Alliances are more likely to be long-lasting when (1) they involve collaboration with suppliers or distribution allies, or (2) both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging.
