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How to Formulate a Competitive Strategy in Business

Competitive strategy is a business term that has been part of the vernacular for decades.

The online business dictionary gives a simple definition of competitive strategy: “Long-term action plan that is devised to help a company gain a competitive advantage over its rival.”

Jacksonville University online business students pursuing a Master’s of Business Administration (MBA) or a Master of Science in Organizational Leadership explore the intricacies of competitive strategy in the course entitled, Global Corporate Strategy and Policy, as well as other courses.

It is a vital component for every company, especially those that conduct business in a hyper-competitive market or a competitive niche within a specific industry.

The definitive work on business strategy formulation was published in 1980 by Harvard Business School professor Michael E. Porter, whose Five Forces model for conducting and analyzing competitor research is the foundation for business owners who are serious about formulating strategy.

Less familiar, perhaps, are Porter’s four parameters for formulating competitive strategy, which he introduced in 1985:

  • Cost leadership – establishing and maintaining the lowest cost of operation within an industry by reducing
  • Differentiation leadership – establishing and maintaining a uniquely desirable product or service
  • Cost focus – narrowing the scope of the market wherein the lowest cost is established and maintained; i.e., a specific niche (target segment) within an industry
  • Differentiation focus – narrowing the scope of the market wherein the uniquely desirable trait of a product or service is intended to create differentiation within an industry niche or target segment

These are considered generic strategies that form the basis of business-related decisions moving forward. A lot of information is needed before it can be determined what strategy will work best.

SEE: How to Take Action on Competitor Research

Conducting a SWOT Analysis

The decision about what guiding parameter will be used as the basis of creating a business strategy should be made after careful analysis of an organization’s strengths, weaknesses, opportunities and threats (SWOT).

A SWOT analysis gives a company’s decision makers the data they need to determine an organization’s strengths and weaknesses. The outcome of the analysis provides a context for a company’s place and function within the chosen industry, as well as how to respond to market forces and competitor actions.

Along with an internal examination of strengths and weaknesses, an analysis of the strengths and weaknesses of potential competitors is vital. Competitor research, when performed effectively, can help decision makers discover potential additional opportunities that are not currently being met by other organizations.

It also provides the data necessary to determine how to implement a course guided by a cost leadership strategy or by a differentiation leadership approach.

Questions to Answer to Determine Strategy

To gauge how best to position a business or organization competitively, these questions must be answered:

What is the business doing? This can be answered, in part, by a SWOT analysis. It reveals the set of assumptions that can help determine whether a strategy makes sense.

What is happening in the industry environment? An answer to this question will reveal what government actions have been taken through history that affected the industry, as well as current political tendencies that could affect the industry moving forward. The favorability of the market conditions is a critical factor in determining the potential level of success.

What should the business be doing? This answer will determine how to respond to a given event or evolving market conditions. It can help prepare a company to protect itself in the event of an economic downturn or the emergence of new threats, such as a new competitor or sudden shifts in technological capability.

Key Words: Long-Term and Action

As the online business dictionary emphasized, a competitive strategy is a long-term action plan.

That means that in addition to finding initial answers to the questions above, ongoing tests of the viability of the chosen strategy must be conducted. That requires occasional SWOT analyses to discover changes in market conditions and the organization’s ability to respond to them, as well as vigilant analysis of competitors to remain informed about potential outside threats and opportunities.

It also means paying close attention to how specific decisions and processes affect the overall health of the company. For example, if the staff at the company’s call center isn’t properly trained in sales techniques for the industry and the product or service being sold, potential sales could be lost.

Similarly, if an organization depends on a robust, professional-looking online presence – but the company’s website loads slowly or regularly crashes – the overall health of the organization could be compromised.

Factors to monitor include:

  • Customer service
  • Staff turnover rate
  • Payroll growth
  • Technological advances
  • Marketing and advertising approach
  • Brand recognition
  • Outside recognition of the organization’s level of industry expertise
  • Use of time

The bottom line when it comes to creating and executing a competitive strategy is that it should align with the goal of continuous improvement. It should consider the one certainty in business – that things will change over time, and the company that responds best to change will thrive the most.

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