A competitive business strategy — more popularly known as a competitive advantage in the business environment — is the ability of a company to produce or sell goods and services better than another. A competitive business strategy may focus on a cost advantage or a differentiation advantage. To develop a competitive strategy, companies should focus on streamlining operations and removing unnecessary costs while setting their products apart from others in the business environment.
Cost advantage strategies start with how much a company must pay to acquire the economic resources it needs to produce goods and services. Economic resources include land, labor, and capital. Overpaying for these resources will quickly lead to high product costs because most companies allocate production costs to each individual good or service from the production process. To recoup these costs and earn a profit, companies will typically add a specific percentage to the product cost, known as cost-plus pricing. A competitive business strategy can help companies find the lowest cost resources to use in their production process.
In addition to obtaining economic resources at the lowest cost available, companies must use production processes that are highly efficient when churning out goods. Business owners and managers should develop production processes with as few steps as possible because each additional step represents more costs to add into the product’s final cost. Producing too few goods at above average costs will often result in the company selling goods and services at a price point few consumers can afford.
Differentiation is the ability for companies to separate their products from a competitor by offering more consumers more advantages from products. This competitive business strategy also relies on the positional advantage a company can gain when reaching a specific target market or region of consumers. Companies can differentiate their products through specific advertisements, attempting to create a perception of value in the mind of consumers and offering better customer service when responding to issues or feedback.
A competitive business strategy is also possible through the pricing policies for consumer goods and services. Some of the most common pricing policies include: premium pricing to create a sense of inclusion, penetration pricing to set low initial prices for gaining market share, skimming to charge high initial prices and then lowering the price as competitors enter the market, bundle pricing to include additional items at a lower total cost, and promotional pricing add more incentives to purchase the company’s products against a competitors.