Feedback Form
Feedback Analytics
 
 
 
subscribe to our RSS feed

4 Types of Competitive Strategy

Description: A look at the four broad categories of competitive strategies, two with threatening moves (offensive and defensive strategies) and two with non-threatening moves (collusive strategies and strategic alliances).
There are four broad categories of competitive strategies, two with threatening moves and two with non-threatening moves. Threatening moves take two general forms, offensive and defensive strategies.Similarly, non-threatening moves are also classified into two broad categories; collusive strategies and strategic alliances.Porter defines them as moves that 1) improve the firm's position and that of rival firms even if they are not matched, 2) improve the firm's position and that of rival firms only if they are matched my most rival firms, and 3) improve the firm's position because they not matched by rival firms.These strategies are discussed below.

Offensive Strategies

Offensive strategies involve strategic moves that improve the firm's position relative to that of rival firms in the industry.There are six basic offensive strategies; strategic moves that 1) neutralize, match, or exceed the competitive strength of rival firms, 2) turn competitive attention to the weaknesses of rival firms in brand perceptions, demographic/geographic reach, and organizational resources, 3) throw rival firms off balance with multiple tactics (new product introductions coupled with increases in advertising and reductions in price) across a wide range of market segments, 4) lead to a first-mover advantage in unserved or uncontested markets by maneuvering around rival firms rather than meeting them head on (end-run offensives), 5) selectively captures market share from rival leaders when the lack of resources or market visibility prevents a full scale offense (guerrilla offensives) and 6) secure a first mover advantage that is difficult to imitate with initiatives such as expanding capacity beyond current market demand and securing pricing advantages with long-term supply contracts.

Successful offensive strategy are almost always a source of a competitive advantage because they are moves intended to yield a cost leadership position, differentiation advantage, or provide the best value product/service to industry consumers.At the core of these strategies are the firm's competitive resources – the tangible and intangible assets and organizational capabilities that are linked to what industry consumers value. Offensive strategies can be launched by existing rival firms seeking to improve their position or new entrants seeking to establish a position in the industry.

Defensive Strategies

Defensive strategies are those moves that reduce the ability of rival firm strategies to threaten the firm's competitive strength or organizational resources.Because of this, they are rarely a source of a competitive advantage.Their intended purpose is to defend an industry position, protect competitive resources from imitation, and sustain an existing advantage by lowering the risk and weakening the impact of rival firm offensive attacks.

There are five basic defensive strategies; retaliation, commitment, government intervention, strategic flexibility, and avoidance.Retaliation strategies described by Porter as discipline, denying a base, and commitment are efforts to discourage rival firms from attacking.Discipline involves one immediate response directed at the initiator so that rival firms can always expect retaliation to occur.Denying a base involves preventing a new entrant from meeting its goals so they withdraw or deescalate their efforts. Commitment strategies include those that 1) deter retaliation by communicating a commitment to unequivocally follow through on offensive moves, 2) deter threatening moves with a commitment to direct and continued retaliation if rival firms make certain moves and 3) create trust by communicating a commitment to make no new moves or forego existing moves in an effort to deescalate a competitive battle.Government intervention strategies involve the use of political and legal tactics to prevent rival firms from changing the rules of the game.Strategy flexibility protects firm resources through the ability to move quickly out of declining markets into more prosperous ones.Lastly, avoidance strategies dodge confrontation by focusing on market segment of little interest to rival firms.

Collusive Strategies

Collusive strategies involve collaborative efforts that tamper with the industry balance of supply and demand.Price/output collusion occurs when rival firms reduce the supply of an output below its competitive level in order to raise price above its competitive level and earn a greater than economic return.Because this strategy is illegal tacit forms are more common than explicit forms.There are a wide range of tacit forms and discussion of them is beyond the scope of this module.It is suffice to say that Axelrod found a simple "tit for tat" strategy in which rival firms cooperate with each other until one of them cheats to generate the highest industry-wide profits as long as at least a few key industry players are implementing collusive strategies.

The industry structure can influence the perception that tacit collusion is non-threatening and facilitate its use by rival firms.Opportunities for tacit collusion are more likely in industries where 1) a small number of firms that are large in size control the industry (McDonalds, Burger King), 2) rival firms produce and sell similar products that are difficult to differentiate (Pepsi, Coca Cola), 3) the industry leader establishes and maintains an acceptable industry price and profit margin (Microsoft), 4) rival firms are unaffected by large inventories and order backlogs (Exxon, Shell), 5) norms for competitive behavior define some rival strategies as unacceptable (Healthcare) and most importantly 6) entry barriers are high.

Tacit price/output collusion can also be dangerous because the norms of collusive strategies can to lead to complacency when the entire industry participates.Even if rival firms tacitly cooperate to earn greater than economic profits, it doesn't necessarily mean that they can sustain them.Product advancements (typewriter, word processor, main frames, PC networks, wireless networks), focused cost leadership strategies (Toyota, Honda, U-Haul) and technological advances (Napster, Web) provide numerous examples of how entering firms were able to capitalize on the complacency of industry leaders and bid down the price until the advantages of these strategies were eroded and the competitive position of industry leaders was in jeopardy.

Strategic Alliances

Strategic alliances are cooperative arrangements of rival firms that don't involve the reduction of industry output to control prices.They are perceived to be non-threatening when performance improvements arises across participating firms that wouldn't be possible without the cooperative efforts of those involved.They enable rival firms 1) to manage risks and share costs when the economies of scale and learning are lacking, 2) facilitate low cost entry into new markets, industries, and industry segments by rival firms that individually lack the required products, capabilities, and resources, and 3) provide rival firms with strategic flexibility and a point of entry without incurring the cost of full-scale under conditions of high uncertainty.

Strategic alliances take many forms but fall into three broad categories.Non-equity alliances (licensing and distribution agreements) are cooperative arrangements enforced by contractual obligations without any equity position being shared by rival firms.Equity alliances are the same as non-equity ones except that one rival firm or the other or both make an equity investment in the arrangement.This involves supplementing contractual relationships with stock purchases.Joint ventures involve the formation of an independent firm in which participating firms invest and share the profits.

Strategic alliances are a commonly used today by rival firms.Traditionally, only small firms and niche players considered this type of cooperative arrangement to manage risks, share costs and remove entry barriers.Global economic growth and advanced communication methods have furthered the use of strategic alliances by small firms.They have also made it necessary and possible for large firms to use strategic alliances to reduce cost and enter global markets that were previously untapped.

Source: "Module 7: Competitive Strategy" (a MS Word document) by Mary Hamilton | University of Rhode Island
Source URL: http://web.archive.org/web/20040620223629/http://www.cba.uri.edu/Faculty/Lehrer/module-7.doc