Choosing How to Compete

Business: AQA A Level (2023 Specification), topic 7.7.2

When choosing how to compete with other businesses, a business may decide to compete on either price or customer benefits:

A business may decide to compete against other businesses on the basis of price; for example, discount retailers often try to price-match or undercut one another to remain competitive.

A business may also decide to compete against other businesses on the basis of the benefits it can offer customers.
For example, Google’s Google Docs and Microsoft’s Office 365, compete in terms of the benefits they can offer customers: both products offer customer email access, digital storage, and document editing capabilities.

The cost leadership approach is taken by businesses which compete on price, and which seek to be the cheapest retailer or producer within the market.
For example, Aldi seeks a cost leadership approach as it aims to compete on price.
Businesses can increase their competitiveness by reducing their costs, for example negotiating better deals with suppliers and producing their own products if this can be done at a cost lower than the cost of buying such products from suppliers.

The differentiation approach is taken by businesses that compete in terms of the benefits offered to customers from the purchase of its products or services.
For example, Apple competes within the market based on its iOS product and the benefits this can offer to consumers when compared to other operating systems.
Businesses can increase their competitiveness by investing in research, development, and innovation so that the products and services it offers continue to increase in terms of the benefit offered to customers.

If a business fails to target customers based on cost or differentiation, Porter’s strategy classifies the business as a concern, known as ‘stuck in the middle’.

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