Businesses are constantly seeking competitive advantages in the marketplace. There are many different ways in which this can be done, but many will focus on a few tried and true methods of gaining a leg up on the competition. These methods can generally be classified into about four different primary categories. Both Stanford University and the University of Cambridge cite Michael Porter's broad and narrow categories of competitive strategies as the basis for understanding how businesses try to compete.
Cost leadership is the first competitive advantage businesses often attempt to gain. Cost leadership as an advantage occurs when a business is able to offer the same quality product as its competitors, but at a lower price. Cost leadership can occur when a company finds ways to produce goods at a lower cost through the perfection of production methods or by the utilization of resources in a more efficient manner than competitors. Other factors, such as proprietary technology, can also factor into this type of advantage. Cost leadership may be classified as an offensive strategy, whereby businesses attempt to drive competitors out of the market by consistently using price strategies designed to win over consumers.
Differentiation is a second strategy that businesses often use to set themselves apart from competitors. In a differentiation strategy, low cost is only one of many possible factors that may set aside a business from others. Business that differentiate themselves typically look for one or more marketable attributes that they have that can set them apart from their competitors. They then find the segment of the market that finds those attributes important and market to them. The process can also work in the other direction with businesses conducting research to determine which things consumers find most important and then developing a niche market for those products or characteristics.
Another way for a business to gain a competitive advantage is to utilize a defensive strategy. The advantage gained by this type of strategy is that it allows the business to further distance itself from its competition by, in some sense, maintaining a competitive advantage it has gained. Therefore, this strategy is closely related to differentiation and cost leadership because it is a method used by businesses to keep those advantages in place once they have been attained. Whereas the other two strategies are more offensive in nature, this strategy becomes an actual advantage as it becomes increasingly difficult for so-called competitors to offer any real opposition to the business.
Competitive advantages can also be gained by businesses that seek strategic alliances with other businesses in related industries or within the same industry. Businesses have to be careful not to cross the line between alliances and collusion, though. Collusion occurs when businesses within the same industry work together to artificially control prices. Strategic alliances, on the other hand, are more along the lines of joint ventures that businesses use to pool resources and gain themselves exposure at the expense of other competitors not in the alliance.