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The Meaning of “Competitive Parity” in Strategic Management

The Meaning of “Competitive Parity” in Strategic Management

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Anyone who’s ever listened to two business people having a conversation would be forgiven for assuming that they were speaking a different language.

Indeed, with so much jargon and industry-specific terminology even people working in different businesses often have trouble understanding each other.

This gets even more extreme when you’re looking at abstract, somewhat academic fields of business study like strategic management.

In this post, we’ll tackle the strategic management term “competitive parity,” putting you on an even playing field with the people who throw this phrase around like confetti at a wedding.

What does “competitive parity” mean in strategic management?

The phrase “competitive parity” refers to an area where a business has neither an advantage or a disadvantage over its peers. That is, a business that has achieved competitive parity with its competitors in one specific area performs equally well in that area. Competitive parity is important in strategic management because it allows businesses to focus their resources on areas where they have an advantage rather than overspending in areas where they do not.

The meaning of “parity”

Parity, according to the Oxford English Dictionary, means “the state or condition of being equal.” In other words, parity means equality.

In the business world specifically, “parity” refers to products or services that are basically identical to those offered by a competitor. If you and your competitor make totally unique things, you don’t have any “parity products” with them.

If you and your competitor both make foaming hand soap pumps that could be swapped out with no real difference, on the other hand, that’s an example of a parity product.

The meaning of “competitive parity” in more detail

“Competitive parity” is a noun phrase made up of the noun parity and the adjective competitive. Put simply, competitive parity refers to matching your competition in the business world.

Typically, this phrase is used to talk about the results you get when selling products or services to customers. If you earn roughly the same amount of money as your competitors in a specific area of your business, you’ve achieved competitive parity.

Competition and winning in business

At its most basic, you can think of competition as winning or losing a race against other companies.

This is, of course, an oversimplification. As can be seen by the use of words like ‘ecosystem’ to describe specific industries, competition is a highly complex topic with lots of interrelatedness.

For now, though, we’ll focus on winning or not winning as shown by making your foaming hand soap pump as cheaply as possible and selling it for the most money.

If your hand soap pump sells more than your competitors and you spend less on it, you’re at a distinct competitive advantage because you can earn more by selling them.

If your pump and your competitor’s pump earn you both roughly the same amount, you’re both at competitive parity in the foaming soap pump market.

Finally, if your competitor’s soap pump is cleaning up and leaving you high and dry (puns intended), then you’re looking at a distinct competitive disadvantage.

Management and strategic management

Before we look at the importance of competitive parity as a business strategy, let’s take a diversion and explore the concept of strategic management.

Although there many different aspects of strategic management, at its core it’s a technique for continually examining how your business is doing and where you want it to go and making minor course adjustments along the way.

In strategic management, in other words, it’s important to view all parts of your business’s operations at one time and understand how they connect with one another.

Why competitive parity can be important for businesses

Usually, when we speak about competition in business it’s assumed that winning is the best possible outcome. However, this is actually not true in all cases.

In the strategic management playbook, it’s equally important to know your areas of strength and weakness and spend accordingly.

Your business won’t succeed if you blow your entire marketing budget on a product you make that’s just kind of so-so, after all.

With an understanding of competitive parity, it’s possible to plan strategically not just in areas where your company can win but in areas where it can keep breaking even.

This allows you to diversify your products and take risks on new lines, since you know you’ve always got those foaming hand pumps to fall back on if the new thing doesn’t work out.