Racing to the bottom doesn’t win the race unless you’re a skier. When a business faces new competition and lowers its prices in a race to the bottom, it’s a quick route to commodity products and razor-thin margins.

What’s the alternative? In a one-page refresher course on competitive strategy, Hugh Macfarlane reminds us that Michael Porter proposed three generic strategies for responding to competitive forces.

The two main strategies are:

1. Spend less than your competition to produce your products and services. Spend less, but maintain your quality standards. This doesn’t mean just cut your prices. It means finding ways to use your unique capabilities to make things at the same level of quality as your competition, but at a lower cost.

WalMart sells products whose quality is at least as good as the competition in its market, but produces them at a lower cost. It purchases in large volume and pressures its vendors to lower their prices, it improves the efficiency of its distribution system, and it keeps labor costs low.

2. Charge more than your competition without increasing your costs. Charge more because you have found a way to use your capabilities to build a product that customers will pay more to obtain. Create this differentiation without increasing your costs.

Apple is a good example of a company that has not increased its costs to make something that customers willingly pay more to obtain.

Don’t try to do a little of each of these strategies. If neither of them work, then apply the third strategy.

Focus on a niche market and apply Spend Less or Charge More in your specialized market.

Kevin Maas, New York Yankees

On June 29, 1990 the Yankees brought Kevin Maas up from from their Triple-A farm team, the Columbus Clippers. He was a promising hitter and in that first partial season, boy did he deliver. Handsome and appealing, Maas started hitting them out of the park at a torrid pace. He hit 10 home runs in only 72 at-bats, a big league record. By the end of the season he had 21 homers after playing in just 79 games. Average home runs in the major leagues is only 15, and that’s for an entire season.

Kevin was number two Rookie-of-the-Year that first summer.

But Maas couldn’t keep the pace. His record the next season was 23 homers in 500 at-bats. His record dropped to 11 the next year and continued downhill. Bouncing between the majors and the minors, Kevin continued to play ball for a few years before disappearing from professional baseball.

What happened?

Baseball is a closed system. The same pitchers see a batter more than once. They study the batter and look for his weaknesses. They pitch to those weaknesses and soon the batting strategy that hit balls out of the park no longer works.

The batters that stay in the major leagues change their strategy. They study the pitchers. They look for patterns and holes in the pitching and change their batting accordingly. As Bill Waddell over at Evolving Excellence puts it:

These people are all driven by the basic principles of physics upon which their expertise is built, but their talent is in application of it, tailored to the specific challenges they face.

Batters that don’t change their strategy in response to pitching changes find themselves no longer getting hits. Soon they are out of the lineup, going the way of Kevin Maas.

Just as batters compete with the pitcher for hits, companies compete for customers in their industry. It’s a closed system. Your company might find a way to win customers, but your competitors are studying you. They look at how you hit and they look for your weaknesses. They change their pitching, going directly for your weak spot.

Like the major league hitters, a winning response requires studying your competitors the way they study you. Learn what weakness in you they are pursuing and what weaknesses in them you can exploit. Adjust your strategy. Apply the basic principles and create an original solution, not the one that worked last year or the one that you see others using. It’s your ability to adapt and to be creative in the application of basic principles that creates your competitive advantage.