Chapter 03

Confirming Pages

Chapter 3 Competitive Strategy and Advantage in the Marketplace

Chapter Learning Objectives

LO1. Gain an understanding of competitive strategies frequently used to provide distinctive industry positioning and competitive advantage in the marketplace.

LO2. Recognize industry conditions that favor a market target that is either broad or narrow and that indicate whether the company should pur-sue a competitive advantage linked to low costs or product differentiation.

LO3. Understand the role of resource-based strategies in supplementing generic strategies and achieving competitive advantage.

LO4. Learn how strategic alliances and partnerships can be used to add to a fi rm’s collection of resources and competencies.

gam30301_ch03_034-056.indd 34gam30301_ch03_034-056.indd 34 2/23/08 10:14:02 AM2/23/08 10:14:02 AM

Confirming Pages

Chapter 3 Competitive Strategy and Advantage in the Marketplace 35

In Chapter 1 we introduced the concept of competitive strategy and its importance in attaining a sustainable competitive advantage in the mar-ketplace. The chapter exposed you to proven approaches to winning a sus-tainable competitive advantage, including strategies keyed to lower costs, differentiating features, a focus on a narrow market niche, and developing unmatched resource strengths and competitive capabilities. Regardless of approach, a company’s competitive strategy deals exclusively with the spe-cifics of management’s game plan for securing a competitive advantage vis-à-vis rivals.

There are many routes to competitive advantage, but they all involve giving buyers what they perceive as superior value compared to the offer-ings of rival sellers. Superior value can mean offering a good product at a lower price, a superior product that is worth paying more for, or an attractive combination of price, features, quality, service, and other appeal-ing attributes. This chapter examines approaches to providing customers with superior value, including strategies that yield distinctive industry positioning and strategies keyed to exploiting unsurpassed resources and competencies.

Competitive Strategies and Industry Positioning There are countless variations in the competitive strategies that companies employ, mainly because each company’s strategic approach entails custom-designed actions to fit its own circumstances and industry environment. The custom-tailored nature of each company’s strategy is also the result of management’s efforts to uniquely position the company in its industry. Companies are much more likely to achieve competitive advantage and earn above-average profits if they are able to find a unique way of deliver-ing superior value to customers. For example, during the 1990s, Starbucks’ convenient locations, flavorful coffee drinks, superior customer service, and appealing store ambiance made it stand out among other restaurants sell-ing coffee and gave it a competitive advantage in the ready-to-drink cof-fee industry. There have since been an untold number of coffeeshops that have attempted to imitate Starbucks’ competitive strategy, but none have been able to achieve a comparable level of success. By choosing a unique approach to providing value to customers and striving for operational excel-lence, Starbucks has achieved an enduring brand loyalty that makes it dif-ficult for others to triumph by merely copying its strategic approach. “Me too” strategies can rarely be expected to deliver competitive advantage and stellar performance unless the imitator possesses resources or competencies that allow it to provide greater value to customers than that offered by firms with similar strategic approaches.

Competitive strategies that provide distinctive industry positioning and competitive advantage in the marketplace involve choosing between (1) a market target that is either broad or narrow, and (2) whether the company should pursue a competitive advantage linked to low costs or product dif-ferentiation. Figure 3.1 presents four proven competitive strategies keyed to

LO1

Gain an understanding of competitive strategies frequently used to provide distinctive industry positioning and competitive advantage in the marketplace.

LO1

Gain an understanding of competitive strategies frequently used to provide distinctive industry positioning and competitive advantage in the marketplace.


Confirming Pages

36 Part One Strategy, Corporate Entrepreneurship, and Leadership

industry positioning. 1 The general approach to competing and operating the business is notably different for each of the four competitive strategies. The four generic strategies are:

1. A low-cost provider strategy —striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by under-pricing rivals.

2. A broad differentiation strategy —seeking to differentiate the company’s product or service from rivals’ in ways that will appeal to a broad spec-trum of buyers.

3. A focused low-cost strategy —concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having lower costs than rivals and thus being able to serve niche members at a lower price.

4. A focused differentiation strategy —concentrating on a narrow buyer seg-ment (or market niche) and outcompeting rivals by offering niche mem-bers customized attributes that meet their tastes and requirements better than rivals’ products.

Each of these four generic competitive approaches stakes out a different mar-ket position. The following sections explore the ins and outs of the four generic competitive strategies and how they differ.

1 This classification scheme is an adaptation of a narrower three-strategy classification pre-sented in Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980), Chapter 2, especially pp. 35–40 and 44–46. For a dis-cussion of the different ways that companies can position themselves in the marketplace, see Michael E. Porter, “What Is Strategy?” Harvard Business Review 74, no. 6 (November–December 1996), pp. 65–67.

OverallLow-Cost

Provider Strategy

BroadDifferentiation

Strategy

FocusedDifferentiation

Strategy

FocusedLow-CostStrategy

Type of Competitive Advantage Pursued

Mar

ket Co

vera

ge

Pres

ence

in

a Li

mite

d Num

ber

of M

arke

t Se

gmen

ts

Pres

ence

in

a Bro

adRa

nge

of M

arke

t Se

gmen

ts

Value CreationKeyed to Lower

Cost

Value CreationKeyed to

DifferentiatingFeatures

FIGURE 3.1 The Four Generic Competitive Strategies

Source: This is an author-expanded version of a 3-strategy classification discussed in Michael E. Porter, Competitive Strategy (New York: Free Press, 1980), pp. 35–40.


Confirming Pages


Low-Cost Provider Strategies Striving to be the industry’s overall low-cost provider is a powerful competitive approach in markets with many price-sensitive buyers. A company achieves low-cost leadership when it becomes the industry’s lowest-cost provider rather than just being one of perhaps several competitors with low costs. Successful low-cost providers boast meaningfully lower costs than rivals—but not neces-sarily the absolutely lowest possible cost. In striving for a cost advantage over rivals, managers must take care to include features and services that buyers con-sider essential— a product offering that is too frills-free can be viewed by consumers as offering little value even if it is priced lower than competing products.

A company has two options for translating a low-cost advantage over rivals into attractive profit performance. Option 1 is to use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits. Option 2 is to maintain the present price, be content with the present market share, and use the lower-cost edge to earn a higher profit margin on each unit sold, thereby raising the firm’s total profits and overall return on investment. For maximum effectiveness, companies employing a low-cost provider strategy need to achieve their cost advantage in ways difficult for rivals to copy or match. If rivals find it rel-atively easy or inexpensive to imitate the leader’s low-cost methods, then the leader’s advantage will be too short-lived to yield a valuable edge in the marketplace.

Achieving Low-Cost Leadership To succeed with a low-cost provider strategy, company managers have to scrutinize each cost-creating activ-ity and determine what factors cause costs to be high or low. Then they have to use this knowledge to keep the unit costs of each activity low. They have to be proactive in eliminating nonessential work steps and low-value activities. Normally, low-cost producers work diligently to create cost-conscious corporate cultures that feature broad employee participation in continuous cost improvement efforts and limited perks and frills for execu-tives. They strive to operate with exceptionally small corporate staffs to keep administrative costs to a minimum. Many successful low-cost leaders also use benchmarking to keep close tabs on how their costs compare with rivals and firms performing comparable activities in other industries.

But while low-cost providers are champions of frugality, they usually don’t scrimp on investing in resources that promise to drive costs out of the busi-ness. Wal-Mart, one of the foremost practitioners of low-cost leadership, has invested in state-of-the-art technology throughout its operations—its distri-bution facilities are an automated showcase, it uses online systems to order goods from suppliers and manage inventories, it equips its stores with cutting-edge sales-tracking and checkout systems, and it sends daily point-of-sale data to 4,000 vendors. Wal-Mart’s information and communications systems and capabilities are more sophisticated than those of virtually any other retail chain in the world.

Success in achieving a low-cost edge over rivals comes from outmanaging rivals in performing essential activities and eliminating or curbing “nonessential” activities.

Success in achieving a low-cost edge over rivals comes from outmanaging rivals in performing essential activities and eliminating or curbing “nonessential” activities.


Confirming Pages


Market Conditions Favoring a Low-Cost Provider Strategy A competitive strategy predicated on low-cost leadership is particularly pow-erful when:

1. Price competition among rival sellers is especially vigorous —Low-cost provid-ers are in the best position to compete offensively on the basis of price and to survive price wars.

2. The products of rival sellers are essentially identical and are readily available from several sellers —Commodity-like products and/or ample supplies set the stage for lively price competition; in such markets, it is the less effi-cient, higher-cost companies that are most vulnerable.

3. There are few ways to achieve product differentiation that have value to buyers —When the product or service differences between brands do not matter much to buyers, buyers nearly always shop the market for the best price.

4. Buyers incur low costs in switching their purchases from one seller to another —Low switching costs give buyers the flexibility to shift purchases to lower-priced sellers having equally good products. A low-cost leader is well positioned to use low price to induce its customers not to switch to rival brands.

5. The majority of industry sales are made to a few, large volume buyers —Low-cost providers are in the best position among sellers in bargaining with high-volume buyers because they are able to beat rivals’ pricing to land a high volume sale while maintaining an acceptable profit margin.

6. Industry newcomers use introductory low prices to attract buyers and build a customer base —The low-cost leader can use price cuts of its own to make it harder for a new rival to win customers.

As a rule, the more price-sensitive buyers are, the more appealing a low-cost strategy becomes. A low-cost company’s ability to set the industry’s price floor and still earn a profit erects protective barriers around its market position.

The Hazards of a Low-Cost Provider Strategy Perhaps the biggest pitfall of a low-cost provider strategy is getting carried away with overly aggressive price cutting and ending up with lower, rather than higher, profitability. A low-cost/low-price advantage results in superior prof-itability only if (1) prices are cut by less than the size of the cost advantage or (2) the added volume is large enough to bring in a bigger total profit despite lower margins per unit sold. Thus, a company with a 5 percent cost advantage cannot cut prices 20 percent, end up with a volume gain of only 10 percent, and still expect to earn higher profits!

A second big pitfall is relying on an approach to reduce costs that can be eas-ily copied by rivals. The value of a cost advantage depends on its sustainabil-ity. Sustainability, in turn, hinges on whether the company achieves its cost advantage in ways difficult for rivals to replicate or match. A third pitfall is becoming too fixated on cost reduction. Low costs cannot be pursued so zeal-ously that a firm’s offering ends up being too features-poor to gain the inter-ests of buyers. Furthermore, a company driving hard to push its costs down

LO2

Recognize industry conditions that favor a market target that is either broad or narrow and that indicate whether the company should pursue a competitive advantage linked to low costs or product differentiation.

LO2



Confirming Pages


has to guard against misreading or ignoring increased buyer preferences for added features or declining buyer price sensitivity. Even if these mistakes are avoided, a low-cost competitive approach still carries risk. Cost-saving tech-nological breakthroughs or process improvements can nullify a low-cost lead-er’s hard-won position.

Broad Differentiation Strategies Differentiation strategies are attractive whenever buyers’ needs and prefer-ences are too diverse to be fully satisfied by a standardized product or service. A company attempting to succeed through differentiation must study buyers’ needs and behavior carefully to learn what buyers think has value and what they are willing to pay for. Then the company must include these desirable features to clearly set itself apart from rivals lacking such product or service attributes.

Successful differentiation allows a firm to:

• Command a premium price, and/or • Increase unit sales (because additional buyers are won over by the differ-

entiating features), and/or • Gain buyer loyalty to its brand (because some buyers are strongly

attracted to the differentiating features and bond with the company and its products).

Differentiation enhances profitability whenever the extra price the prod-uct commands outweighs the added costs of achieving the differentiation. Company differentiation strategies fail when buyers don’t value the brand’s uniqueness and/or when a company’s approach to differentiation is easily copied or matched by its rivals.

Approaches to Differentiation Companies can pursue differentiation from many angles: a unique taste (Dr Pepper, Listerine); multiple features (Microsoft Vista, Microsoft Office); wide selec-tion and one-stop shopping (Home Depot, Amazon.com); superior service (FedEx); spare parts availability (Caterpillar guarantees 48-hour spare parts delivery to any customer anywhere in the world or else the part is furnished free); engineering design and performance (Mercedes, BMW); prestige and distinctiveness (Rolex); product reliability (Whirlpool and GE in large home appliances); quality manufacturing (Michelin in tires, Toyota and Honda in automobiles); technological leadership (3M Corporation in bonding and coating products); a full range of services (Charles Schwab in stock bro-kerage); a complete line of products (Campbell’s soups); and top-of-the-line image and reputation (Ralph Lauren and Starbucks).

The most appealing approaches to differentiation are those that are hard or expensive for rivals to duplicate. Indeed, resourceful competitors can, in time, clone almost any product or feature or attribute. If Coca-Cola introduces a vanilla-flavored soft drink, so can Pepsi; if Nokia introduces mobile phones

Easy-to-copy differentiating features cannot produce sustainable competitive advantage; differentiation based on hard-to-copy competen-cies and capabilities tends to be more sustainable.

Easy-to-copy differentiating features cannot produce sustainable competitive advantage; differentiation based on hard-to-copy competen-cies and capabilities tends to be more sustainable.


Confirming Pages


with cameras and Internet capability, so can Motorola and Samsung. As a rule, differentiation yields a longer-lasting and more profitable competitive edge when it is based on product innovation, technical superiority, product qual-ity and reliability, comprehensive customer service, and unique competitive capabilities. Such differentiating attributes tend to be tough for rivals to copy or offset profitably and buyers widely perceive them as having value.

Creating Value for Customers through Differentiation While it is easy enough to grasp that a successful differentiation strategy must offer value in ways unmatched by rivals, a big issue in crafting a differentia-tion strategy is deciding what is valuable to customers. Typically, value can be delivered to customers in three basic ways.

1. Include product attributes and user features that lower the buyer’s costs. Com-mercial buyers value products that can reduce their cost of doing busi-ness. For example, making a company’s product more economical for a buyer to use can be done by reducing the buyer’s raw materials waste (providing cut-to-size components), reducing a buyer’s inventory require-ments (providing just-in-time deliveries), increasing product reliability to lower a buyer’s repair and maintenance costs, and providing free techni-cal support. Similarly, consumers find value in differentiating features that will reduce their expenses. The recent increase in gasoline prices in the United States has spurred the sales of hybrid-powered automobiles that have higher sales prices than similar gasoline models, but offer better fuel economy.

2. Incorporate features that improve product performance. 2 Commercial buyers and consumers alike value higher levels of performance in many types of products. Product reliability, output, durability, convenience, or ease of use are aspects of product performance that differentiate products offered to buyers. Mobile phone manufacturers are currently in a race to improve the performance of their products through the introduction of next-generation phones with a more appealing, trend-setting set of user fea-tures and options.

3. Incorporate features that enhance buyer satisfaction in noneconomic or intangible ways. Goodyear’s Aquatred tire design appeals to safety conscious motor-ists wary of slick roads. Bentley, Ralph Lauren, Louis Vuitton, Tiffany, Cartier, and Rolex have differentiation-based competitive advantages linked to buyer desires for status, image, prestige, upscale fashion, superior craftsmanship, and the finer things in life. L. L. Bean makes its mail-order customers feel secure in their purchases by providing an unconditional guarantee with no time limit.

Where to Look for Opportunities to Differentiate Differentiation is not something hatched in marketing and advertising depart-ments, nor is it limited to quality and service. Differentiation opportunities

2 Ibid., pp. 135–38.


Confirming Pages


can exist in activities that affect the value of a product or service; possibilities include the following:

• Supply chain activities that ultimately spill over to affect the performance or quality of the company’s end product. Starbucks gets high ratings on its coffees partly because it has very strict specifications on the coffee beans purchased from suppliers.

• Product R&D activities that aim at improved product designs and per-formance, more frequent first-to-market victories, added user safety, or enhanced environmental protection.

• Production R&D and technology related activities that permit the manufac-ture of customized products at an efficient cost; make production meth-ods safer for the environment; or improve product quality, reliability, and appearance. Dell Computer’s build-to-order production process continues to be a strong differentiating feature for the company that appeals to many corporate and individual PC buyers.

• Manufacturing activities that reduce product defects, extend product life, allow better warranty coverages, or enhance product appearance. The quality edge enjoyed by Japanese automakers stems partly from their distinctive competence in performing assembly line activities.

• Distribution and shipping activities that allow for fewer warehouse and on-the-shelf stockouts, quicker delivery to customers, more accurate order filling, and/or lower shipping costs.

• Marketing, sales, and customer service activities that result in superior tech-nical assistance to buyers, faster maintenance and repair services, better credit terms, or greater customer convenience.

Perceived Value and the Importance of Signaling Value The price premium commanded by a differentiation strategy reflects the value actually delivered to the buyer and the value perceived by the buyer. The value of certain differentiating features is rather easy for buyers to detect, but in some instances buyers may have trouble assessing what their experience with the product will be. 3 Successful differentiators go to great lengths to make buy-ers knowledgeable about a product’s value and incorporate signals of value such as attractive packaging, extensive ad campaigns (i.e., how well-known the product is), the quality of brochures and sales presentations, the seller’s list of customers, the length of time the firm has been in business, and the professionalism, appearance, and personality of the seller’s employees. Such signals of value may be as important as actual value (1) when the nature of differentiation is subjective or hard to quantify, (2) when buyers are making a first-time purchase, (3) when repurchase is infrequent, and (4) when buyers are unsophisticated.

3 The relevance of perceived value and signaling is discussed in more detail in Porter, Competitive Advantage: Creating and Sustaining Superior Performance, (New York: Simon & Schuster, 1996), pp. 138–142.


Confirming Pages


Market Conditions Favoring a Differentiation Strategy Differentiation strategies tend to work best in market circumstances where:

1. Buyer needs and uses of the product are diverse —Diverse buyer preferences allow industry rivals to set themselves apart with product attributes that appeal to particular buyers. For instance, the diversity of consumer pref-erences for menu selection, ambience, pricing, and customer service gives restaurants exceptionally wide latitude in creating differentiated concepts. Other industries offering opportunities for differentiation based upon diverse buyer needs and uses include magazine publishing, automobile manufacturing, footwear, and computers.

2. There are many ways to differentiate the product or service that have value to buyers —Industries that allow competitors to add features to product attri-butes are well suited to differentiation strategies. For example, hotel chains can differentiate on such features as location, size of room, range of guest services, in-hotel dining, and the quality and luxuriousness of bedding and furnishings. Similarly, cosmetics producers are able to differentiate based upon prestige and image, formulations that fight the signs of aging, UV light protection, exclusivity of retail locations, the inclusion of antioxidants and natural ingredients, or prohibitions against animal testing.

3. Few rival firms are following a similar differentiation approach —The best dif-ferentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator encounters less head-to-head rivalry when it goes its own separate way to create unique-ness and does not try to outdifferentiate rivals on the very same attri-butes. When many rivals are all claiming “ours tastes better than theirs” or “ours gets your clothes cleaner than theirs,” competitors tend to end up chasing the same buyers with very similar product offerings.

4. Technological change is fast-paced and competition revolves around rapidly evolving product features —Rapid product innovation and frequent intro-ductions of next-version products heighten buyer interest and provide space for companies to pursue distinct differentiating paths. In video game hardware and video games, golf equipment, PCs, mobile phones, and MP3 players, competitors are locked into an ongoing battle to set themselves apart by introducing the best next-generation products—companies that fail to come up with new and improved products and distinctive performance features quickly lose out in the marketplace.

The Hazards of a Differentiation Strategy Differentiation strategies can fail for any of several reasons. A differentiation strategy keyed to product or service attributes that are easily and quickly copied is always suspect. Rapid imitation means that no rival achieves meaningful dif-ferentiation, because whatever new feature one firm introduces that strikes the fancy of buyers is almost immediately added by rivals. This is why a firm must search out sources of uniqueness that are time-consuming or burden-some for rivals to match if it hopes to use differentiation to win a sustainable competitive edge over rivals.

LO2


LO2



Confirming Pages


Differentiation strategies can also fail when buyers see little value in the unique attributes of a company’s product. Thus even if a company sets the attributes of its brand apart from its rivals’ brands, its strategy can fail because of trying to differentiate on the basis of something that does not deliver adequate value to buyers. For example, consumers may have a “so what” attitude about the Adidas 1 running shoe that utilizes a 20 MHz microprocessor to make adjust-ments to pavement and ground surfaces. Adidas may find buyers will decide the computer-controlled running shoes are not worth the $250 retail price and sales will be disappointingly low.

Overspending on efforts to differentiate is a strategy flaw that can end up erod-ing profitability. Company efforts to achieve differentiation nearly always raise costs. The trick to profitable differentiation is either to keep the costs of achiev-ing differentiation below the price premium the differentiating attributes can command in the marketplace or to offset thinner profit margins by selling enough additional units to increase total profits. If a company goes overboard in pursuing costly differentiation, it could be saddled with unacceptably thin profit margins or even losses. The need to contain differentiation costs is why many companies add little touches of differentiation that add to buyer satis-faction but are inexpensive to institute.

Other common pitfalls and mistakes in crafting a differentiation strategy include: 4

• Overdifferentiating so that product quality or service levels exceed buyers’ needs. Even if buyers “like” the differentiating extras, they may not find them sufficiently valuable to pay extra for them.

• Trying to charge too high a price premium. Even if buyers view certain extras or deluxe features as “nice to have,” they may still conclude that the added cost is excessive relative to the value they deliver.

• Being timid and not striving to open up meaningful gaps in quality or service or performance features vis-à-vis the products of rivals —tiny differences between rivals’ product offerings may not be visible or important to buyers.

A low-cost provider strategy can always defeat a differentiation strategy when buyers are satisfied with a basic product and don’t think “extra” attributes are worth a higher price.

Focused (or Market Niche) Strategies What sets focused strategies apart from low-cost leadership or broad differen-tiation strategies is a concentration on a narrow piece of the total market. The targeted segment, or niche, can be defined by geographic uniqueness or by special product attributes that appeal only to niche members. The advantages of focusing a company’s entire competitive effort on a single market niche are considerable, especially for smaller and medium-sized companies that may lack the breadth and depth of resources to tackle going after a national cus-tomer base with a “something for everyone” lineup of models, styles, and prod-uct selection. Community Coffee, the largest family-owned specialty coffee

4 Porter, Competitive Advantage, pp. 160–162.

LO2


LO2



Confirming Pages


retailer in the United States, has a geographic focus on the state of Louisiana and communities across the Gulf of Mexico. Community holds only a 1.1 per-cent share of the national coffee market, but has recorded sales in excess of $100 million and has won a 50 percent share of the coffee business in the 11-state region where it is distributed. Examples of firms that concentrate on a well-defined market niche keyed to a particular product or buyer segment include Animal Planet and the History Channel (in cable TV); Google (in Internet search engines); Porsche (in sports cars); and Bandag (a specialist in truck tire recapping that promotes its recaps aggressively at over 1,000 truck stops).

A Focused Low-Cost Strategy A focused strategy based on low cost aims at securing a competitive advan-tage by serving buyers in the target market niche at a lower cost and a lower price than rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment. The avenues to achieving a cost advantage over rivals also serving the target market niche are the same as for low-cost leadership—outmanage rivals in keeping the costs to a bare minimum and searching for innovative ways to bypass or reduce nonessential activities. The only real dif-ference between a low-cost provider strategy and a focused low-cost strategy is the size of the buyer group to which a company is appealing.

Focused low-cost strategies are fairly common. Producers of private-label goods are able to achieve low costs in product development, marketing, dis-tribution, and advertising by concentrating on making generic items similar to name-brand merchandise and selling directly to retail chains wanting a low-priced store brand. The Perrigo Company has become a leading man-ufacturer of over-the-counter health care products with 2006 sales of more than $1.4 billion by focusing on producing private-label brands for retailers such as Wal-Mart, CVS, Walgreen, Rite-Aid, and Safeway. Even though Per-rigo doesn’t make branded products, a focused low-cost strategy is appropri-ate for the makers of branded products as well. Concepts & Connections 3.1 describes how Motel 6 has kept its costs low in catering to budget-conscious travelers.

A Focused Differentiation Strategy Focused differentiation strategies are keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a nar-row, well-defined group of buyers (as opposed to a broad differentiation strat-egy aimed at many buyer groups and market segments). Companies like Four Seasons Hotels and Resorts, Chanel, Gucci, and Ferrari employ successful differentiation-based focused strategies targeted at affluent buyers wanting products and services with world-class attributes. Glaceau Vitamin Water and Under Armour have found success by offering performance-oriented products for athletes and fitness buffs. Orvis has become a leading seller of high-quality sporting goods equipment by focusing on sportsmen dedicated to fly fish-ing and bird hunting. Indeed, most markets contain a buyer segment willing to pay a price premium for the very finest items available, thus opening the


Confirming Pages


Concepts & Connections 3.1

Motel 6 caters to price-conscious travelers who want a clean, no-frills place to spend the night. To be a low-cost provider of overnight lodging, Motel 6 (1) selects relatively inexpensive sites on which to construct its units (usu-ally near interstate exits and high traffic locations but far enough away to avoid paying prime site prices); (2) builds only basic facilities (no restaurant or bar and only rarely a swimming pool); (3) relies on standard architectural designs that incorporate inexpensive materials and low-cost construction techniques; and (4) provides simple room furnishings and decorations. These approaches lower both investment and operating costs. Without restaurants, bars,

MOTEL 6’s FOCUSED LOW-COST STRATEGY

and all kinds of guest services, a Motel 6 unit can operate with just front-desk personnel, room cleanup crews, and skeleton building-and-grounds maintenance.

To promote the Motel 6 concept with travelers who have simple overnight requirements, the chain uses unique, rec-ognizable radio ads done by nationally syndicated radio personality Tom Bodett; the ads describe Motel 6’s clean rooms, no-frills facilities, friendly atmosphere, and depend-ably low rates (usually under $40 a night).

Motel 6’s basis for competitive advantage is lower costs than competitors in providing basic, economical overnight accommodations to price-constrained travelers.

strategic window for some competitors to pursue differentiation-based focu-sed strategies aimed at the very top of the market pyramid.

Conditions Making a Focused Low-Cost or Focused Differentiation Strategy Viable A focused strategy aimed at securing a competitive edge based either on low cost or differentiation becomes increasingly attractive as more of the following conditions are met:

• The target market niche is big enough to be profitable and offers good growth potential.

• Industry leaders have chosen not to compete in the niche—in which case focusers can avoid battling head-to-head against the industry’s biggest and strongest competitors.

• It is costly or difficult for multisegment competitors to meet the special-ized needs of niche buyers and at the same time satisfy the expectations of mainstream customers.

• The industry has many different niches and segments, thereby allowing a focuser to pick a niche suited to its resource strengths and capabilities.

• Few, if any, other rivals are attempting to specialize in the same target segment.

The Hazards of a Focused Low-Cost or Focused Differentiation Strategy Focusing carries several risks. The first major risk is the chance that competi-tors will find effective ways to match the focused firm’s capabilities in serving


Confirming Pages


the target niche. In the lodging business, large chains like Marriott and Hilton have launched multibrand strategies that allow them to compete effectively in several lodging segments simultaneously. Marriott has flagship hotels with a full complement of services and amenities that allow it to attract travelers and vacationers going to major resorts; it has J.W. Marriott and Ritz-Carlton hotels that provide deluxe comfort and service to business and leisure travelers; it has Courtyard by Marriott and SpringHill Suites brands for business trav-elers looking for moderately priced lodging; it has Marriott Residence Inns and TownePlace Suites designed as a “home away from home” for travelers staying five or more nights; and it has 520 Fairfield Inn locations that cater to travelers looking for quality lodging at an “affordable” price. Similarly, Hilton has a lineup of brands (Conrad Hotels, Doubletree Hotels, Embassy Suites Hotels, Hampton Inns, Hilton Hotels, Hilton Garden Inns, and Home-wood Suites) that enable it to compete in multiple segments and compete head-to-head against lodging chains that operate only in a single segment. Multibrand strategies are attractive to large companies like Marriott and Hilton precisely because they enable a company to enter a market niche and siphon business away from companies that employ a focus strategy.

A second risk of employing a focus strategy is the potential for the preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. An erosion of the differences across buyer seg-ments lowers entry barriers into a focuser’s market niche and provides an open invitation for rivals in adjacent segments to begin competing for the focuser’s cus-tomers. A third risk is that the segment may become so attractive it is soon inun-dated with competitors, intensifying rivalry and splintering segment profits.

The Peril of Adopting a “Stuck in the Middle” Strategy Each of the four generic competitive strategies positions the company differently in its market and competitive environment. Each establishes a central theme for how the company will endeavor to outcompete rivals. Each creates some boundaries or guidelines for maneuvering as market circumstances unfold and as ideas for improving the strategy are debated. Thus, settling on which generic strategy to employ is perhaps the most important strategic commitment a com-pany makes—it tends to drive the rest of a company’s strategic actions.

One of the big dangers in crafting a competitive strategy is that manag-ers, torn between the pros and cons of the various generic strategies, will opt for “stuck in the middle” strategies that represent compromises between lower costs and greater differentiation and between broad and narrow market appeal. Compromise or middle-ground strategies rarely produce sustainable competitive advantage or a distinctive competitive position. Usually, compa-nies with compromise strategies end up with a middle-of-the-pack industry ranking—they have average costs, some but not a lot of product differentia-tion relative to rivals, an average image and reputation, and little prospect of industry leadership.


Confirming Pages


Resource- and Competence-Based Strategic Approaches to Competitive Advantage Companies are able to supplement strategies keyed to unique industry posi-tioning with strategies that rely on valuable and rare resources possessed by the firm. Resource-based strategies attempt to exploit company resources in a manner that offers value to customers in ways rivals are unable to match. For example, a company pursuing a broad low-cost strategy might build its strategy around unique resources that allow it to produce or distribute prod-ucts at a lower cost than rivals. Dell Computer has amassed a variety of valu-able resource strengths that have yielded a considerable cost advantage in the PC industry. Dell Computer’s supplier relationships and build-to-order manufacturing capabilities allowed it to operate with no more than two hours of PC components inventory in 2006. Also at that time, its direct selling busi-ness model and Internet sales capabilities allowed it to average just 3 to 4 days worth of finished goods inventory, while its rivals typically held as much as 30 days of finished goods inventory. The inability of Dell’s rivals to match its supplier-, manufacturing-, and sales-related resource strengths made it difficult for them to match Dell’s pricing and earn comparable profit margins.

Resource strengths and competitive capabilities can also facilitate differen-tiation in the marketplace. Because Fox News and CNN have the capability to devote more air time to breaking news stories and get reporters on the scene very quickly compared to the major networks, many viewers turn to the cable networks when a major news event occurs. Microsoft has stronger capabilities to design, create, distribute, and advertise an array of software products for PC applications than any of its rivals. Avon and Mary Kay Cosmetics have differentiated themselves from other cosmetics and personal care companies by assembling a salesforce numbering in the hundreds of thousands that gives them direct sales capability—their sales associates can demonstrate products to interested buyers, take their orders on the spot, and deliver the items to buyers’ homes. 5

A Company’s Resources, Capabilities, and Competencies as the Basis for Competitive Advantage One of the most important aspects of identifying resource strengths and competitive capabilities that can become the basis for competitive advantage has to do with a company’s competence level in performing key pieces of its business—such as supply chain management, R&D, production, distribu-tion, sales and marketing, and customer service. A company’s proficiency

5 For a more detailed discussion, see George Stalk, Jr., Philip Evans, and Lawrence E. Schulman, “Competing on Capabilities: The New Rules of Corporate Strategy,” Harvard Business Review 70, no. 2 (March–April 1992), pp. 57–69.

LO3

Understand the role of resource-based strategies in supplementing generic strategies and achieving competitive advantage.

LO3

Understand the role of resource-based strategies in supplementing generic strategies and achieving competitive advantage.

A resource-based strategy utilizes a compa-ny’s resources and competitive capabilities to achieve a cost-based advantage or differentia-tion. The most successful resource-based strategies offer value to customers in ways that are unmatched by rivals.

A resource-based strategy utilizes a compa-ny’s resources and competitive capabilities to achieve a cost-based advantage or differentia-tion. The most successful resource-based strategies offer value to customers in ways that are unmatched by rivals.


Confirming Pages


in conducting different facets of its operations can range from merely a competence in performing an activity to a core competence to a distinctive competence:

1. A competence is an internal activity an organization is good at doing. Some competencies relate to fairly specific skills and expertise (like just-in-time inventory control or picking locations for new stores) and

may be performed in a single department or organiza-tional unit. Other competencies, however, are inher-ently multidisciplinary and cross-functional. A competence in continuous product innovation, for

example, comes from teaming the efforts of people and groups with expertise in market research, new product R&D, design and engineering, cost-effective manufacturing, and market testing.

2. A core competence is a proficiently performed internal activity that is cen-tral to a company’s strategy and competitiveness. A core competence is a highly valuable resource strength because of the contribution it makes to the company’s success in the marketplace. A company may have more

than one core competence in its resource portfolio, but rare is the company that can legitimately claim more than two or three core competencies. Most often, a core competence is knowledge-based, residing in people and in a company’s intellectual capital and not in its assets on the

balance sheet. Moreover, a core competence is more likely to be grounded in cross-department combinations of knowledge and expertise rather than being the product of a single department or work group. 3M Corporation has a core competence in product innovation—its record of introducing new products goes back several decades and new product introduction is central to 3M’s strategy for growing its business.

3. A distinctive competence is a competitively valuable activity that a com-pany performs better than its rivals. Because a distinctive competence repre-

sents a uniquely strong capability relative to rival companies, it qualifies as a competitively superior resource strength with competitive advantage potential. This is particularly true when the distinctive compe-tence enables a company to deliver standout value to customers (in the form of lower prices or better prod-

uct performance or superior service). Toyota has worked diligently over several decades to establish a distinctive competence in low-cost, high-quality manufacturing of motor vehicles; its “lean production” system is far superior to that of any other automaker’s and the company is pushing the boundaries of its production advantage with a new Global Body assembly line. Toyota’s new assembly line costs 50 percent less to install and can be changed to accommodate a new model for 70 percent less than its previous production system. 6

6 George Stalk, Jr. and Rob Lachenauer, “Hard Ball: Five Killer Strategies for Trouncing the Competition,” Harvard Business Review 82, no. 4 (April 2004), p. 65.

A competence is an activity that a company performs well.A competence is an activity that a company performs well.

A core competence is a competitively important activity that a company performs better than other internal activities.

A core competence is a competitively important activity that a company performs better than other internal activities.

A distinctive competence is a competitively important activity that a company performs better than its rivals—therefore offering the potential for competitive advantage.

A distinctive competence is a competitively important activity that a company performs better than its rivals—therefore offering the potential for competitive advantage.


Confirming Pages


The conceptual differences between a competence, a core competence, and a distinctive competence draw attention to the fact that a company’s resource strengths and competitive capabilities are not all equal. 7 Some competencies and competitive capabilities merely enable market survival because most rivals have them. Core competencies are competitively more important resource strengths than competencies because they add power to the company’s strat-egy and have a bigger positive impact on its market position and profitability. Distinctive competencies are even more competitively important. A distinc-tive competence is a competitively potent resource strength for three reasons: (1) it gives a company competitively valuable capability that is unmatched by rivals, (2) it has potential for being the cornerstone of the company’s strategy, and (3) it can produce a competitive edge in the marketplace.

Determining the Competitive Power of a Resource Strength What is most telling about a company’s resource strengths is how powerful they are in the marketplace. The competitive power of a resource strength is measured by how many of the following four tests it can pass: 8

1. Is the resource really competitively valuable? All companies possess a collec-tion of resources and competencies—some have the potential to contrib-ute to a competitive advantage while others may not. Apple’s operating system for its MacIntosh PCs is by most accounts a world beater (com-pared to Windows XP) but Apple has failed miserably in converting its resource strength in operating system design into competitive success in the global PC market—it’s an industry laggard with a two percent world-wide market share.

2. Is the resource strength rare—is it something rivals lack? Companies have to guard against pridefully believing that their core competences are distinc-tive competences or that their brand name is more powerful than those of their rivals. Who can really say whether Coca-Cola’s consumer marketing prowess is better than Pepsi-Cola’s or whether the Mercedes-Benz brand name is more powerful than that of BMW or Lexus? Although many retailers claim to be quite proficient in product selection and in-store merchandising, a number run into trouble in the marketplace because

7 For a more extensive discussion of how to identify and evaluate the competitive power of a company’s capabilities, see David W. Birchall and George Tovstiga, “The Strategic Potential of a Firm’s Knowledge Portfolio,” Journal of General Management 25, no. 1 (Autumn 1999), pp. 1–16 and David Teece, “Capturing Value from Knowledge Assets: The New Economy, Markets for Know-How, and Intangible Assets,” California Management Review 40, no. 3 (Spring 1998), pp. 55–79. 8 See Jay B. Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Manage-ment 17, no. 1 (1991), pp. 105–109; and Jay B. Barney and Delwyn N. Clark, Resource-Based Theory: Creating and Sustaining Competitive Advantage (New York: Oxford University Press, 2007). Also see M. A. Peteraf, “The Cornerstones of Competitive Advantage: A Resource-Based View,” Strate-gic Management Journal 14 (1993), pp. 179–191; and David J. Collis and Cynthia A. Montgomery, “Competing on Resources: Strategy in the 1990s,” Harvard Business Review 73, no. 4 (July–August 1995), pp. 120–23.


Confirming Pages


they encounter rivals whose competencies in product selection and in-store merchandising are equal to or better than theirs.

3. Is the resource strength hard to copy? The more difficult and more expensive it is to imitate a company’s resource strength, the greater its potential competitive value. Resources tend to be difficult to copy when they are unique (a fantastic real estate location, patent protection), when they must be built over time (a brand name, a strategy supportive organizational culture), and when they carry big capital requirements (a cost-effective plant to manufacture cutting-edge microprocessors). Wal-Mart’s competi-tors have failed miserably in their attempts over the past two decades to match its state-of-the-art distribution capabilities.

4. Can the resource strength be trumped by substitute resource strengths and com-petitive capabilities? Resources that are competitively valuable, rare, and costly to imitate lose their ability to offer competitive advantage if rivals possess equivalent substitute resources. For example, manufacturers rely-ing on automation to gain a cost-based advantage in production activities may find their technology based advantage nullified by rivals’ use of low-wage offshore manufacturing. Resources can contribute to a competitive advantage only when resource substitutes don’t exist.

Understanding the nature of competitively important resources allows managers to identify resources or capabilities that should be further devel-

oped to play an important role in the company’s future strategies. In addition, management may determine that it doesn’t possess a resource that independently passes all four tests listed here with high marks, but does have a bundle of resources that can be leveraged to develop a core competence. Although Callaway Golf Company’s engineering and market research

capabilities are matched relatively well by rivals Cobra Golf and Ping Golf, its cross-functional development skills allow it to consistently outperform both rivals in the marketplace. Callaway Golf’s technological capabilities, under-standing of consumer preferences, and collaborative organizational culture have allowed it to remain the largest seller of golf equipment for more than a decade. The company’s bundling of resources used in its product develop-ment process qualifies as a distinctive competence and is the basis of the com-pany’s competitive advantage.

Resource-based strategies can also be directed at undermining a rival’s competitively valuable resources by identifying substitute resources to

accomplish the same objective. Amazon.com lacks the broad network of retail stores operated by rival Barnes & Noble, but it is able to make its products readily available to anyone with Internet access. Amazon.com’s free shipping on orders over $25 and searchable index of books and other merchandise is

much more appealing than visiting a big-box bookstore for many busy consumers.

Companies may lack stand-alone resource strengths capable of contributing to competitive advantage, but may develop a distinctive competence through bundled resource strengths.

Companies may lack stand-alone resource strengths capable of contributing to competitive advantage, but may develop a distinctive competence through bundled resource strengths.

Substitute resources may be developed to allow companies to offset resource weaknesses or defi ciencies in performing competitively critical activities.

Substitute resources may be developed to allow companies to offset resource weaknesses or defi ciencies in performing competitively critical activities.


Confirming Pages


Supplementing Resources and Competencies through Strategic Alliances and Collaborative Partnerships Companies in all types of industries have elected to form strategic alliances and partnerships to add to their collections of resources and competencies. This is an about-face from times past, when the vast majority of companies were confi-dent they could independently develop whatever resources were needed to be successful in their industries. But globalization of the world economy, revolu-tionary advances in technology, and rapid growth in emerging markets in Asia, Latin America, and Eastern Europe have made strategic partnerships common-place in most industries. 9 Even the largest and most financially sound compa-nies have concluded that simultaneously running the races for global market leadership and for a stake in the industries of the future requires more diverse skills, resources, technological expertise, and competitive capabilities than they can assemble alone. Such companies, along with others that are missing the resources and competitive capabilities needed to pursue promising opportuni-ties, have determined that the fastest way to fill the gap is often to form alliances with enterprises having the desired strengths. Consequently, these companies form strategic alliances or collaborative partnerships in which two or more com-panies jointly work to achieve mutually beneficial strategic outcomes. Thus, a strategic alliance is a formal agreement between two or more separate companies in which there is strategically relevant collaboration of some sort, joint contribution of resources, shared risk, shared control, and mutual dependence. Often, alliances involve joint marketing, joint sales or distribution, joint production, design collaboration, joint research, or projects to jointly develop new technologies or products. The rela-tionship between the partners may be contractual or merely collaborative; the arrangement commonly stops short of formal ownership ties between the part-ners (although there are a few strategic alliances where one or more allies have minority ownership in certain of the other alliance members). Five factors make an alliance “strategic,” as opposed to just a convenient business arrangement: 10

1. It is critical to the company’s achievement of an important objective.

2. It helps build, sustain, or enhance a core competence or competitive advantage.

3. It helps block a competitive threat.

4. It helps open up important new market opportunities.

5. It mitigates a significant risk to a company’s business.

Companies in many different industries all across the world have made strategic alliances a core part of their overall strategy; U.S. companies alone announced nearly 68,000 alliances from 1996 through 2003. 11 In the personal

9 Yves L. Doz and Gary Hamel, Alliance Advantage: The Art of Creating Value through Partnering (Boston: Harvard Business School Press, 1998), pp. xiii, xiv.

10 Jason Wakeam, “The Five Factors of a Strategic Alliance,” Ivey Business Journal 68, no. 3 (May–June 2003), pp. 1–4.

11 Jeffrey H. Dyer, Prashant Kale, and Harbir Singh, “When to Ally and When to Acquire,” Harvard Business Review 82, no. 7/8 (July–August 2004), p. 109.

LO4

Learn how strategic alliances and partnerships can be used to add to a fi rm’s collection of resources and competencies.

LO4

Learn how strategic alliances and partnerships can be used to add to a fi rm’s collection of resources and competencies.


Confirming Pages


computer (PC) industry, alliances are pervasive because PC components and software are supplied by so many different companies—one set of compa-nies provides the microprocessors, another group makes the circuit boards, another the monitors, another the disk drives, another the memory chips, and so on. Moreover, their facilities are scattered across the United States, Japan, Taiwan, Singapore, Malaysia, and parts of Europe. Strategic alliances among companies in the various parts of the PC industry facilitate the close cross-company collaboration required on next-generation product development, logistics, production, and the timing of new product releases.

During the 1998–2004 period, Samsung Electronics, a South Korean corpo-ration with $54 billion in sales, entered into over 50 major strategic alliances involving such companies as Sony, Yahoo, Hewlett-Packard, Nokia, Motorola, Intel, Microsoft, Dell, Mitsubishi, Disney, IBM, Maytag, and Rockwell Automa-tion; the alliances involved joint investments, technology transfer arrangements, joint R&D projects, and agreements to supply parts and components—all of which facilitated Samsung’s strategic efforts to transform itself into a global enterprise and establish itself as a leader in the worldwide electronics industry.

Studies indicate that large corporations are commonly involved in 30 to 50 alliances and that a number have hundreds of alliances. One recent study esti-mated that about 35 percent of corporate revenues in 2003 came from activi-ties involving strategic alliances, up from 15 percent in 1995. 12 Another study reported that the typical large corporation relied on alliances for 15 to 20 percent of its revenues, assets, or income. 13 Companies that have formed a host of alli-ances have a need to manage their alliances like a portfolio—terminating those that no longer serve a useful purpose or that have produced meager results, forming promising new alliances, and restructuring certain existing alliances to correct performance problems and/or redirect the collaborative effort. 14

How Strategic Alliances Build Resource Strengths and Core Competencies The most common reasons why companies enter into strategic alliances are to expedite the development of promising new technologies or products, to overcome deficits in their own technical and manufacturing expertise, to bring together the personnel and expertise needed to create new skill sets, to improve supply chain efficiency, to gain economies of scale in production, and to acquire or improve market access through joint marketing agreements. 15 In bringing together firms with different skills and knowledge bases, alliances

12 Salvatore Parise and Lisa Sasson, “Leveraging Knowledge Management across Strategic Alliances,” Ivey Business Journal 66, no. 4 (March–April 2002), p. 42. 13 David Ernst and James Bamford, “Your Alliances Are Too Stable,” Harvard Business Review 83, no. 6 (June 2005), p. 133. 14 An excellent discussion of the portfolio approach to managing multiple alliances and how to restructure a faltering alliance is presented in Ernst and Bamford, “Your Alliances Are Too Stable,” pp. 133–141.

15 Michael E. Porter, The Competitive Advantage of Nations (New York: Free Press, 1990), p. 66. For a discussion of how to realize the advantages of strategic partnerships, see Nancy J. Kaplan and Jonathan Hurd, “Realizing the Promise of Partnerships,” Journal of Business Strategy 23, no. 3 (May–June 2002), pp. 38–42; Parise and Sasson, “Leveraging Knowledge Management across Stra-tegic Alliances,” pp. 41–47; and Ernst and Bamford, “Your Alliances Are Too Stable,” pp. 133–141.


Confirming Pages


open up learning opportunities that help partner firms better leverage their own resource strengths. 16

Allies can learn much from one another in perform-ing joint research, sharing technological know-how, and collaborating on complementary new technolo-gies and products. 17 Manufacturers frequently pursue alliances with parts and components suppliers to gain the efficiencies of better supply chain management and to speed new products to market. By joining forces in components pro-duction and/or final assembly, companies may be able to realize cost savings not achievable with their own small volumes—German automakers Volkswa-gen AG, Audi AG, and Porsche AG formed a strategic alliance to spur mutual development of a gasoline-electric hybrid engine and transmission system that they could each then incorporate into their motor vehicle models; BMW, General Motors, and Daimler AG formed a similar partnership. Both alliances were aimed at closing the gap on Toyota, generally said to be the world leader in fuel-efficient hybrid engines. Johnson & Johnson and Merck entered into an alliance to market Pepcid AC; Merck developed the stomach distress remedy and Johnson & Johnson functioned as marketer—the alliance made Pepcid products the best-selling remedies for acid indigestion and heartburn.

FAILED STRATEGIC ALLIANCES AND COOPERATIVE PARTNER SHIPS Most alliances that aim at technology sharing or providing market access turn out to be temporary, fulfilling their purpose after a few years because the ben-efits of mutual learning have occurred. Although long-term alliances some-times prove mutually beneficial, most partners don’t hesitate to terminate the alliance and go it alone when the payoffs run out. Alliances are more likely to be long-lasting when (1) they involve collaboration with suppliers or distribu-tion allies, or (2) both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging.

Whether intended for long-term or temporary purposes, a surprising num-ber of alliances fail to benefit either partner. In 2004, McKinsey & Co. esti-mated that the overall success rate of alliances was around 50 percent, based on whether the alliance achieved the stated objectives. 18 Many alliances are dissolved after a few years. The high “divorce rate” among strategic allies has several causes, the most common of which are: 19

• Diverging objectives and priorities. • An inability to work well together. • Changing conditions that make the purpose of the alliance obsolete. • The emergence of more attractive technological paths. • Marketplace rivalry between one or more allies.

16 A. Inkpen, “Learning, Knowledge Acquisition, and Strategic Alliances,” European Management Journal 16, no. 2 (April 1998), pp. 223–229.

17 For a discussion of how to raise the chances that a strategic alliance will produce strategically important outcomes, see M. Koza and A. Lewin, “Managing Partnerships and Strategic Alliances: Raising the Odds of Success,” European Management Journal 18, no. 2 (April 2000), pp. 146–151.

18 This same 50 percent success rate for alliances was also cited in Ernst and Bamford, “Your Alliances Are Too Stable,” p. 133; both co-authors of this HBR article were McKinsey personnel.

19 Doz and Hamel, Alliance Advantage, pp. 16–18.

The competitive attraction of alliances is in allowing companies to bundle competencies and resources that are more valuable in a joint effort than when kept separate.

The competitive attraction of alliances is in allowing companies to bundle competencies and resources that are more valuable in a joint effort than when kept separate.


Confirming Pages


Experience indicates that alliances stand a reasonable chance of helping a company reduce competitive disadvantage but very rarely have they proved a strategic option for gaining a durable competitive edge over rivals.

THE STRATEGIC DANGERS OF RELYING ON ALLIANCES FOR KEY RESOURCE STRENGTHS The Achilles heel of alliances and coop-erative strategies is becoming dependent on other companies for essential expertise and capabilities. To be a market leader (and perhaps even a serious market contender), a company must ultimately develop its own capabilities in areas where internal strategic control is pivotal to protecting its competi-tiveness and building competitive advantage. Moreover, some alliances hold only limited potential because the partner guards its most valuable skills and expertise; in such instances, acquiring or merging with a company possessing the desired know-how and resources is a better solution.

Key Points 1. Early in the process of crafting a strategy, company managers have to decide

which of the four basic competitive strategies to employ—overall low-cost, broad differentiation, focused low-cost, or focused differentiation.

2. In employing a low-cost provider strategy, a company must do a better job than rivals of cost-effectively managing internal activities and/or it must fi nd innova-tive ways to eliminate or bypass cost-producing activities. Low-cost provider strategies work particularly well when price competition is strong and the prod-ucts of rival sellers are very weakly differentiated. Other conditions favoring a low-cost provider strategy are when supplies are readily available from eager sellers, when there are not many ways to differentiate that have value to buyers, when the majority of industry sales are made to a few, large buyers, when buyer switching costs are low, and when industry newcomers are likely to use a low introductory price to build market share.

3. Broad differentiation strategies seek to produce a competitive edge by incorpo-rating attributes and features that set a company’s product/service offering apart from rivals in ways that buyers consider valuable and worth paying for. Success-ful differentiation allows a fi rm to (1) command a premium price for its product, (2) increase unit sales (because additional buyers are won over by the differenti-ating features), and/or (3) gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products). Differentiation strategies work best in markets with diverse buyer preferences where there are big windows of opportunity to strongly dif-ferentiate a company’s product offering from those of rival brands, in situations where few other rivals are pursuing a similar differentiation approach, and in circumstances where technological change is fast-paced and competition centers on rapidly evolving product features. A differentiation strategy is doomed when competitors are able to quickly copy most or all of the appealing product attri-butes a company comes up with, when a company’s differentiation efforts meet


Confirming Pages

55

with a ho-hum or so what market reception, or when a company erodes profi t-ability by overspending on efforts to differentiate its product offering.

4. A focus strategy delivers competitive advantage either by achieving lower costs than rivals in serving buyers comprising the target market niche or by offering niche buyers an appealingly differentiated product or service that meets their needs better than rival brands. A focused strategy becomes increasingly attrac-tive when the target market niche is big enough to be profi table and offers good growth potential, when it is costly or diffi cult for multisegment competitors to put capabilities in place to meet the specialized needs of the target market niche and at the same time satisfy the expectations of their mainstream customers, when there are one or more niches that present a good match with a focuser’s resource strengths and capabilities, and when few other rivals are attempting to specialize in the same target segment.

5. Deciding which generic strategy to employ is perhaps the most important stra-tegic commitment a company makes—it tends to drive the rest of the strategic actions a company decides to undertake and it sets the whole tone for the pursuit of a competitive advantage over rivals.

6. Companies are able to supplement the four generic strategies with strategies that rely on valuable and rare resources possessed by the fi rm. Resource-based strategies attempt to exploit company resources in a manner that offers value to customers in ways rivals are unable to match. A company’s resource strengths and competitive capabilities can contribute to an organizational competence, core competence, or distinctive competence. A distinctive competence is a com-petitively potent resource strength for three reasons: (1) it gives a company com-petitively valuable capability that is unmatched by rivals, (2) it can underpin and add real punch to a company’s strategy, and (3) it is a basis for sustainable com-petitive advantage. Companies lacking important standalone resource strengths capable of contributing to competitive advantage may fi nd advantage through bundled resource strengths or substitute resources.

7. Companies lacking key resource strengths or competences may also form alliances with enterprises having the desired strengths. Consequently, these companies form strategic alliances or collaborative partnerships in which two or more compa-nies jointly work to achieve mutually benefi cial strategic outcomes. Strategic alli-ances are formal agreements between two or more separate companies in which there is strategically relevant collaboration of some sort, joint contribution of resources, shared risk, shared control, and mutual dependence. Alliances are more likely to be long-lasting when (1) they involve collaboration with suppliers or dis-tribution allies, or (2) both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging.

Assurance of Learning

Exercises

1. Progressive Insurance has fashioned a strategy in auto insurance focused on people with a record of traffi c violations who drive high-performance cars, driv-ers with accident histories, motorcyclists, teenagers, and other so-called high-risk categories of drivers that most auto insurance companies steer away from. Pro-gressive discovered that some of these high-risk drivers are affl uent and pressed for time, making them less sensitive to paying premium rates for their car insurance. Management learned that it could charge such drivers high enough premiums to cover the added risks. Progressive also is known for its expedited application process and friendly application policies toward higher-risk drivers.

LO1 LO1


Confirming Pages

56

Progressive also pioneered the low-cost direct sales model of allowing customers to purchase insurance online and over the phone.

Progressive also studied the market segments for insurance carefully enough to discover that some motorcycle owners were not especially risky (middle-aged suburbanites who sometimes commuted to work or used their motorcycles mainly for recreational trips with their friends). Progressive’s strategy allowed it to become a leader in the market for luxury car insurance for customers who appreciated Progressive’s streamlined approach to doing business. The company also maintains roving claims adjusters who arrive at accident scenes to assess claims and issue checks for repairs on the spot. Progressive introduced 24-hour claims reporting, which has become an industry standard.

How would you characterize Progressive Insurance’s competitive strategy? Does it appear that Progressive is pursuing a cost-based advantage or differentia-tion? Has it focused on a niche within the insurance industry or is it pursuing a broad range of customer groups? Please support your assessment with facts from the information provided above.

Sources: www.progressiveinsurance.com ; Ian C. McMillan, Alexander van Putten, and Rita Gunther McGrath, “Global Gamesmanship,” Harvard Business Review 81, no. 5 (May 2003), p. 68; and Fortune, May 16, 2005, p. 34.

2. Go to www.bmwgroup.com and then click on the link for www.bmwgroup.com . The site you fi nd provides an overview of the company’s key functional areas, including research & development and production activities. Explore each of the links on the Research & Development page to better understand the company’s approach to People & Networks, Innovation & Technology, and Mobility & Traffi c. Also review the statements under Production focusing on Vehicle Produc-tion and Sustainable Production. How do these activities contribute to BMW’s differentiation strategy and the unique position in the industry that BMW has achieved?

3. Review the discussion of GE’s innovation capabilities at www.ge.com/research. Explain how the company has bundled its technology resources to contribute to competitive advantage in its businesses. Is there evidence the company’s deploy-ment of resources has given it a distinctive competence in the area of innovation? Explain why or why not.

LO1LO1

LO3LO3

Exercise for Business Simulation Users

The exercise for simulation users presented in Chapter 2 asked that you prepare a strategy map for your simulation company. Please refer to the strategy map that you prepared in that exercise and describe key resources that your strategy will rely upon to create customer value. Specifi cally, what human capital and organizational capital resources must your simulation company possess to support internal processes? Also, which of the four generic strategies best characterize the product attributes and brand image choices presented in your strategy map?

LO1

LO3

LO1

LO3


Chapter 03

Documents

Transcript of Chapter 03