A company competing in a particular industry or market has a varied menu of strategy options for seeking and securing a competitive advantage (see Figure 4.1). The first and foremost strategic choice is which of the five basic competitive strategies to employ— overall low-cost, broad differentiation, best-cost, focused low-cost, or focused differentiation. A strategy of trying to be the industry's low-cost provider works well in situations where:
The industry's product is essentially the same from seller to seller (brand differences are minor).
Many buyers are price-sensitive and shop for the lowest price.
There are only a few ways to achieve product differentiation that have much value to buyers.
Most buyers use the product in the same way and thus have common user requirements.
Buyers' costs in switching from one seller or brand to another are low or even zero.
Buyers are large and have significant power to negotiate pricing terms.
two-way systems enabled high-speed Internet hookups.
To achieve a low-cost advantage, a company must become more skilled than rivals in controlling the cost drivers and/or it must find innovative ways to eliminate or bypass cost-producing activities. Successful low-cost providers usually achieve their cost advantages by imaginatively and persistently ferreting out cost savings throughout the value chain. They are good at finding ways to drive costs out of their businesses year after year after year.
Differentiation strategies seek to produce a competitive edge by incorporating attributes and features into a company's product/service offering that rivals don't have. Anything a firm can do to create buyer value represents a potential basis for differentiation. Successful differentiation is usually keyed to lowering the buyer's cost of using the item, raising the performance the buyer gets, or boosting a buyer's psychological satisfaction. To be sustainable, differentiation usually has to be linked to unique internal expertise, core competencies, and resources that translate into capabilities rivals can't easily match. Differentiation tied just to unique features seldom is lasting because resourceful competitors are adept at cloning, improving on, or finding substitutes for almost any feature that appeals to buyers.
Best-cost provider strategies combine a strategic emphasis on low cost with a strategic emphasis on more-than-minimal quality, service, features, or performance. The aim is to create competitive advantage by giving buyers more value for the money; this is done by matching close rivals on key quality/service/features/performance attributes and beating them on the costs of incorporating such attributes into the product or service. To be successful with a best-cost provider strategy, a company must be able to incorporate upscale product or service attributes at a lower cost than rivals. Sustaining a best-cost provider strategy generally means having the capability to simultaneously manage unit costs down and product/service caliber up.
A focused strategy delivers competitive advantage either by achieving lower costs in serving the target market niche or by developing an ability to offer niche buyers something different from rival competitors. A focused strategy based on either 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 do not see that having a presence in the niche is crucial to their own success—in which case focusers can often escape battling head-to-head against some of the industry's biggest and strongest competitors.
It is costly or difficult for multi-segment 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.
The industry has many different niches and segments, thereby allowing a focuser to pick a competitively attractive niche suited to its resource strengths and capabilities. Also, with more niches there is more room for focusers to avoid each other in competing for the same customers.
Few, if any, other rivals are attempting to specialize in the same target segment— a condition that reduces the risk of segment overcrowding.
The focuser can compete effectively against challengers based on the capabilities and resources it has to serve the targeted niche and the customer goodwill it may have built up.
Once a company has decided which of the five basic competitive strategies to employ in its quest for competitive advantage, then it must decide whether to supplement its choice of a basic competitive strategy approach with strategic actions relating to alliances and collaborative partnerships, mergers and acquisitions, integration forward or backward, outsourcing of certain value chain activities, offensive and defensive moves, and the use of the Internet in selling directly to end users, as shown in Figure 4.1. Many companies are using strategic alliances and collaborative partnerships to help them in the race to build a global market presence and in the technology race. Even large and financially strong companies have concluded that simultaneously running both races requires more diverse and expansive skills, resources, technological expertise, and competitive capabilities than they can assemble and manage alone. Strategic alliances are an attractive, flexible, and often cost-effective means by which companies can gain access to missing technology, expertise, and business capabilities. The competitive attraction of alliances is to bundle competencies and resources that are more valuable in a joint effort than they are when kept separate. Competitive advantage emerges when a company acquires valuable resources and capabilities through alliances that it could not otherwise obtain on its own and that give it an edge over rivals. Mergers and acquisitions are another attractive strategic option for strengthening a firm's competitiveness. Companies racing for global market leadership frequently make acquisitions to build a market presence in countries where they currently do not compete. Similarly, companies racing to establish attractive positions in the industries of the future merge or make acquisitions to close gaps in resources or technology, build important technological capabilities, and move into position to launch next-wave products and services. When the operations of two companies are combined via merger or acquisition, the new company's competitiveness can be enhanced in any of several ways—lower costs, stronger technological skills, more or better competitive capabilities, a more attractive lineup of products and services, wider geographic coverage, and/or greater financial resources with which to invest in R&D, add capacity, or expand into new areas.
Vertically integrating forward or backward makes strategic sense only if it strengthens a company's position via either cost reduction or creation of a differentiation- based advantage. Otherwise, the drawbacks of vertical integration (increased investment, greater business risk, increased vulnerability to technological changes, capacity-matching problems, and less flexibility in making product changes) outweigh the advantages (enhanced technological capabilities, better product quality or customer service, and greater scale economies). Collaborative partnerships with suppliers and/or distribution allies often permit a company to achieve the advantages of vertical integration without encountering the drawbacks.
Outsourcing pieces of the value chain formerly performed in-house can enhance a company's competitiveness whenever (1) an activity can be performed better or more cheaply by outside specialists; (2) the activity is not crucial to the firm's ability to achieve sustainable competitive advantage and won't hollow out its core competencies, capabilities, or technical know-how; (3) it reduces the company's risk exposure to changing technology and/or changing buyer preferences; (4) it streamlines company operations in ways that improve organizational flexibility, cut cycle time, speed decision making, and reduce coordination costs; and/or (5) it allows a company to concentrate on its core business and do what it does best. In many situations outsourcing is a superior strategic alternative to vertical integration. Companies have a number of offensive strategy options for improving their market positions and trying to secure a competitive advantage: offering an equal or better product at a lower price, leapfrogging competitors by being the first to adopt next-generation technologies or the first to introduce next-generation products, attacking competitors' weaknesses, going after less contested or unoccupied market territory, using hit-and-run tactics to steal sales away from unsuspecting rivals, and launching preemptive strikes.
Defensive strategies to protect a company's position usually take the form of making moves that put obstacles in the path of would-be challengers and fortify the company's present position while undertaking actions to dissuade rivals from even trying to attack (by signaling that the resulting battle will be more costly to the challenger than it is worth).
One of the most pertinent strategic issues that companies face is how to use the Internet in positioning the company in the marketplace—whether to use the Internet as only a means of disseminating product information (with traditional distribution channel partners making all sales to end users), as a secondary or minor channel, as one of several important distribution channels, as the company's primary distribution channel, or as the company's exclusive channel for accessing customers. Once all the higher-level strategic choices have been made, company managers can turn to the task of crafting functional and operating-level strategies to flesh out the details of the company's overall business and competitive strategy. The timing of strategic moves also has relevance in the quest for competitive advantage. Because of the competitive importance that is sometimes associated with when a strategic move is made, company managers are obligated to carefully consider the advantages or disadvantages that attach to being a first-mover versus a fast-follower versus a wait-and-see late-mover. At the end of the day, though, the proper objective of a first-mover is that of being the first competitor to put together the precise combination of features, customer value, and sound revenue/cost/profit economics that puts it ahead of the pack in capturing an attractive market opportunity. Sometimes the company that first unlocks a profitable market opportunity is the first-mover and sometimes it is not— but the company that comes up with the key is surely the smart mover.
