There are three types of strategies:
- price leadership,
- differentiation,
- focusing.
strategies are called basic, since all types of businesses or industries follow them, regardless of whether they produce, serve, or are non-profit enterprises.
Advantages of a low-cost leadership strategy is the ability for the leader to offer a lower price than competitors at the same level of profit, and in conditions of a price war, the ability to better withstand competition due to better starting conditions.
The purpose of the differentiation strategy is to achieve a competitive advantage by creating products or services that are perceived by consumers as unique. In this case, companies can use an increased (premium) price. The advantage of a differentiation strategy is that the company is safe from competitors as long as consumers remain firmly loyal to its products. This provides it with a competitive advantage.
With a focusing strategy a limited group of segments is selected. A marketing niche can be identified geographically, by type of consumer, or by segment of a product range. Having chosen a segment, the company uses either differentiation or a low-price approach in it.
Rice. M. Porter's competition matrix
M. Porter identified three main strategies that are universal and applicable to any competitive force.
Leadership in the area of costs creates a greater set of actions both in pricing policy and in determining the level of profitability. The main idea: all actions and decisions of the enterprise should be aimed at reducing costs
. Differentiation means the creation by a company of a product and service with unique properties, which are most often secured by a trademark. The strategy has become widespread due to the saturation and individualization of consumer demand. Uniqueness allows you to set a high price
Segment Focus- this is focusing on one of the market segments and achieving there either cost leadership, or a special position, or both.
Add. material (1):
Competitive Strategies
The main (reference) competitive strategies are most clearly presented by Porter in the form of a corresponding matrix.
Porter's Competition Matrix (1975)
Cost reduction strategy (cost leadership)
The incentive to use this strategy is significant economies of scale and attracting a large number of consumers for whom price is a determining factor in their purchase.
Advantages of the strategy:
Additional growth in sales volume and obtaining excess profits by reducing the market share of competitors with higher prices for similar products;
Destruction of competitors' strategy in the field of product differentiation and market localization due to the affordability of their products;
Tightening the cost barrier for enterprises seeking to enter this industry;
Availability of large reserves when prices for raw materials, materials and components increase;
Guaranteed profit even when prices from your closest competitors are reduced;
Displacement of substitute goods due to mass production and low production costs.
a large share of the enterprise in the market, the enterprise has access to cheap raw materials;
demand for manufactured products is price elastic and fairly homogeneous in structure;
competition occurs primarily in the price area;
consumers lose a significant portion of their income when prices rise;
the enterprise and industry produce standardized products, and in the current conditions there are no effective ways to differentiate them.
large-scale or mass production;
advanced resource-saving technologies;
strict control of product costs;
predominantly wholesale sales of products;
marketing orientation to the entire market.
Destabilizing factors:
technological innovations;
changing consumer preferences;
reducing consumer sensitivity to prices;
copying of work methods by competitors.
Strategy of differentiation (strategy of difference)
This strategy is based on specialization in the manufacture of special (original) products that have clear distinctive advantages from the point of view of consumers. It involves the differentiation of a product in the market due to its quality characteristics.
Advantages of the strategy:
additional growth in sales volume and obtaining excess profits by winning the preferences of various consumer groups based on superior quality and wider choice;
tightening the barrier to entry into the industry due to established consumer preferences;
guaranteed profit from the sale of products by an enterprise using the services of only this company;
displacement of substitute goods by strengthening ties with consumers.
Required market conditions:
distinctive product characteristics are perceived and valued by consumers;
the demand for manufactured products is quite diverse in structure;
competition occurs primarily in the non-price area;
few businesses use differentiation strategy.
Requirements for organizing production and management:
availability of easily reconfigurable production;
high level of design preparation for production;
retail or small wholesale sales of products.
Destabilizing factors:
high costs of creating a product image, causing a significant increase in prices;
excessive differentiation of a product, in which the consumer ceases to feel that the product belongs to a given group.
This strategy often uses personal selling with the involvement of sales agents.
Segment focus strategy (concentration strategy)
This strategy is aimed at providing advantages over competitors in a separate specific market segment. At the same time, stable sales are guaranteed, but, as a rule, significant growth in this segment is not observed (strategy of avoiding competition).
In doing so, the firm can serve its narrow target segment more effectively than competitors who disperse their efforts throughout the market.
Advantages of the strategy:
additional growth in sales volume and profit generation by reducing the market share and specialization of the enterprise in a specific segment (a group of buyers with special specific needs);
the ability to use cost reduction strategies or product differentiation for a limited number of consumers in the target market segment;
comprehensive servicing of a specific market segment based on the combined use of cost reduction strategies and product differentiation for a relatively narrow group of buyers;
creating an image of a company that cares about the needs of specific customers.
Required market conditions:
the existence of a clearly defined distinct group of consumers with specific needs;
competitors are not trying to specialize in this segment;
The company's resources and marketing capabilities do not allow it to serve the entire market.
Requirements for organizing production and management:
as a rule, divisional organization of the management structure (by goods);
high degree of diversification of production and sales activities;
close location of production units to consumers;
predominantly small-scale type of production;
having its own retail network.
Destabilizing factors:
differences in product characteristics for the target segment and the entire market become insignificant;
reduction in prices for similar goods produced by enterprises using a cost reduction strategy.
Later, two more strategies were added to Porter’s three basic competition strategies.
Innovation implementation strategy.
Enterprises that adhere to this strategy focus their efforts on searching for fundamentally new, hitherto unknown types of products, methods of organizing production, and sales promotion techniques.
This strategy is a source of large sales volumes and excess profits, but is associated with increased risk. This is, as a rule, an enterprise - esplerent. Matrix organizational structures, project-based or new-oriented, are used here. Risk is determined by a high degree of uncertainty in the outcome.
Advantages of the strategy:
obtaining excess profits due to monopoly set prices (the “cream skimming” strategy);
blocking entry into the industry due to monopoly ownership of exclusive rights to products, technologies, services (patents, licenses);
lack of substitute goods;
creating an image of an enterprise as an innovator.
Required market conditions:
lack of analogues of products;
the presence of potential demand for the proposed innovations;
presence of investors.
Requirements for organizing production and management:
highly qualified personnel;
venture business organization, especially in the initial stages.
Destabilizing factors:
high costs at the initial stages of development;
large investment needs;
market opposition;
illegal imitation of innovations by other companies;
high risk of bankruptcy.
Strategy for immediate response to market needs.
Enterprises implementing this strategy are aimed at meeting emerging market needs as quickly as possible. The main principle of activity is the selection and implementation of projects that are the most profitable in current market conditions, the ability to quickly reorient production, change technology in order to obtain maximum profit in a short period of time.
Advantages of the strategy:
obtaining excess profits due to high prices for scarce products;
high consumer interest in purchasing goods;
a small number of substitute goods;
creating an image of a company that is ready to sacrifice everything to immediately satisfy emerging customer needs.
Required market conditions:
demand for products is inelastic;
entry into and exit from the industry is not difficult;
a small number of competitors;
market instability.
Requirements for organizing production and management:
a small flexible non-specialized enterprise with a high degree of diversification;
project structure;
high degree of personnel mobility;
developed marketing service;
research focused only on highly profitable non-long-term projects.
Destabilizing factors:
high unit costs;
lack of long-term prospects in a particular business;
a large number of destabilizing environmental factors;
lack of guarantees of profit;
high risk of bankruptcy.
Add. material (2):
Industry profitability- only one of the factors determining the choice of competitive strategy. The second central problem in choosing a competitive strategy is the positioning of the company within a particular industry. Depending on its positioning relative to other market participants, its earnings will be above or below the industry average. A company with a favorable position will earn high profits even if the industry structure turns out to be unfavorable and average profitability indicators are therefore low.
The basis for the company's effective performance in the long term is a sustainable competitive advantage. And although each company has a large number of strengths and weaknesses compared to its competitors, they can, as a rule, have only two types of competitive advantages: low costs and product differentiation. The significance of a company's strengths and weaknesses is ultimately determined by its ability to reduce costs as much as possible (compared to competitors) or to achieve greater differentiation of its product compared to competitors' products. The ability to minimize costs or differentiate products depends, in turn, on the structure of the industry.
The two main types of competitive advantages, combined with the industry in which a company is trying to achieve those advantages, allow it to develop the three most common competitive strategies that can achieve levels of performance above the industry average: cost leadership, differentiation and focus. The focusing strategy comes in two varieties: focusing on costs And focusing on differentiation. These three strategies are presented in Fig. 1.3.
Each of the general strategies involves fundamentally different paths to obtaining competitive advantages, which consist of a combination of the choice of the specific type of advantages sought, as well as the scale of strategic goals within which these advantages are planned to be obtained.
Cost leadership and differentiation strategies typically focus on gaining competitive advantage across a broad range of industry segments, while focus strategies focus on gaining cost or differentiation advantages within narrow industry segments. The specific actions required to implement each strategy will vary depending on the type of industry, and the possibilities for implementing a particular overall strategy in a particular industry will also vary. It is not easy to choose a general strategy, and even more difficult to implement it in practice, but there are logical ways to gain competitive advantage, and these methods can be tried in any industry.
Rice. 1.3. General competitive strategies
The main thing to understand about the most common strategies is that each of these strategies is inherently focused on obtaining certain competitive advantages and, in order to achieve these advantages, the company must make a choice, that is, decide what type of competitive advantage it needs and at what scale the company will achieve these benefits. It is impossible to be “all things to all people” - this is a strategic recipe for mediocre and ineffective activity; this often means that the company lacks any competitive advantage.
MINIMIZING COSTS
Perhaps of the three most common strategies cost minimization is the most obvious and understandable. As part of this strategy, the company aims to establish low-cost production of industry goods. Typically, such a company has a wide scope of activity: the company serves several industry segments, while also capturing related industries if possible - often it is this broad scope of activity that allows the company to achieve leadership in cost minimization. The sources of cost advantages can be varied and vary depending on the type of industry. These may include increased efficiency through economies of scale, proprietary proprietary technologies, special access rights to sources of raw materials, and many other factors. For example, in the television industry, cost leadership involves optimally sized picture tubes, low-cost design, automated assembly, and global manufacturing scale that funds research and development. If a company provides security services, cost advantages come from low overhead costs, an abundance of cheap labor, and effective training programs required due to the high turnover of employees in this field. Being a producer of a low-cost product involves more than simply benefiting from a learning curve. These manufacturers must continually seek out new sources of cost advantages and capitalize on them.
If a company has achieved undisputed leadership in cost reduction and maintained this advantage for a long time, the efficiency of such a company will far exceed the market average - but provided that the company can keep the prices of its products at the average level for the industry or at a level slightly exceeding it. A company that is a leader in cost reduction, thanks to this advantage, will receive high profits even at prices comparable to those of competitors, or at prices lower than those of competitors. However, such a company must not forget the basics of differentiation. The company's product must be assessed by customers as comparable to competitors' products or at least quite acceptable, otherwise the company, even being a leader in cost minimization, will be forced to significantly reduce product prices in order for sales to reach the required levels. This could negate any benefits gained from a cost-cutting position. For example, Texas Instruments (watch production) and Northwest Airlines (air transportation) fell into this trap: both companies managed to significantly minimize their costs. But then Texas Instruments couldn't solve its product differentiation problems and had to exit the market.
Northwest Airlines recognized the problem early, and management made efforts to improve marketing, passenger service, and ticketing services to ensure that the company's products were as competitive as competitors' products.
Thus, no matter how much a company relies on competitive advantage in the form of cost reduction, it must still achieve equality, or at least approximate equality, in the fundamentals of differentiation of its products in relation to the products of competitors - only then can the company achieve performance indicators exceeding average market level. Equality in the fundamentals of differentiation allows a company that is a leader in cost minimization to directly translate its low cost advantage into high profits - higher than those of its competitors. But even with approximately equal differentiation bases, the low prices required to gain control over the desired market share do not in any way affect the leader’s advantages in minimizing costs, due to which the leader receives higher incomes than the market average.
The logic of a cost leadership strategy usually requires the company to become the sole leader, rather than simply being part of a group of others seeking that position. Many companies that refuse to acknowledge this fact have made a serious strategic mistake. When there are several candidates for the position of leader in minimizing costs, the competition between them becomes especially fierce - because every, even the smallest, fragment of the market begins to be decisive. And until one company takes a leadership position, thereby “persuading” other competitors to change strategy, the consequences of this struggle for profitability (and also for the structure of the industry in the long term) can be very detrimental, and this is exactly the case with several petrochemical enterprises. industry.
Thus, a cost leadership strategy is fundamentally based on a preemptive right to a certain advantage—a right that a company is forced to relinquish unless at some point it is able to radically change its cost position through major technological advances.
DIFFERENTIATION
The second most common competitive strategy is differentiation strategy, which consists of the fact that the company is trying to occupy a unique position in a particular industry, giving the product such characteristics that will be appreciated by a large number of buyers. There may be one or more such characteristics or attributes - the main thing is that they are really important to buyers.
In this case, a company whose products satisfy specific customer needs through these attributes has positioned itself in some unique way, and the reward for this uniqueness is the willingness of customers to pay high prices for the company's products.
Methods of differentiation vary from industry to industry. Differentiation may be based on the unique properties of the product itself, sales features, special marketing approaches, as well as a wide variety of other factors. For example, in the construction equipment industry, Caterpillar's product differentiation is based on long machine life, maintenance, parts availability, and an excellent dealer network. In the perfume and cosmetics industry, the basis of differentiation is most often the image of the product and its placement on department store shelves.
A company that can differentiate products in a certain way and maintain a chosen direction over a long period will operate more efficiently than the average company in its industry - but only if the markups on the company's products exceed the additional costs of differentiation, that is, to make the product unique. A company choosing a differentiation strategy must therefore constantly look for new ways of differentiation - ones that can generate profits that exceed the costs of differentiation itself. But a company following the path of differentiation should not forget about costs: any, even the highest markups will not lead to anything if the company takes a position that is not profitable in terms of costs. Thus, if a company chooses differentiation as a strategy, it should strive for parity or approximate parity of costs relative to its competitors, cutting costs in all areas not directly related to the chosen direction of differentiation.
The logic of the differentiation strategy requires that the company base differentiation on such product attributes that would distinguish it from the product of competing companies. If a company wants to be paid a high price for its products, it must be truly unique or perceived by customers as unique. But unlike the cost leadership strategy, the implementation of a differentiation strategy does not require the presence of only one leader in the industry - in this case, there may be several companies that successfully implement the differentiation strategy, but provided that the products in this industry have several parameters that are especially valued buyers.
FOCUSING
The third general competitive strategy is focus strategy. This strategy is different from the others: it is based on choosing a narrow area of competition within a particular industry. A company that has adopted a focus strategy selects a specific segment or group of industry segments and directs its activities to serve exclusively that segment or segments. By optimizing its strategy according to target segments, a company tries to gain specific competitive advantages in those segments, although it may not have overall competitive advantages within the entire industry.
The focusing strategy comes in two varieties. Focus on costs is a strategy in which a company, operating in its target segment, tries to gain an advantage through low costs. At focusing on differentiation the company differentiates itself in its target segment. Both strategy options are based on those characteristics that distinguish the selected target segment from other segments of the industry. The target segment is likely to include both customers with specific needs and production and distribution systems that best satisfy them and, on this basis, differ from industry standards. With a cost focus, a company takes advantage of differences in cost structure across different industry sectors, while with a differentiation focus, a company benefits from the fact that certain market segments have special groups of customers with specific needs. The existence of such differences in cost structure and consumer demand suggests that these segments are poorly served by competitors with broad specializations - such companies serve these special segments on an equal basis with all others. In this case, a company that has chosen a focusing strategy receives competitive advantages by completely focusing its work on this segment. It does not matter whether it is a narrow or broad segment: the essence of the focus strategy is that the company generates income due to those features of a given segment that distinguish it from other sectors of the industry. Narrow specialization in itself is not sufficient for a company to achieve performance indicators that will be above the market average.
Consider the example of Hammermill Paper Company. This company's work is an excellent example of a focus strategy: the company adopted a strategy based on differences in its production process and then optimized its production according to its chosen target segment. Hammermill is moving more and more towards producing relatively small quantities of high-quality paper for specific purposes, whereas large companies whose equipment is configured to produce large quantities would incur significant losses producing such a product. Hammermill equipment is more suitable for producing small batches of goods and frequent reconfiguration to meet certain product parameters.
A company that has chosen focus as a competitive strategy has a significant advantage over competitors with a broad specialization, namely: such a company can choose the direction of optimization - differentiation or cost reduction. For example, it may be that competitors are not serving a particular market segment well enough to meet the needs of customers in that sector, leaving a great opportunity for the company to focus on differentiation. On the other hand, competitors with a broad specialization are likely to spend too much money and effort on serving this segment, which means that their costs to satisfy the needs of customers in this segment are too high. In this case, the company has the option of choosing to focus on costs - after all, it is possible to reduce costs by spending money solely on satisfying the needs of customers in this segment, and nothing more.
If the company's target segment is no different from other segments, the focus strategy will not bring the desired results. For example, in the soft drink industry, Coca-Cola and Pepsi produce a wide range of products with different compositions and tastes, while Royal Crown decided to specialize in the production of only cola drinks. The company's chosen segment is already well served by Coke and Pepsi - even though these companies also serve other segments. Therefore, Coke and Pepsi have a clear advantage over Royal Crown in the cola segment of the market, thanks to the fact that they produce a wider range of products.
The performance indicators of a company that has chosen a focusing strategy will be above the industry average if:
a) the company will be able to achieve sustainable leadership in its segment in minimizing costs (focusing on costs) or maximally differentiate its product in this segment (focusing on differentiation);
b) in this case, the segment will be attractive from the point of view of its structure. The structural attractiveness of the segment is a necessary condition, since some segments in the industry will obviously be less profitable than others. Often, the industry provides opportunities for successful implementation of several long-term focus strategies, but only if the companies choosing this strategy pursue it in different segments. Most industries have several different segments that have specific customer needs or production and delivery systems, making them excellent testing grounds for a focus strategy.
"STUCK IN THE MIDDLE"
A company that unsuccessfully attempts to implement all three strategies will inevitably find itself “stuck” in the middle between leaders and laggards. This strategic position is a sure sign of poor company performance and is also a recipe for not gaining any of the competitive advantages. A “stalled” company will always be in an extremely disadvantageous position from a competitive point of view - in any market segment, all advantageous positions will be occupied either by leaders in cost minimization, or by companies that have chosen differentiation or focus. Even if a stuck company successfully discovers a profitable product or a promising group of customers, competitors who have advantages and know how to maintain those advantages will quickly grab all the profitable finds. In most industries there are always a few floundering companies.
If a company suddenly becomes stuck, it will make significant profits only if the structure of the industry is highly favorable to this, or if the company is so lucky that its competitors also turn out to be stuck firms. However, such companies typically earn much lower profits than those that consistently implement one of the general competitive strategies. When an industry reaches a maturity stage in its development process, this makes the difference in performance between “sluggish” companies and companies implementing one of the general strategies more noticeable, more obvious. After all, in this way it becomes clear that the company's strategy was wrong from the very beginning, but the rapid growth of the industry did not allow us to notice the shortcomings of the strategy at first.
When a company begins to stall, it often means that its management did not make a conscious choice of strategy at the time. Such a company is trying hard to gain competitive advantage, but usually to no avail - when you try to achieve different types of competitive advantage at the same time, it makes your actions inconsistent. Even quite successful companies can get stuck: those that, for the sake of growth or prestige of the company, decided to make compromises in the course of implementing one of the general competitive strategies. A classic example of this is Laker Airways, which began its operations in the North Atlantic market with a clearly defined cost-focus strategy: the company was focused on the segment of the airline market where ticket prices were the most important thing for customers, so the company offered only the most basic services. However, over time, the company began to offer new services and new routes, thus adding an element of luxury to its service. This negatively affected the company's image and undermined its service and supply chain. The consequences were tragic: the company eventually went bankrupt.
The temptation to deviate from the systematic implementation of one of the general strategies (which inevitably leads to “getting stuck”) is especially great for those companies that, having chosen a focusing strategy, dominate their market segment. Specialization requires a company to intentionally limit potential sales. Success often blinds, and a company implementing a focus strategy forgets what led it to success and compromises on its chosen strategy for the sake of further growth. But rather than sacrificing the original strategy, the company should rather find new, growth-promising industries where the company can also implement one of the general competitive strategies or take advantage of existing relationships in that industry.
IS IT POSSIBLE TO IMPLEMENT MORE THAN ONE STRATEGY AT THE SAME TIME?
Each of the most common competitive strategies represents a fundamentally different approach to gaining competitive advantage and how to maintain it over a long period of time. Each such strategy combines a specific type of competitive advantage that the firm is trying to achieve, as well as the scope of the strategic goal.
Typically, a company must choose a specific type of both - otherwise it will face the fate of being “stuck” between the leaders and the laggards. If a company tries to simultaneously serve a large number of different market segments, choosing to focus on costs or differentiation, it loses the benefits that it could gain by optimizing its strategy with a specific target segment in mind (focus). Sometimes a company is able to create two completely independent business units within one corporation, and each of these units implements its own strategy. A good example of this is the British hotel company Trusthouse Forte: the company has created five separate hotel chains, each targeting a specific market segment. However, such a company must strictly separate from each other units focused on the implementation of different strategies - otherwise none of these units will achieve the competitive advantages that are expected to be obtained as a result of the implementation of the strategy chosen by management. An approach to competition in which management allows corporate culture to be transferred from one business unit to another, and does not have clearly defined policies for each business unit, undermines the competitive strategy of both each business unit and the entire corporation, and leads to to the fact that the company becomes one of the “stalled” ones.
Typically, cost leadership and differentiation do not go together—differentiation tends to be quite expensive. To make a company unique and thereby force customers to pay the highest prices for its products, management is forced to increase costs - this is the price of differentiation. In the construction equipment industry, in particular, this is exactly what Caterpillar management did. On the contrary, cost reduction often requires compromises in differentiation—reducing overhead and other costs inevitably leads to product standardization.
However, cost reduction does not always require concessions in the area of product differentiation. Many companies have found ways to cut costs while making their products even more differentiated through the use of effective organizational techniques or fundamentally different technologies. Sometimes this way can achieve radical reductions without sacrificing differentiation - unless, of course, the company was previously strictly focused on cost reduction. But simple cost reduction should be distinguished from the conscious achievement of cost minimization as a certain competitive advantage. When a company competes with strong rivals who are also vying for cost leadership, a point is invariably reached eventually when further reductions cannot be achieved without compromising product differentiation. It is at this point that a company's strategy may become inconsistent and the company is forced to make choices.
If a firm can achieve cost leadership while remaining a differentiated product, it will be richly rewarded for its efforts: differentiation involves high product prices, while cost leadership means low costs.
Thus, the benefits are cumulative. An example of a company that has managed to achieve both leadership in cost minimization and the implementation of a differentiation strategy is Crown Cork & Seal, a metal packaging company. The company specializes in the production of containers for liquid products - beer, soft drinks, aerosols. The company's products are made of steel - unlike the products of other companies that produce both steel and aluminum containers. The company differentiates its product within its target segments through dedicated service and technology support, as well as offering a full line of steel sealed cans, metal lids and can sealing equipment. This type of differentiation would be more difficult to achieve in other industry sectors where customers have different needs. At the same time, Crown is focusing its production on producing only the types of containers required by customers in target sectors and is investing heavily in state-of-the-art two-piece sealed can packaging technology. As a result, Crown has most likely already achieved low-cost producer status in its market segments.
A firm can simultaneously pursue a differentiation strategy and achieve cost leadership if the following three conditions are met: The firm's competitors are stuck. When a company's competitors are stuck, nothing they can do can put the company in a position where cost leadership and differentiation are incompatible. This is exactly what happened in the Crown Cork situation. The company's most serious competitors had not invested in low-cost steel container technology, so the company was able to achieve cost savings without sacrificing product differentiation. But if the company's competitors had adopted a cost leadership strategy, Crown's attempt to become a low-cost, differentiated product manufacturer would have been doomed: the company would have been stuck. After all, in this case, all the opportunities to reduce costs without sacrificing differentiation would have already been exploited by Crown's competitors.
However, the situation when competitors are stalled, and the company itself, thanks to this, achieves advantages in both the area of costs and in the area of differentiation, is often temporary. Eventually, one of the competitors will begin to implement one of the general competitive strategies and will also succeed very well in finding a balance between costs and differentiation. That is, the company must still choose a certain type of competitive advantage that it is focused on and which it will try to maintain for a long period of time. Weak competitors are also dangerous: in these conditions, a company is trying to achieve both differentiation and cost minimization, trying to combine these two directions of strategy, but as a result, such a company will be exposed if a new powerful competitor appears on the market.
Cost levels are influenced by market share and industry relationships. It is possible to achieve simultaneous leadership in cost minimization and differentiation if the level of costs is determined by the size of the market, and to a greater extent than by product design, manufacturability, level of service and other factors. If a company achieves advantages by having a significant market share, the cost advantages allow the company to maintain its cost leadership position even if the company incurs additional costs in other areas. In another case, with a certain market share of the company, it is possible to reduce the cost of differentiation to a level lower than that of competitors. In the same way, it is possible to achieve both cost reduction and differentiation in areas where there are inter-industry interconnections that can only benefit certain companies and not their competitors. Such unique interrelationships can help reduce the costs of differentiation or at least offset the high costs at her. And yet, an attempt to simultaneously achieve leadership in minimizing cost costs and a high degree of product differentiation always makes the company vulnerable and unprotected in the face of such competitors who will actively invest in the implementation of one of the general strategies, correlating their strategy either with a certain market share or with existing relationships in the industry.
The company becomes a pioneer in major innovations. Introducing a major technological innovation to an industry allows a company to simultaneously reduce costs and make significant strides in product differentiation, thereby achieving success in both strategies. The introduction of new automated production technologies can have this effect, as can the use of new information technologies in logistics or computer-aided product design. The same effect can be achieved through the use of innovative organizational practices that do not involve technology.
However, the ability to achieve the status of a manufacturer of a differentiated low-cost product directly depends on the extent to which the company can become the sole owner of the rights to innovation. Once the innovation is adopted by one of its competitors, the company is again forced to choose between cost reduction and differentiation, finding itself, for example, in a dilemma of the following type: is the company's information system, compared to the same system of a competitor, better suited for minimizing costs or for differentiation? A pioneer company may even find itself at a disadvantage if, in its pursuit of cost minimization and differentiation at the same time, its management failed to anticipate the possibility of its competitors replicating the innovation. Once the innovation becomes the property of competitors who have chosen one of the general strategies, the pioneer company will not be able to achieve any of the advantages.
A company should always actively pursue cost minimization opportunities that do not require compromises in differentiation. At the same time, the company must also use all differentiation opportunities that do not require high costs. However, if a company fails to find the intersection of both types of opportunities, company management must be prepared to select a particular type of competitive advantage in order to adjust the balance of costs and differentiation accordingly.
By general strategies, Porter means strategies that have universal applicability or are derived from some basic postulates. In his
Rice. 3. Porter's four-cell matrix illustrates the choice of strategy. Quadrant 1, for example, is occupied by small European firms - manufacturers of passenger cars, which have achieved leadership in reducing costs by expanding production and reducing costs per unit of production. Volvo could be placed in quadrant 2, and BMW, which makes luxury cars for a narrow circle of price-insensitive consumers, could be placed in quadrant 3B
In the book “Competitive Strategy” M. Porter presents three types of general strategies aimed at increasing competitiveness. A company that wants to create a competitive advantage must make strategic choices so as not to “lose its face.” There are three basic strategies for this:
- leadership in cost reduction;
- differentiation;
- focusing (special attention). To satisfy the first condition, the company must keep costs lower than those of its competitors.
To provide differentiation, it must be able to offer something unique of its own.
The third strategy option proposed by Porter involves the company focusing on a specific group of customers, a specific part of the product, or a specific geographic market.
Low-cost production is about more than simply moving down the experience curve. The product manufacturer must find and exploit every opportunity to gain cost advantages. Typically, these advantages are obtained by selling standard products without added value, when mass-market goods are produced and sold and when the company has strong distribution chains.
Porter goes on to point out that a company that has achieved cost leadership cannot afford to ignore the principles of differentiation. If consumers do not consider the product to be comparable or acceptable, the leader will have to discount prices to weaken its competitors and thereby lose its leadership.
Porter concludes that a cost leader in product differentiation must be on par with, or at least not far behind, its competitors.
Differentiation, According to Porter, means that a company strives to be unique in some aspect that is considered important by a large number of customers. It selects one or more of these aspects and behaves in such a way as to satisfy the needs of consumers. The price of this behavior is higher production costs.
From the above it follows that the parameters of differentiation are specific to each industry. Differentiation may lie in the product itself, delivery methods, marketing conditions, or some other factor. A company that relies on differentiation must look for ways to improve production efficiency and reduce costs.
There are two types of focusing strategy. A company within a selected segment is either trying to achieve cost advantages or increasing product differentiation in an attempt to differentiate itself from other companies in the industry. Thus, it can achieve competitive advantage by focusing on specific market segments. The size of the target group depends on the degree rather than the type of focus, and the essence of the strategy in question is to work with a narrow group of consumers that is different from other groups.
According to Porter, any of the three main types of strategy can be used as an effective means of achieving and maintaining competitive advantage.
Firms stuck in the middle.
The following excerpt is taken from Competitive Strategy by M. Porter.
“The three main strategies represent alternatives to sound approaches to competition. One of the negative conclusions that can be drawn from the foregoing discussion is that a firm that fails to direct its strategy along one of the three paths, a firm stuck in the middle, finds itself in an extremely poor strategic position. Its market share is insufficient, it is underinvested, and must either cut costs or differentiate products industry-wide to avoid cost competition, or cut costs and differentiate products within a more limited area.
A company stuck in the middle is almost guaranteed a low profit margin. Either it loses numerous consumers who demand low prices, or it must sacrifice profits to break away from low-price firms. It also loses the opportunity to run a highly profitable business, that is, it loses the cream of the crop, leaving it to firms that have been able to focus their efforts on generating high profits or have achieved differentiation. A company stuck “halfway” is likely characterized by a low level of corporate culture and inconsistency in the organizational structure and incentive system.
A firm stuck in the middle must make a fundamental strategic decision. It must: either take steps to achieve cost leadership, or at least reach the average level, which usually entails active investment in modernization and perhaps the need to spend money to gain a larger market share, or choose a specific goal, i.e., focus efforts on some aspect, or achieve some uniqueness (differentiation). The last two alternatives could very likely cause the company's market share and even sales to decline."
Risk associated with cost leadership
A company that is a leader in cost reduction is under constant pressure to maintain its position. This means that the leader must invest in modern equipment, ruthlessly replace outdated products, resist the temptation to expand the range and keep a close eye on technical innovations. Cost reduction does not in any way automatically follow expansion of production volume; without constant vigilance, it is also impossible to reap the benefits of economies of scale.
The following dangers must be kept in mind:
1) technological advances that reduce the value of the investments and know-how made;
2) new competitors and your followers who. achieve the same cost advantage through imitation or investment in modern equipment;
3) inability to grasp the need to change pro- < product or market as a result of being immersed in cost reduction problems;
4) cost inflation, which undermines the company's ability to maintain a price differential high enough to offset competitive efforts or other differentiation benefits.
Risk associated with differentiation
Differentiation comes with some dangers. Among them:
1) the cost gap between a company that differentiates its products and those competitors that have chosen a cost leadership strategy may be too large to compensate for it with the special product range, services or prestige that the company can offer its customers;
2) the need of buyers for product differentiation may decrease, which is possible with an increase in their awareness;
3) imitation can hide a noticeable difference, which is generally typical for industries reaching the stage of maturity.
The first circumstance is so important that it deserves special comment.
A company can differentiate its products, but differentiation can only go beyond price differences. So, if a differentiated company falls too far behind in reducing costs due to changes in technology or simple carelessness, the low-cost company can move into a strong attack position. Thus, Kawasaki and other Japanese motorcycle manufacturers were able to attack differentiated product manufacturers such as Harley Davidson and Triumph by significantly lowering prices.
Risk of Focusing
There are also various dangers associated with the focusing strategy:
1) increased differences in costs between companies that have chosen a focusing strategy and other manufacturers may negate the benefits associated with serving a narrow target group, or outweigh the effect of differentiation achieved through focusing;
2) differences between the types of products and services required by the strategic target group and the market as a whole may be reduced;
3) competitors can find target groups within the target group served by the company that has adopted the focus strategy and succeed in their new endeavor.
Many business practitioners consider Porter's theories to be too general to be used to explain real-life situations. However, there is no doubt that the relationship between consumer assessment of product quality and price is a central issue. This is reflected in the concept of general strategies put forward by Porter.
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The author of the method of strategic choice based on the concept of rivalry is Harvard Business School professor M. Porter, who proposed a set of standard strategies based on the idea that each of them is based on a competitive advantage and the company must achieve it by choosing its own strategy.
It must decide what type of competitive advantage it wants and in what area.
Thus, the first component of strategic choice according to this model is competitive advantage, which is divided into two main types: lower costs and product differentiation.
Low costs reflect a firm's ability to develop, produce, and sell a comparable product at a lower cost than its competitors. By selling a product at the same (or approximately the same) price as its competitors, the company in this case receives a greater profit.
true story. Thus, Korean firms producing steel and semiconductor devices defeated foreign competitors in this way. They produce comparable products at very low costs, using low-paid but highly productive labor and modern technology and equipment purchased abroad or manufactured under license.
Differentiation is the ability to provide the buyer with unique and greater value in the form of new product quality, special consumer properties or after-sales service. Thus, German machine tool firms compete using differentiation based on high product performance, reliability and fast maintenance. Differentiation allows a firm to dictate high prices, which, at equal costs to its competitors, ensures greater profits.
The second component of strategic choice is the area of competition that the company focuses on within its industry. One reason competition is important is that industries are segmented. Almost every industry has clearly defined product types, multiple distribution and sales channels, and multiple types of buyers. Basically, the choice in this component is as follows: either compete on a “broad front” or target one sector of the market. For example, in the automotive industry, leading American and Japanese companies produce a whole range of cars of different classes, while BMW and Daimler-Benz (Germany) primarily produce powerful, high-speed and expensive high-class cars and sports cars, and Korean companies Hyundai and Daewoo focused on small and ultra-small class cars.
M. Porter combines the type of competitive advantage and the area in which it is achieved in the concept of typical strategies, which are shown in Fig. 4.3.
For example, in shipbuilding, Japanese firms have adopted a differentiation strategy and offer a wide range of high-quality ships at high prices. Korean shipbuilding firms have chosen a cost leadership strategy and offer a variety of types of good quality ships, but the cost of Korean ships is lower than Japanese ones. The strategy of successful Scandinavian shipyards is focused differentiation. They produce specialized types of ships, such as icebreakers or cruise ships, in the manufacture of which they use specialized
4.3. Typical competitive strategies according to M. Porter
new technologies. These vessels are sold at a very high price to justify the cost of labor, which is expensive in the Scandinavian countries. Finally, Chinese shipbuilders, who have recently begun to actively compete in the global market, offer relatively simple and standard ships with even lower costs and at lower prices than Korean ones (strategy - focusing on the cost level).
An example of competitive strategies in the automotive industry is given by J. Thompson.
For example, the Toyota company is known all over the world for the low cost of its cars while maintaining a certain, fairly high level of quality.
Fig.4.4. M. Porter's model of competitive strategies regarding the global auto industry (situation at the end of the 80s - early 90s)
In turn, General Motors, competing with Toyota in the same market segments, focused on differentiating its products by a variety of colors and specifications. Thus, in 1988, 105 Vauxhalls car models were offered on the UK market at prices ranging from £4,800 to £20,500.
Hyundai is known all over the world for producing small cars at low cost (Pony 1.3 and Pony 1.6).
The strategy of BMW and Mercedes is designed to produce high-quality cars for a certain, wealthy segment of the population. At the same time, the difference in the type of additional specifications makes it possible to achieve exclusivity of the car being sold for a specific buyer’s order, and the high image of the companies themselves allows them to occupy a stable market share.
Thus, the underlying concept of generic strategies is the idea that every strategy is based on competitive advantage and that in order to achieve it, a firm must justify and select its strategy.
The scheme for making a profit by a company, depending on the chosen standard strategy, can be presented as follows (Fig. 4.5).
When it comes to cost leadership strategy, there are many ways to reduce costs while maintaining industry average quality. However, some ways to reduce costs involve moving along the experience curve, increasing the scale of production to achieve maximum savings.
In Fig. Figure 4.6 provides an example of an experience curve. Lower cost levels are achieved as production volumes increase.
Rice. 4.5. Typical strategies and profitability
Rice. 4.6. Experience curve
production, i.e. repeated production of the same type of product will lead to finding a more efficient method of its production.
The philosophy of economies of scale is based on the so-called experience curve. It was proposed in 1926 when, through empirical analysis, it was discovered that unit production costs fell by 20% whenever production doubled. This theory emphasizes increasing a company's market share because it allows it to increase production and move down the curve toward lower production costs. This is how you can achieve a higher level of income and profit margins and, consequently, greater competitiveness of the enterprise in the market.
In turn, the transfer of production skills and the distribution of areas of activity allows a diversifying enterprise to receive higher profits from joint activities than those that would be received by independently operating industries. In this case, economies of scale in production arise when it becomes possible to reduce the costs of managing disparate productions through centralized management, as well as to reduce costs at any link in the production process due to existing internal relationships. Although this strategic fit can occur at any point in the production process, it is most often viewed in three main ways.
In Fig. Figure 4.7 shows economies of scale in industry.
Unit costs
Rice. 4.7. Economies of scale
If the volume of production on this curve corresponds to point X, then in terms of the cost of production you are inferior to the company whose position corresponds to point Y on the graph.
The main idea behind these two effects is that they imply that sales volume is an important prerequisite for achieving low production costs. This path to achieving better results involves capturing and maintaining a large market share. As a result, when multiple firms are involved, competition for market share can greatly undermine any low-cost advantage if prices are driven down by firms seeking to achieve specific sales volumes (Figure 4.8).
Rice. 4.8. Cost reduction and price reduction
How does low cost give a firm a competitive advantage if its products are essentially the same as those of other manufacturers in the industry? Low cost can allow a company to:
First, conduct price competition if necessary;
Secondly, to accumulate profits that can be reinvested in production to improve the quality of products, while the price of these products will correspond to the average price in the industry.
Thus, it is not low cost itself that creates competitive advantages, but the opportunities that it provides for improving the competitiveness of products.
There are several types of risks associated with a cost leadership strategy.
First, an overemphasis on efficiency can cause a firm to become unresponsive to changing customer demands. In particular, in many industries, consumer demands have become more modern and individualized. A low-cost manufacturer who produces a standard, unbranded product may one day find that its customer base is being squeezed out by competitors who are tweaking and improving their products to suit the times.
Second, if the industry is truly a consumer goods industry, then the risk of a low-cost strategy is significantly higher. This is because in this case there can only be one cost leader, and if firms compete exclusively on price, then being second and third in cost provides only minor advantages.
Third, many ways to achieve low costs can be easily copied. Competitors, for example, may acquire the plant with the most efficient scale of production, and as the industry matures, the effect of the experience curve will be negated, since most firms will already have the full benefits of accumulated experience at their disposal. But perhaps the greatest threat comes from competitors who are able to price at the industry's marginal cost because they have other, more profitable product lines that more than cover their fixed production costs.
If we talk about a differentiation strategy, it means that it is necessary to be different from others in some way. The key to success in differentiation is uniqueness, which is valued by customers. If customers are willing to pay a premium for these unique features, and if costs are controlled by the firm, then the price premium will lead to greater profitability.
Central to this strategy is understanding the buyer's needs. The company needs to know what is valued by customers, provide exactly the required set of qualities and, accordingly, set the price. If the company has achieved success, then a certain group of buyers in this market segment will not consider products offered by other companies as substitutes for its products. The company thus creates a group of regular customers, almost a mini-monopoly.
A successful differentiation strategy reduces the intensity of competition that often occurs in consumer goods industries. If suppliers raise prices, “loyal” buyers, with little price sensitivity, are likely to accept the eventual price increase proposed by the manufacturer of the exclusive product. Moreover, customer commitment acts as a kind of barrier to new manufacturers entering this market and replacing this product with other similar products.
However, a differentiation strategy is not a risk-free strategy.
First, if the basis of differentiation, that is, the way a firm wants to be different from others, can be easily copied, other firms will be perceived as offering the same product or service. Then competition in this industry will most likely turn into price competition.
Second, firms that focus on broad differentiation may be marginalized by companies that focus on only one specific segment.
Third, if the strategy is based on a process of continuous product improvement (with the goal of always being one step ahead of its competitors), then the firm risks simply being at a disadvantage, since it will incur maximum costs for research and new development, while competitors will use the results of its activities to their advantage.
Fourth, if the firm ignores the costs of differentiation, then raising the price will not lead to higher profits.
The term differentiation is widely used in both strategic planning and marketing. However, it can also be used in a narrower sense when determining a firm's position in an industry. In most industries, companies do not offer products that are exactly the same as their competitors. For example, they may differ in style, in the distribution network used, in the level of after-sales service. If such differences lead to the fact that the company can charge a higher price than the existing average price in the industry, then the company can be considered to be differentiating, to use M. Porter's terminology. However, in most cases, such differences only give us an idea of the position in the industry of a particular company.
Because there are only a small number of industries that produce a product in its “pure form,” most firms in the industry inevitably have to offer something slightly different to stay in the game. Such firms will therefore not be differentiators unless they can charge a higher price.
A focus strategy involves selecting a narrow segment or group of segments in an industry and serving the needs of that segment more effectively than competitors serving a broader market segment can. The focus strategy can be used either by a cost leader that serves a given segment or by a differentiator that meets the special requirements of a market segment in a way that allows it to charge a high price. So firms can compete on a broad front (serving multiple segments) or focus on a narrow area (targeted action). Both focus strategies are based on the differences between the target segments and the rest of the industry. It is these differences that can be called the reason for the formation of a segment that is poorly served by competitors who operate on a large scale and do not have the ability to adapt to the specific needs of this segment. A cost-focused firm can outperform broad-based firms because of its ability to eliminate excesses that are not valued by that segment.
Moreover, broad differentiation and focused differentiation are often confused. The main difference between the two is that a broad differentiation company bases its strategy on widely valued differentiators (e.g., IBM in computers), while a focused manufacturer seeks out and satisfies a segment with specific needs. much better.
The obvious danger of the focusing strategy is that the target segment may disappear for some reason. In addition, some other companies will enter this segment, surpassing this company in focus, and lure away customers, or for some reason (for example, tastes will change, demographic changes will occur) the segment will shrink.
However, there is a certain appeal in the idea of focusing on a narrow target market segment and being able to tailor your product to the needs of specific consumers. If a company understands this correctly, it can benefit significantly. But if a firm was once a manufacturer of a large number of different products for a wide range of consumers and decided to focus its efforts on the high-income segment using a strategy of focused differentiation, then this may lead to adverse consequences in the future.
If a firm discovered an opportunity to make a profit by selling a product at a higher price to certain consumers, then you can be sure that other firms were also able to consider this option. Before the firm realizes it, price-sensitive consumers will have a huge number of firms to choose from, thereby ending the firm's ability to charge a higher price. In addition to price pressure, there is another problem related to the level of costs. A firm's transfer of interest from a broad market to a limited segment usually means a sharp reduction in production volumes. In turn, this can lead to extremely high unit costs unless the firm has reduced overhead costs, which must accommodate lower production volumes and are driven by a narrower customer base. Thus, a firm can terminate its operations using both price and cost pressures.
The biggest strategic mistake, according to M. Porter, is the desire to chase all the rabbits, that is, to use all competitive strategies at the same time. In other words, according to M. Porter, a company that has not made a choice between strategies - to be a cost leader or to engage in differentiation - risks being stuck halfway. Such companies try to achieve advantages based on both low cost and differentiation, but actually gain nothing. Poor performance results from the fact that a cost leader, a differentiator, or a firm with a focused strategy will be in a better market position to compete in any segment. The firm stuck in the middle will receive a significant share of the profits only if the industry situation is extremely favorable or if all other firms are in a similar position. Rapid growth in the early stages of an industry's life cycle may allow such firms to generate good returns on their investments, but as the industry matures and as competition becomes more intense, firms that have not made a choice between existing alternative strategies , risk being forced out of the market.
Following one or another standard strategy makes it necessary for the company to have certain restrictions (barriers) that would make it difficult for competitors to imitate (copy) its chosen strategies. Because these barriers are not insurmountable, a firm usually needs to offer its competitors a changing goal through constant investment and renewal.
With all the distinctness and diversity of M. Porter’s typical strategies, they nevertheless have common elements: both strategies require entrepreneurs to pay great attention to both product quality and cost control. Therefore, it is very important to consider these two strategies not as mutually exclusive alternatives, but as orientations (Figure 4.9).
Rice. 4.9. Differentiation and efficiency
From Fig. Figure 4.9 shows that a firm at position A on the graph would undoubtedly seek to pursue a strategy aimed at differentiation by serving a specific market segment, offering a product with a unique combination of properties, and would be able to charge a higher price.
The firm in position B is pursuing a purely efficient strategy. Efforts are aimed at reducing costs at all stages of work. The main profit is obtained due to low costs at average prices for the industry.
The firm in position C is pursuing neither strategy. As M. Porter puts it, this company is “stuck in the middle.” Lack of differentiation means an inability to raise prices above the industry average, and efficiency leads to higher costs.
A firm in position D is in an advantageous position because it has advantages in both strategies. A firm's ability to differentiate leads to the ability to charge a higher price, while at the same time efficiency provides cost advantages. At the same time, it is quite difficult for a company to take advantage of two strategies simultaneously. This is explained by the fact that differentiation usually leads to the need to improve products, which in turn leads to increased costs. Conversely, achieving the lowest cost in an industry usually involves the firm being forced to move away from differentiation due to product standardization. But most often, significant difficulties arise due to the incompatibility, and even contradiction, of the requirements for organizing production, which each strategy implies.
F. Kotler offers his own classification of competitive strategies based on the market share owned by the enterprise (firm).
1. “Leader” strategy. The “leader” company in the product market occupies a dominant position, and its competitors also recognize this. The leading firm has a whole range of strategic alternatives at its disposal:
Expansion of primary demand, aimed at discovering new consumers of the product, expanding the scope of its use, increasing the one-time use of the product, which is usually advisable to apply at the initial stages of the product’s life cycle;
A defensive strategy adopted by an innovating firm to protect its market share from its most dangerous competitors;
An offensive strategy, most often consisting of increasing profitability by maximizing the use of experience. However, as practice shows, there is a certain limit, beyond which further increase in market share becomes unprofitable;
A demarketing strategy that involves reducing one's market share to avoid accusations of monopoly.
2. The “challenger” strategy. A firm that does not occupy a dominant position can attack the leader, that is, challenge him. The goal of this strategy is to take the place of leader. In this case, the key becomes the solution of two important tasks: choosing a springboard for carrying out an attack on the leader and assessing the possibilities of his reaction and defense.
3. “follow the leader” strategy. A “follower” is a competitor with a small market share that chooses adaptive behavior by aligning its decisions with those of competitors. This strategy is most typical for small businesses, so let’s take a closer look at possible strategic alternatives that provide small businesses with the most acceptable level of profitability.
Creative market segmentation. A small firm should focus only on certain market segments in which it can better exercise its competence or has greater agility in order to avoid clashes with leading competitors.
Use R&D effectively. Since small businesses cannot compete with large firms in basic research, they must focus R&D on improving technology to reduce costs.
Stay small. Successful small businesses focus on profit rather than increasing sales or market share, and they strive for specialization rather than diversification.
A strong leader. The influence of the leader in such firms extends beyond the formulation of strategy and communication of it to employees, also covering the management of the day-to-day activities of the company.
4. Specialist strategy. The “Specialist” focuses primarily on only one or several market segments, i.e., he is more interested in the qualitative side of the market share. It seems that this strategy is most closely associated with M. Porter's focusing strategy. Moreover, despite the fact that the “specialist” firm dominates in a certain way in its market niche, from the point of view of the market for a given product (in the broad sense) as a whole, it must simultaneously implement a “following the leader” strategy.
Since the mid-90s of the last century, the theory of “core competencies of a corporation” by G. Hamel and K. K. Prokholad has become a popular concept for developing strategies. The main ideas of this direction in the field of strategic management were published in the well-known book in the West by these authors, “Competing for the Future,” published in 1994 and translated into Russian.
Managers who preach this theory see further than traditional business administrators. They use the power of imagination to create products, services and even industries that do not yet exist, and then turn their dreams into reality. In this way, they create a new market space in which they can dominate the competition, since this market space was invented by them.
To do this, as G. Hamel and K. K. Prokholad believe, managers should perceive their company not as a set of enterprises, but as a combination of key basic components, that is, a combination of skills, abilities and technologies that allow them to provide benefits to consumers. To go not from the market to the product produced by the company, but from the product to the market, even a completely new one - this is the essence of the theory of core competencies. G. Hamel and K. K. Prahalad write: “Diversified companies are like a tree, the trunk and largest branches of which are the core products, the other branches are the divisions, and the leaves, flowers and fruits are the final products. The root system, which provides nutrition, support and stability to the tree, forms key competencies. When analyzing competitive products, don't lose sight of the forces behind them. Yes, the crown is the decoration of trees, but we should not forget about the roots.”
The key components are the “form of existence”, the result of the collective experience of the organization as a whole, especially when it comes to coordination
Rice. 4.10. Competencies as the roots of competitiveness
dynamization of actions for the production of a wide range of products and integration of various technological areas.
Thus, what makes it difficult for companies to predict their competitive future is that management looks ahead through the narrow prism of the markets they exist and serve. But any company, according to G. Hamel and K. K. Prahalad, can be looked at from different points of view, for example, the Honda company.
Do Honda's managers view their company only as a motorcycle manufacturer or as a company with unique capabilities in the design and production of engines and electric trains? The view expressed in the first part of each of these questions is limited and tends to make future products and services appear very similar to those produced and supplied in the past. For example, the opinion “Honda only makes motorcycles” leads to the conclusion that the company should focus on producing more modern motorcycles.
The second point of view is liberating and suggests a wide range of future products and services, that is, it encourages the company to develop, produce and sell cars, lawn mowers, mini tractors, marine engines and generators in addition to motorcycles.
Immediately after publication, the concept of G. Hamel and K. K. Prahalad was criticized. The main “thesis against” was very reminiscent of the criticism of strategic planning in the early seventies of the last century: the main thing is not to develop a system of key competencies and even to have them, but the main thing is to implement them. Examples of Microsoft, which took advantage of the development of Apple, General Motors, whose “strategic architecture” led to a decrease in market share from 46 to 35%, confirmed this position. Core competencies are only part of competitive success. More compelling arguments are needed. In 1995, they were proposed by M. Tracey and F. Wiersema in their book “The Discipline of Market Leaders,” which was only 208 pages long. They presented three value disciplines, or ways of delivering value to the consumer - operational excellence, product leadership and customer intimacy. Companies that want to gain a competitive advantage and dominate the market must choose only one of these disciplines and achieve excellence in it.
1. Operational Excellence. Examples of companies with such value discipline are AT&T, McDonald's, General Electric. They deliver to their consumers a combination of quality, price and ease of purchase that no one else in the market can match. These companies do not offer new products or services and They do not cultivate special, non-traditional relationships with their consumers.They guarantee low prices or unconditional, upon request, service.
The main emphasis is on the optimization and rationalization of production processes, strict management, the development of close and unhindered relationships with suppliers, intolerance of losses and rewarding efficiency, provision of standard basic services without disputes with the consumer and at his first request.
2. Product leadership. Examples of companies with such value discipline are Microsoft, Motorola, Reebok, Revlon. Companies of this type focus their efforts on offering goods and services that push the existing boundaries of efficiency and quality and introduce fundamentally new consumer properties to their products. The main emphasis is on invention, product development and market exploitation, decentralized management, exceptional creativity and speed of commercialization of ideas, speed of decision-making and appropriate organization of production processes.
If in the first case, with production excellence, the key to success is the skillful interweaving of unique knowledge, the use of technology and strict management, then in this case it is overcoming constant tension, ensuring an optimal balance between the modernization of old products and the development of a new generation product.
3. Proximity to the consumer. Examples of such companies with this value discipline are IBM, Cannon, Airbone Express. They deliver value through proximity to the consumer, delivering not what the market wants, but what the specific consumer requires, constantly adapting their products and services to the needs of the consumer at a reasonable price. The main emphasis is on developing long-term relationships with consumers, adapting products and services to customer requirements, and delegating responsibility to employees who work directly with customers. The key to the success of such companies is the combination of skilled workers, the use of modern methods of implementing a wide network of capacities to provide products and services.
Just like M. Porter with his competitive strategies, M. Tracy and F. Wiersema firmly argue that for successful competition, a company must choose one of the value disciplines, and not scatter forces and resources, causing tension, confusion and death. However, the choice itself is one of the central points of the concept and, according to the authors, is divided into three rounds.
Round 1: Understanding the Status Quo
During this round, top management must find out what the current position of the company is, that is, determine it from the standpoint of the realities of the external business environment and the resource potential of the company.
Round 2: Discuss realistic options
In this round, senior management moves from analyzing the current situation to discussing options for the future. Managers identify opportunities (for each option) of value disciplines and estimate the approximate costs of their implementation.
Round 3. Development of specific projects and decision making
At this stage, senior management transfers their plans to special teams who translate the main ideas into specific projects, and senior management is given the right to make the final decision - the choice of a specific value discipline that will provide the firm with market dominance through appropriate competitive advantages.
The views of M. Tracy and F. Wiersema turned out to be the seeds that fell on fertile soil, since they returned entrepreneurs to the traditional, understandable concept of competition as a head-to-head battle on the principle “my win is your loss.” However, modern trends in the global economy have turned out to be more complex and multifaceted. That is why neither the concept of G. Hamel and K. K. Prahalad, nor the views of M. Tracy and F. Wiersema could provide universal recipes for all occasions.
Michael Porter identifies three basic competitive strategies for enterprises:
1. Absolute cost leadership
2. Differentiation
3. Focus
In some, although rare, cases, a firm may be able to successfully implement more than one approach.
The Low Cost Leadership strategy aims to achieve production at the lowest cost in the industry. The competitive advantage here is obvious - low costs compared to competitors allow the company to dictate the lower limit of the market price and, as a result, increase its market share. This provides the company not only with greater stability in relation to industry competitors, but also with greater opportunities to counter the entry of third-party firms and substitute products into the market. This type of strategy is effective when the industry is characterized by a high degree of product standardization and industry demand is sensitive to price changes.
A company can become a price leader only if it a) provides better cost management (control over production factors) and b) is able to transform cost chains in the direction of reducing them. The first can be achieved by intensifying production by refining technology, modernizing equipment and distributing production experience across departments, as well as increasing economies of scale by increasing market share and reducing product differentiation. The second can be realized by reducing production costs by simplifying products, using different technology, cheaper materials and automation of expensive processes, as well as by reducing transaction costs through the use of new methods of promoting goods, moving production to economically favorable regions (proximity of sources of raw materials and buyers, low taxes) and deepening vertical integration both towards suppliers and towards distribution channels.
At the same time, the concentration of a company's efforts on reducing costs makes it vulnerable to changes in demand. In the event of technological breakthroughs (the creation of a new type of product) and changes in consumer preferences, the company may lose all demand, despite the low price. In addition, the low-price leadership strategy has the disadvantage that it can be easily imitated by competitors, reducing its long-term viability, thereby limiting the strategy's value to the firm.
Cost leadership imposes a number of obligations on the firm that it must fulfill in order to maintain its position: reinvest in modern equipment, ruthlessly write off obsolete assets, avoid expanding the specialization of production, and monitor technological improvements. “To achieve cost leadership, it is necessary to actively create production capacity at a cost-effective scale, vigorously pursue cost reductions based on the accumulation of experience, tightly control production and overhead costs, avoid small transactions with customers, minimize costs in areas such as research and development, service , sales system, advertising, etc. All this requires great attention to cost control on the part of management. Lower costs relative to competitors become the keynote of the overall strategy, although product and service quality and other areas cannot be ignored,” Porter writes.
A low-cost position protects a firm from competitors because it means it can earn profits when its rivals have lost that ability. A low-cost position protects the firm from powerful buyers, since the latter can only use their power to reduce prices to the level of less efficient competitors. Low costs protect against powerful suppliers, giving the firm a greater degree of flexibility as input costs increase. The factors that provide a low-cost position also tend to create high barriers to entry associated with economies of scale or cost advantages. Finally, a low-cost position typically places a firm in a more favorable position with respect to substitutes than its competitors. Thus, a low-cost position protects the company from all five competitive forces.
A low cost strategy is especially important in the following cases:
· price competition among sellers is especially strong;
· the product produced in the industry is standard;
· differences in price for the buyer are significant;
· most customers use the product in the same way;
· costs for buyers to switch from one product to another are low;
· There are a large number of buyers who have serious power to reduce the price.
Risks of a low-cost strategy: technological changes that undermine past investments or experience; the ability of companies or followers new to the industry to reduce costs by copying experience or investing in the latest equipment; the firm's inability to respond to necessary product changes or market changes due to increased cost concerns; cost-push inflation, which reduces a firm's ability to maintain sufficient price differentials to offset brand prestige or other competitive advantages in differentiation.
General requirements for resources, qualifications and production organization when implementing a low-cost strategy:
· Real investments and access to capital;
· Skills in technological process development;
· Careful supervision and control over labor processes;
· Product design to facilitate production;
· Low-cost distribution and sales system;
· Strict control over the level of costs;
· Frequent and detailed control reports;
· Clear organizational structure and responsibility;
· Incentives based on clear quantitative indicators.
The second basic strategy is the strategy of differentiating the product or service offered by the company, that is, creating a product or service that would be perceived as unique within the entire industry. Differentiation can take many forms: by design or brand prestige, by technology, by functionality, by service, by dealer network or other parameters. Ideally, a company differentiates itself in several areas. The differentiation strategy is associated with giving the product specific properties that will provide the company with consumer loyalty to its products.
A differentiation strategy, when successfully implemented, is an effective means of achieving profits above the industry average because it creates a strong position to confront the five competitive forces, although in a different way than a cost leadership strategy. Differentiation protects against competitive rivalry because it creates consumer brand loyalty and reduces sensitivity to product price. It leads to an increase in net profit, which reduces the severity of the cost problem. Consumer loyalty and the need for competitors to overcome the uniqueness factor creates a barrier to entry into the industry. Differentiation provides higher levels of profit to counter the power of suppliers, and also helps moderate the power of buyers, since the latter are deprived of comparable alternatives and are therefore less price sensitive. Finally, a firm that has differentiated and earned customer loyalty has a more favorable position with respect to substitutes than its competitors.
The use of a differentiation strategy is effective when there is a high consumer appreciation of the distinctive properties of the product and there are a variety of ways to use it, and product differentiation itself has many aspects. It can be achieved on the basis of technical excellence, quality, service delivery, value for money (credit sales). The most attractive differentiation is the one that is difficult or expensive to imitate.
The main task of developing a differentiation strategy is to ensure a reduction in the total costs of consumers for using the product, which is achieved by increasing convenience and ease of use and expanding the range of satisfaction of consumer needs. To do this, the firm must focus its efforts on identifying sources of value for the consumer, giving the product features that increase consumer satisfaction, and providing support in the process of consuming the product. All this is associated with extensive research and development and active marketing activities. Since the success of a differentiation strategy depends on the consumer's perception of the value of the product, the risks of differentiation are:
Cost differentials between the differentiation firm and the low-cost firm may become too large to retain the loyalty of customers who will choose savings over exceptional features of the product or service.
· as consumer experience accumulates, the importance of the differentiation factor for more sophisticated buyers may decrease;
· copying reduces the resulting differentiation, which typically occurs as an industry ages.
General requirements for resources, qualifications and production organization when implementing a differentiation strategy:
· Opportunities to attract highly qualified labor, researchers and creative personnel;
· Product design;
· Creative skills;
· High potential for marketing and fundamental research;
· High reputation for product quality or technological leadership of the company;
· Significant industry experience or a unique combination of skills acquired in other industries;
· Close cooperation with sales channels;
· Close functional coordination of R&D, product design and marketing;
· Subjective assessments and incentives instead of quantitative indicators.
Focus, or concentration, is a type of strategy in which a firm concentrates its efforts on a specific group of customers, product type, or geographic market segment. The competitive advantage of a company generated by the specialization of activities can be associated with both lower costs and the uniqueness of the product. Even if a focus strategy does not lead to low cost or differentiation in terms of the market as a whole, it can achieve one or both of these positions in a narrower target market space. However, if the goals of a low-cost or differentiation strategy apply to the industry as a whole, then a focusing strategy means concentrating on a narrower goal, which is reflected in the activities of all functional areas of the business.
The benefits of such a strategy come from customer loyalty, which offsets the impact of economies of scale. A firm can implement such a strategy if it can effectively serve the niche and the size of the niche itself is small enough not to attract large firms.
Focusing is useful when:
· the segment is too large to be attractive;
· the segment has good growth potential;
· the segment is not critical for the success of most competitors;
· a company using a focusing strategy has enough skills and resources to successfully operate in the segment;
· The company can protect itself from challenging competitors due to customer goodwill toward its outstanding ability to serve segment customers. Risks of a focused strategy: there is a possibility that competitors will find an opportunity to approach the company's actions in a narrow target segment; the requirements and preferences of consumers of the target market segment gradually spread to the entire market;
· the segment may become so attractive that it will attract the interest of many competitors.
The following set of risks is associated with focusing:
* increasing cost differences between competitors operating on a broad strategic plan and a firm pursuing a focusing strategy leads to the elimination of the latter's cost advantage in serving a narrow target market or neutralizing the differentiation achieved through focusing;
* narrowing the differences between the products or services in demand in the target market and the products or services in the industry market as a whole;
* a situation in which competitors find narrower market segments within the strategic target market and thereby overcome the advantage of the firm pursuing a focusing strategy.
The general requirements for resources, qualifications and production organization for a focusing strategy are a combination of the conditions and measures indicated above for differentiation and cost leadership strategies aimed at achieving a specific strategic goal.
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