Types of Business Level Strategy:- 1. Generic Business Strategies 2. Industry Structure and Competitive Strategy 3. Hyper-Competition and Competitive Strategy. Also learn about:-
- Example of Business Strategies
- Types of Business Strategies
- Business Strategy Model
This article will help you to get the answers of:
- What are the three basic business strategies?
- What is overall business strategy?
- What is a business strategy model?
- What is the purpose of a business strategy?
Porter’s Types of Business Strategies: Cost Leadership, Differentiation and Focus Strategy
Business Level Strategy Type # 1. Generic Business Strategies:
Several efforts to classify strategy have been made at various times. One of the earliest was Ansoff’s (1965) Product-Market-Diversification Matrix. This specifies an appropriate strategy for the marketing of new or existing products to new or existing markets. A weakness of this classification was that the sustainability of the strategies involved was not addressed.
Michael Porter made this point and viewing strategy as basically aimed at securing a long-term sustainable advantage in a competitive market developed another classification of strategies. Porter has referred to low cost and differentiation as generic business-level strategies.
These strategies are called generic because all businesses or industries can pursue them irrespective of they are profit or not-for- profit organizations. Each of the generic strategies results from a company making consistent choices that reinforce each other.
According to Porter, a business can try to supply a product or service more cost- effectively than its competitors (cost leadership), it can strive to add value to the product or service through differentiation and command higher prices (differentiation) or it can narrow its focus to a special product market segment that it can monopolize (focus). Not following any of these strategies characterizes a firm as being “stuck in the middle”.
The business strategy depends up on the positioning of the firm in the industry and the industry structure. The industry structure consists of the five forces operating in the industry environment. Positioning depends upon the competitive advantage and competitive scope. Competitive advantage can be acquired by following two approaches of lower cost and differentiation.
Competitive scope consists of narrow target and broad target. When the competitive advantage and competitive scope are put together we get a matrix as Porter suggests that there could be three basic ways in which firms can achieve sustainable competitive advantage.
1. Cost Leadership
In the following paragraphs we discuss these three types of business strategies:
We first try to explain what these strategies do mean and how they can be translated into action. Then we describe the necessary conditions for these strategies to work best.
Business Strategy Type # 1. Cost Leadership Strategy:
Cost leadership is a low-cost competitive strategy that aims at the broad mass market and requires “aggressive construction of efficient-scale facilities, vigorous pursuit of cost reduction from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on”.
If a firm becomes the lowest-cost producer in the industry, then cost leadership may be the most appropriate strategy to pursue. A low cost strategy is based on doing everything possible to lower unit costs.
Porter defines cost leadership strategy as ‘a firm sets out to become the low-cost producer in its industry, a low cost producer must find and exploit all sources of cost advantage. Low-cost producers typically sell a standard, or no frills product and place considerable emphasis on reaping scale or absolute cost advantages from all sources. If a firm can achieve and sustain overall cost leadership, then it will be an above-average performer in its industry provided it can command prices at or near the industry average’.
The cost leader outperforms its competitors by offering products or services at a lower cost than they can. Customers prefer a lower cost product or service if it provides them the same need satisfaction as the comparable products available in the market do. When all firms offer products at a comparable price, the cost leader is able to earn an above average profits due to the low cost of its products.
Moreover, the cost leadership provides a margin of safety to the firm to lower price if the competition grows intense and yet earn more or less the same level of profit.
Business Strategy Type # 2. Differentiation Strategy:
If cost leadership is not a feasible option, but the firm is able to differentiate its products along some attributes that customers value, and the cost of doing so is lower than the extra revenue envisaged, then differentiation may be the appropriate strategy to pursue.
Differentiation aims at the broad mass market and involves the creation of a product or service that is perceived throughout its industry as unique.
Porter defines a differentiation strategy as ‘to be unique in its industry along some dimensions that are widely valued by buyers. It is rewarded for its uniqueness with a premium price. A firm that can achieve and sustain differentiation will be an above-average performer in its industry if its price premium exceeds the extra costs incurred in being unique. The logic of the differentiation strategy requires that a firm choose attributes in which to differentiate it that are different from its rivals’.
Porter defines differentiation in terms of the ability to charge higher prices, and not on the basis of the product’s attributes per se. It can be associated with design or brand image, technology, features, dealer network, or customer service.
A firm is said to follow a differentiation strategy when it outperforms its competitors in offering the product with special features its competitors are neither able nor willing to offer. Customers perceive a product or service differentiated if it provides them the need satisfaction they value, and are prepared to pay more for such need satisfaction.
When the customers distinguish a product or service by reason of its special features and attributes from all other products/services of its type available in the market, the product or service is said to be a differentiated product or service.
A differentiation firm can charge a premium price, gain new customers and command customers’ loyalty for the uniqueness of its product that the customers value In order to pursue a differentiation (value added) strategy, an accurate picture of the target market will have to be obtained to ensure that there are sufficient ways in which to differentiate the product, and that the marketplace can be subdivided and is willing to pay for the differentiation.
An effort will then have to be made to avoid imitation, and this may involve a regular redefinition of the basis of differentiation. For the same reason, it would be desirable for the differentiation to be based on a mix of features and activities rather than a simple product feature or service, and for it to involve any parts of the value chain. Added protection from imitation may also be possible by linking into the value chains of suppliers and buyers.
Differentiation, whether innovation -or marketing-based, is more appropriate in dynamic industry environments, in which it can help to avoid, at least in the short run potentially more costly forms of competition such as price cuts. However, as it often involves new technologies and unforeseen customer and competitor reactions, it also contributes, in turn to environmental unpredictability.
As far as staffing and administrative requirements are concerned, differentiation requires the use of experts, and the establishment of mechanisms to facilitate the coordination of these experts, who may work in different functional departments, or may come from outside of the company.
The profits of a differentiator firm come from the difference in the premium price charged and the additional cost incurred for providing the differentiation. The success of a differentiation firm lies in the extent the firm is able to offer differentiated product/service by maintaining a balance between its price and costs/The firm may fail if the customers cease to keep interest in the differentiated features, or are not willing to pay premium price for these features.
For example, Orient fans offers premium ceiling fans based on product innovation and superior technology. In the Computer industry, Apple Computers in 1992 enjoyed competitive advantage based on differentiation. Apple had a unique proprietary operating system and a strong brand name, both of which enabled the company to differentiate itself from its competitors.
The strategic choices of a product differentiator in terms of product differentiation, market segmentation and distinctive competency:
i. In order to achieve a competitive advantage, a differentiator chooses a high level of product differentiation. Product differentiation can be achieved in quality, innovation and customer responsiveness.
ii. Innovation is very important for technologically complex products, where new features are the source of differentiation, and customers pay a premium price for new and innovative products, such as state-of-the -art computer, stereo, or car.
iii. When differentiation is based on customer responsiveness, a differentiator provides comprehensive after-sales service and product repair. This is important particularly in case of cars and domestic appliances. Companies like Maytag, Dell Computer, and Federal Express all excel in customer responsiveness.
iv. A product’s appeal to customers’ psychological needs (such as prestige or status, patriotism, to safety of home and family or value for money) can become a source of differentiation.
v. A differentiator strives to differentiate itself along as many dimensions as possible. The more it differentiates from its rivals the more it is protected from competition and the wider is its market appeal.
A differentiator chooses to segment its market into many niches and offers a product designed for each market niche and decides to be a broad differentiator, but might choose to serve just those niches where it has a specific differentiation advantage.
In choosing distinctive competency to pursue, a differentiator concentrates on the organization function that provides the sources of its differentiation advantage. Differentiation on the basis of innovation and technological competency depends on the R&D function. Efforts to improve customer service depend on the quality of the sales function.
The success of differentiation strategy depends on the following conditions:
1. The firms must clearly identify who the customer is and what are the needs and values.
2. The extent to which the organization understands what is valued by the customer, user, or perhaps a stakeholder group is often dangerously taken for granted by managers.
3. It is much more difficult for a competitor to imitate a basis of differentiation linked to a mix of activities or features rather than just a product or service.
4. The competitive advantage can be achieved on a static basis because in many markets customer values change, and therefore bases of differentiation need to change. However, even if customer values can be identified that are relatively constant, over time competitors can imitate bases of differentiation. Therefore, a business following a differentiation strategy may have to review continually bases of differentiation and keep changing its strategy.
1. Porter defines differentiation in terms of the ability of a firm to price higher than competitors. He argues that a product or service that offers something unique, or is of greater value than the competition, should command a higher price. However, he forgets to consider the possibility that a firm may offer a differentiated product or service at a similar price in order to increase market share and volume.
2. Porter argues that Sainsbury cannot be following a differentiation strategy because it favors low price. David Sainsbury finds this problematic, since his view is that Sainsbury is trying to keep down cost so that it can reinvest in unique benefits to the customer, as well as reducing price- and successfully so.
Several writers on strategy have supported this view. They argue that businesses may, by keeping down costs relative to competition, reinvest in unique features and therefore achieve differentiation.
This means that a firm can simultaneously follow a cost-based strategy and differentiation. Although Porter says that this is being ‘stuck in the middle’ and is dangerous. Johnson and Scholes remark, “The evidence is that firms can do it successfully”.
3. If a strategy of differentiation is to be followed, the following should be clarified- (a) Differentiation from whom: i.e. who are the competitors, (b) What is the basis of differentiation?
Porter seems to suggest that products and product quality should be taken as the basis of differentiation. However, he himself recognized that differentiation involves much more than product.
The following are the major advantages of differentiation:
1. Differentiation protects a company against competitors to the extent the customers develop brand loyalty for its products. Brand loyalty is a very valuable asset as it protects the company on all fronts. For instance, powerful suppliers do not create a problem as the company’s strategy is targeted to the price than the cost of production. Thus a differentiator can bear a moderate rise in the prices of its inputs better than the cost leader.
2. Powerful buyers also do not pose a threat to the differentiator as it offers the buyers a unique product and command high brand loyalty.
3. Product differentiators are in a position to pass increases in the prices of inputs on to the buyers, as they are willing to pay the premium price.
4. Differentiation and brand loyalty build a barrier for potential competitors to enter the industry.
5. Differentiation compels new companies to develop their own distinctive competencies so that they are able to compete. This is very expensive.
6. The substitute products pose a threat to the extent they are able to satisfy the same customer needs as the differentiator’s products do, and their ability to break the brand loyalty of customers.
1. The differentiator company may find it difficult to maintain its perceived uniqueness in customers’ eyes. The competitors very soon move to imitate and copy the products and do away the uniqueness of the differentiator. This very often happens in computer, autos and electronic appliances.
2. Patents protection and advantages of first-moving help so long as the overall quality of competitive products comes up to match the differentiator’s product. From this point brand loyalty begins to fade and customers start deserting the differentiator. For instance, American Express Company’s green, gold and platinum cards used to be closely associated with high status and prestige.
The company differentiated its products by advertising its exclusivity and uniqueness and charged a premium price. During 1990s American Express’ differentiation strategy suffered a setback as competitor companies like MasterCard and Visa demonstrated that their cards could be used at locations where American Express cannot.
Not only high-income group but also the common consumers could avail many other benefits of using their particular credit cards. Several banks and many other companies like AT&T and CM brought their own credit cards. The emergence of so many competitive products has broken the loyalty of Am. Express’ customers and faded cards’ uniqueness.
3. Another problem of the differentiation strategy lies with the ease with which competitors can imitate a differentiator’s product. The easier it becomes for the competitors’ to imitate, the more difficult it is for the differentiator to charge a premium price.
4. When differentiation of the product is based on the design or physical features of the product, it is far easy to imitate, and the greater is the risk for the differentiator. For example, for the products like VCRs, stereos and cigarettes the customers are price sensitive, the significance of differentiation diminishes very soon as the company wishes to charge a premium price.
5. If the quality of service provided or reliability or any other intangible source is the basis of differentiation like the prestige of a Rolex or BMW or Cheverlet, the imitation of intangibles is much more difficult and that makes a company more secure. Consequently, the differentiator can take advantage of the differentiation for a long time.
Business Strategy Type # 3. Focus Strategy:
The focus strategy is directed to serving the needs of a limited customer group or segment. ‘A focused company concentrates on serving a particular market niche, which may be defined geographically, by type of customer or by segment of the product line’.
Choosing a niche by type of customer means serving a particular type of customers such as only the very rich, or the very young or the very adventurous. Focusing only a segment of the product line means choosing only a particular type of product such as fast motor-cars, or vegetarian foods. A focus strategy requires specialization in some way.
Marketing to such a niche would again involve a choice between cost focus and differentiation focus.
Cost focus is a low-cost competitive strategy that focuses on a particular buyer group or geographic market and attempts to serve only this niche, to the exclusion of others. In using cost focus, the company or business unit seeks a cost advantage in its target market.
Differentiation focus, like cost focus, concentrates on a particular buyer group, product line segment, or geographic market. This is the strategy successfully followed by Casey’s General Stores, Morgan Motor Car Company. In using differentiation focus, the company seeks differentiation in a targeted market segment.
In principle, a focus strategy exploits the differences in cost behavior in some segments, so it is only available where such segments are poorly served by the broadly targeted competitors and, of course, only sustainable for as long as the niche can be defended.
A focus strategy refers to ‘the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others. In cost focus a firm seeks a cost advantage in its target segment, while in differentiation focus a firm seeks differentiation in its target segment.’
The difficult point for the focuser is reached when the niche has been exhausted, at which time he may be tempted, out of a false sense of security derived from his success within the narrow scope of the niche, to target the broader market. This can have catastrophic consequences.
The strategic choices of a focuser in terms of product differentiation, market segmentation and distinctive competency:
A focused company can choose high or low product differentiation as the company can pursue a low-cost or a differentiation approach.
A focused company chooses specific niches in which to compete, rather than going for whole market,
A focuser may pursue any distinctive competency because it can pursue any kind of differentiation or low-cost advantage.
The focus strategy has the following main advantages:
1. The cost advantage of the cost leader protects it from competitors within industry. The lower costs also mean that the increases in the price of inputs will less affect the cost leader than its competitors if the suppliers become more powerful. Similarly, if the buyers grow more powerful, the fall in the price of its product will also affect the cost leader to a lesser extent as compared to its competitors.
2. The development of customer loyalty lessens the threat from substitute products.
3. The focus strategy permits a company to stay close to its customers and to respond to their changing needs. A focuser does not face the difficulty of managing a large number of market segments that a large differentiator has to.
1. Powerful suppliers often pose a threat to a focused company as it buys in small quantities. But as long as it can pass on price increases to loyal customers, this may not be a significant problem.
2. New entrants have to overcome the customer loyalty that the focuser company has created.
3. A focus company’s production costs often exceed those of a low-cost company as it produces at a small volume. This reduces profitability if a focuser is required to invest heavily in developing a distinctive competency, such as expensive product innovation, in order to compete with a differentiated firm.
This difficulty is, however, overcome by the advent of flexible manufacturing systems. Small production runs have become possible at a lower cost. Consequently, small focus firms are increasingly able to compete with large companies in specific market segments where their cost disadvantage is very much reduced.
4. A focuser’s niche can suddenly disappear due to technological change or changes in consumer tastes. A focuser is unable to move easily to new niches as its resources and competency concentrate in one or a few niches while a generalist differentiator easily can.
5. It is possible that differentiators will compete for a focuser’s niche by offering a product that can meet the demands of the focuser’s customers. A focuser is vulnerable to attack and therefore has to constantly defend its niche.
A firm to ensure long-term profitability must be clear as to its basic strategy, as too many firms do not make the important choice between these three strategies and end up being ‘stuck in the middle’.
It should be evident that each strategy makes its own demands on the organization to make consistent choices in terms of product, market & distinctive competency to establish a competitive advantage. A firm pursuing one strategy should also gain from elements of the other strategies too, as long as this did not detract it from its chosen strategy. A differentiator, for example, should pursue all cost reduction that does not sacrifice differentiation, and a cost leader could differentiate until this started to cost a lot.
A firm must gain a fit among the three components of business strategy. For instance, a low cost company cannot opt for a high level of market segmentation and provide a wide range of products. This would greatly enhance the production costs and the company would loose low cost advantage. Similarly, a differentiator firm with a competency in innovation should not try to reduce expenditure on R&D to decrease costs.
However, when a firm confuses its primary goal and source of competitive advantage and pursues both cost reduction and differentiation indiscriminately (or not at all), then it is said by Porter to be “stuck in the middle”.
This, Porter said, is an unenviable strategy because cost leadership and differentiation are inconsistent in principle, and there will typically be a cost leader, differentiator, or focuser that will be able to compete better than the firm stuck in the middle in anyone segment of the market.
Firms with such a (lack of) strategy, Porter said, typically end stuck in the middle because they have made product/market choice in such a way that they have been unable to acquire or sustain a competitive advantage. Consequently, they have below average performance and suffer when industry competition intensifies.
However, the cost leadership and differentiation are not mutually inconsistent, at least in the short run. This may occur, for example, when a firm pioneers a product, service, or process innovation that enables it to reduce cost and at the same time differentiate successfully. With the appropriate barriers erected, it may be possible to exploit such an innovation for a considerable period of time.
Similarly, cost leadership and differentiation may also be pursued together when costs are largely determined by market share, and control of a considerable share enables the firm to use the extra margin to differentiate, and still remain the cost leader. The same may be possible if there are interrelationships between industries that a competitor may be able to exploit while others are not.
Some companies started pursuing one of the three generic strategies but made wrong choices, or were subject to environmental changes. Unless management keeps close track of .the business and its environment, a company may easily loose control of a generic strategy. It is required constantly to adjust product/market choices to suit changing industry conditions.
There are a number of ways to being stuck in the middle:
i. Generally, a focuser can get stuck in the middle when it becomes overconfident and starts acting like a broad differentiator.
ii. A differentiator can get stuck in the middle if competitors attack their markets with more specialized or low-cost products that blunt their competitive edge.
iii. Many large firms will become stuck in the middle unless they make the investment needed to pursue both strategies simultaneously.
Successful management of a generic competitive strategy requires strategic management to pay attention to two issues:
1. They should ensure that the product/market/distinctive competency decisions are oriented toward one specific competitive strategy.
2. They should monitor the environment to keep the firm’s source of competitive advantage in tune with changing opportunities and threats.
Porter’s model is simple and intuitive one. Johnson & Scholes, however, elaborated on his classification, and developed several other assortments of generic strategies. They defined Porter’s strategies in terms of the relationship between perceived value added and price.
The products or services of different firms being more or less equally available, customers may choose to purchase from one source rather than another because of two reasons:
(1) Either, the price of the product or service is lower than that of another firm, or
(2) The product or service is more highly valued by the customer from one firm than another.
Variant # 1. Low Price/Added Value:
This strategy may seem attractive, but there are successful organizations that have followed it. It is the ‘cheap and nasty’ option. It involves reducing price accompanied by low perceived value added and focusing on a price-sensitive segment. Johnson and Scholes remarked, “It might be viable because there could exist a segment of the market which, while recognizing that the quality of the product or service might be low, cannot afford or chooses not to buy better-quality goods.”
They quote an example in which a number of clothing retailers in the UK learned in the 1980s, As chains of stores concentrated on upgrading their merchandise, a number of other stores opened up with lower quality merchandise at much lower prices. They were seeking not to compete in the same marketplace as the fashion chains, but rather to appeal to a market sector with low incomes.
Variant # 2. Low Price Strategy:
This strategy is adopted in seeking advantage over competitors. It reduces prices, while trying to maintain the quality of the product or service. The problem with this strategy is that the competitors can also pursue this strategy that can also reduce price.
Therefore, the only way competitive advantage can be achieved is if lower prices can be sustained while others are unable to do. An organization can sustain reduced prices only if it has the lowest cost base among competitors and is prepared to sustain a price-based battle.
This strategy is difficult to achieve. For a firm that does not have cost leadership, but chooses to compete on price, the danger is that the result is a reduction in margins in the industry as a whole, and an inability to reinvest to develop the product or service.
A strategy of low price can achieve competitive advantage within a market segment in which- (a) low price is important and (b) a business has cost advantage over competitors operating in that segment.
Variant # 3. The Hybrid Strategy:
This strategy provides added value in customer terms while keeping prices down. Japanese firms have been doing this for years. The success of the strategy depends on the ability to both understand and deliver against customer needs, while also having a cost base that permits low prices that are difficult to imitate.
It can be argued that, if differentiation can be achieved, there should be no need to reduce price, since it should be possible to obtain prices at least equal to the competitors, if not higher. However, the hybrid strategy could be advantageous if much greater volumes than the competitors can be achieved, and margins still kept attractive because of a low cost base and as an entry strategy in a market with established competitors.
Variant # 4. Value Added or Differentiation Strategies:
A broad differentiation strategy offers perceived added value over competitors at a similar, or somewhat higher price. The objective is to achieve higher market share, and therefore higher volume, than competitors by offering ‘better’ products or services at the same price; or enhanced margins by pricing slightly higher.
The strategy might be achieved through uniqueness (improvements in products) or marketing based approaches demonstrating better than the competition how the product or service meets customer needs.
Here the strategy is more likely to be built on the power of the brand or on uniquely powerful\promotional approaches. This strategy is successfully followed by many Japanese car firms, which have invested heavily in improving the reliability of their products.
Variant # 5. Focused Differentiation:
Following this strategy a business can compete by offering higher value to the customer at a significantly higher price and competing in a particular market segment and indeed this may be a real advantage. In the market for saloon cars Ford, Rover, Peugeot, Renault, Volkswagen and Japanese competitors are all competing within the one market to convince customers that their product is differentiated from those of their competitors.
A BMW is also a saloon car, but it is not competing directly with other manufacturers. It is offering a product with higher perceived value often at a substantially higher price. It is therefore trying to attract different sort of customers—a different market segment.
Variant # 6. Failure Strategies:
(a) Increased Price/Standard Value Strategy:
This strategy follows increasing price without increasing perceived value to the customer. Unless the organization is in a monopoly position, it is very unlikely that such a strategy can be sustained. It is of course, the very strategy that monopoly organizations are accused of following. Indian telecom department was doing just this. Unless legislation or higher economic barriers to entry protect the organization, competition is likely to erode market share.
(b) Increased Price/Low Value Strategy:
The reduction in value of a product or service, while increasing relative price is disastrous.
(c) Low Value/Standard Price Strategy:
Reducing value while maintaining price is also dangerous, though firms have followed it. In the 1970s Cadbury Schweppes held the price of its basic chocolate bar, while reducing value in terms of quality, packaging, advertising support and so on, in the belief that its market share would be sufficient to preserve its position. It was not competitors with low market share increased theirs substantially.
Business Level Strategy Type # 2. Industry Structure and Competitive Strategy (with example)
Although each of porter’s generic competitive strategies may be used in any industry, certain strategies are more appropriate in some instances. In a fragmented industry, for example, where many small- and medium-sized local companies compete for relatively small shares of the total market, focus strategies will likely predominate.
Fragmented industries are typical for products in the early stages of their life cycle. If few economies are to be achieved through size, no large firms will emerge and entry barriers will be low, allowing a stream of new entrants into the industry. Chinese restaurants, veterinary care, used-car sales are examples.
If a company is successful in overcoming the limitations of a fragmented market, however, it can reap the benefits of a broadly targeted cost leadership or differentiation strategy. For example, until Pizza Hut was able to use advertising to differentiate itself from its local competitors, the pizza fast food business was a fragmented industry composed primarily of locally owned pizza parlors, each with its own distinctive product and service offering. Later Domino’s used the cost leader strategy to achieve U.S. national market share.
As an industry matures, limitations or fragmentation are overcome and the industry tends to become a consolidated industry. A consolidated industry is characterized by domination by a few large companies.
Although many industries start fragmented, fights for market share and attempts to overcome local or niche market boundaries often increase the market share of a few companies. After product standards establish for minimum quality and features, competition shifts to a great emphasis on cost and service.
The combination of slower growth, overcapacity, and knowledgeable buyers put a premium on a firm’s ability to achieve cost leadership or differentiation along the dimensions market desires most. A shift takes place from product R&D to process R&D. Overall product quality improves, and costs are reduced significantly.
The mid-1990s witnessed the development of strategic rollup as an efficient way to quickly consolidate a fragmented industry. With the assistance from venture capitalists, an entrepreneur acquires a large number of owner-operate small businesses.
The resulting large firm takes advantage of economies of scale by building regional or national brands, applying best practices across all aspects of marketing and operations, and hires more sophisticated managers than the small business could afford.
Business Level Strategy Type # 3. Hyper-Competition and Competitive Strategy:
D’Aveni found that it is becoming increasing difficult for firms to sustain a competitive advantage for very long. According to him, “Market stability is threatened by short product life cycles, short product design cycles, new technologies, frequent entry by unexpected outsiders, repositioning by incumbents, and tactical redefinitions of market boundaries as diverse industries merge.”
As a result, a company must constantly strive to improve its competitive advantage. It is not enough to be just the lowest cost competitor. Through continuous improvement programs, competitors are usually working to lower their costs as well. Firms must find new ways not only to reduce costs further, but also to add value to the product or service being provided.
The same is true of a firm pursuing a differentiation strategy. Maytag was successful for many years by offering the most durable brand in major home appliance and charge the highest prices for Maytag brand washing machine.
As other competitors improved the quality of their products, it became increasingly difficult for Maytag to justify significantly higher price. As a result, the company was forced not only to improve the product, but also to reduce cost.
When industries become hyper-competitive, they tend to go through escalating stages of competition. Initially firms compete on cost and quality until an abundance of high-quality, low-priced product occurs. In the second stage of competition, the competitors proceed to untapped markets.
Others usually follow these moves until the moves become too risky or expensive. Firms then create entry barriers to restrict competition. Economies of scale, distribution agreements, and strategic alliances make it difficult for a new firm to enter the industry. Before hyper-competition, strategic initiative facilitated competitive advantage for many years, perhaps for decades.
This is no longer the case. As Industries become hyper-competitive, there is no such thing as a sustainable competitive advantage. Successful strategic initiatives in this type of industry typically last only months to a few years.
The only way a firm in this kind of dynamic industry can sustain any competitive advantage, according to D’Aveni, is through a continuous series of multiple short-term initiatives aimed at replacing a firm’s current successful products the next generation of products before the competitors can do so. Intel and Microsoft are pursuing this approach in the hyper-competitive computer industry.
One disadvantage of D’Aveni’s concept of hyper-competition is that it may lead to an overemphasis on short-term tactics over long-term strategy. Too much emphasis on hyper-competition could cause a company to focus too much on short-term temporary advantage and not enough on achieving its long-term objectives through building sustainable competitive advantage.