DEVELOPING COMPETITIVE STRATEGY
John E. Stinson and William A. Day

Competitive strategies. All companies have one (or more). Sometimes they are clear and well understood throughout the organization. Sometimes they are rather muddy. Sometimes they have been deliberately established; sometimes they have simply evolved. For our purposes here, we are assuming that it is better if the strategies are deliberately established, clear, and well understood. (This is an assumption we could test, but let's leave that for another day.)

"'Customer focus' is knowing what customers want and fulfilling their expectations with innovative products and quality services. To accomplish this, Ameritech focuses its operations squarely on specific customer markets: Residential Services, Business Services, Long-Distance Companies, Public Telephone, Mobile Communications, Directory publishing and Information Services." (Ameritech Annual Report, 1989)

That's a brief statement of Ameritech' s competitive strategy. It tells us that Ameritech will compete in some segments of the telecommunications industry but not in others. They will provide residential telephone service, for example, but will not manufacture and wholesale telephone equipment. It also says that they will attempt to attract and retain customers by providing high-quality service and innovative products. They are not trying to be the lowest-priced competitor.

The statement thus demonstrates the two questions that form the basis for any competitive strategy:

(1) In which industry/segments will the firm compete?
(2) On what basis will the firm build a meaningful competitive advantage?

In this module, we will focus on the development of competitive strategy. We will examine some common strategies utilized by organizations. We will learn about environmental scanning and driving forces, learn how to do strategic analysis, and determine how to maintain competitive advantage.

 

STRATEGY IN ACTION

 

When Ray Kroch started McDonald's, he started with small, walk-up stores located in suburban areas. The stores, staffed by 3-4 people and open from 11:00 AM to 11:00 PM, offered only a very limited menu (hamburgers, cheeseburgers, french fries, shakes, and soft drinks). His target customers were primarily young people and young families. To attract customers, McDonald's offered low prices. Their hamburgers cost 10 cents. At that time, a hamburger in most restaurants cost between 25 and 50 cents. They also differentiated themselves by offering fast service (immediate availability of product). Rather than having customers wait while the food was prepared, it was always ready at McDonald's. Once you placed your order, there was almost zero wait-time. This in contrast to their competition, where you had to place an order, wait while the food was prepared, wait to be served, and wait for your check. Thus McDonald's used a classic strategy. They focused on a specific type of customer, in a specific type of location, with a limited product line, minimizing their costs, and competing on the bases of price and fast service.

"It offered a limited selection of clothes --- so he called it the Limited." ("Leslie Wexner knows what women want," Fortune, August 1985) Since opening his first Limited in Columbus, Ohio in 1963, Les Wexner has refined the concept of identifying niche markets and serving them with differentiated products.

The primary target customer for the Limited has been a fashion-conscious woman (frequently a business woman) who has a variety of needs in her wardrobe. She likes play clothes, dress-up clothes, wear-to-work clothes, great looking lingerie, and international looking accessories. The key term is fashion-conscious. The Limited has targeted women who want the latest designer looks, but at a price the working woman can afford. The Limited sells private label clothes with the most contemporary look (Wexner dislikes the term knock-offs) at a fraction of the prices charged by the designer shops.

Speed is the critical element in Wexner's strategy. The limited searches the world for fashion ideas and plugs dozens of knocked-off looks into their stores. They quickly drop the dogs and ride the winners, replenishing the supply of popular looks. The Limited has trimmed the design-order cycle to 60 days, in contrast to the six months to one year required by most of their competitors. This is facilitated by an information system with point-of-sale computers that track daily sales on a store-by-store basis, pre-arranged manufacturing contracts with numerous plants, primarily located in the Far East, and an incredibly efficient distribution system centered in Columbus, Ohio.

Thus, it is not just having the right look for the target customers. It is having it more quickly, being able to replenish it more rapidly, and having it at a reasonable cost.

Do strategies ever change? Of course. As the environment changes, as industry segments and competitive conditions change, strategies must change. McDonald's is a good example. McDonald's today differs dramatically from the low priced, focused chain established by Ray Kroch in the 1950s. Now there are Big Mac's, Happy meals, Egg McMuffins, Chef Salads, Ronald McDonald's, and even pizza! As the industry matured and demographics changed, McDonald's broadened their scope. To maintain growth, they targeted children and then the elderly as customers. They offered an expanded line of foods to attract a greater variety of customers. Perhaps most significantly, McDonald's moved away from being the low price competitor. They no longer use price as the competitive advantage. Consistency of product and service, community involvement, and convenience provided by a multitude of locations are now the primary competitive advantages they capitalize on.

SCANNING THE ENVIRONMENT FOR DRIVING FORCES

Companies do not exist in isolation. They are part of an industry or industries and function within a competitive environment. They are also, however, impacted by even broader environmental factors. They may be constrained by regulations promulgated by the political/legal system. Changing social values or changing demographic patterns may alter consumers' tastes. A recession or an economic boom will probably impact on profitability. Technological developments may open the door to new products and allow for innovation in process that may affect costs or quality.

All of these environmental systems (political/legal, social/demographic, economic, and technological) are as important to the company as their industry/competitive environment.

Companies need thus to be continually involved in environmental scanning. They need to be constantly analyzing their environment, searching for changes which may have an impact on their operations. These changes, frequently called driving forces, may present either threats or opportunities to the company.

Relevant driving forces change over time. Likewise, relevance of driving forces differs from industry to industry and company to company. Currently, however, some or all of the following are generally recognized as relevant driving forces by many organizations.

* Instantaneous communication The information revolution has significantly impacted on our concept of time and place. Electronic mail, teleconferencing, fax- - these and other technologies allow us to communicate with one another instantaneously, regardless of where we are located. Using electronic data bases, we are able to obtain information in real-time, regardless of the location where that information was originally housed. This revolution has had, and will continue to have, a major impact on the way we do business. It has facilitated a global marketplace. It enables just-in-time inventory systems. It is the backbone of nicheing and micro-marketing. Presently, we have seen only the tip of the iceberg. Instantaneous communication will be a necessity for success in the increasingly tumultuous competitive world.

* Advances in manufacturing technology Computer Integrated Manufacturing, Flexible Manufacturing Systems, Concurrent Engineering, Just-In-Time. Advances in manufacturing technology, such as those noted, have dramatically changed the factory floor. Dirty, greasy, labor-intensive manufacturing may soon become part of a disappearing era. In its place will be the highly automated factory, operated by fewer but more highly skilled workers utilizing the most advanced information technology. These advances, pioneered by the Japanese but increasingly incorporated by US and European companies, permanently lower the cost structure of the products produced, increase quality (defined as consistent conformance to established engineering standards), decrease turnaround time and make the manufacturing system more responsive to customer demand.

* The physical environment of the world The hole in the ozone layer, acid rain, the crisis in solid waste disposal, hazardous waste, smog, global warming, the disappearing rain forests - these are examples of the concerns of an increasingly environmentally aware public. Firms that through their operations pose a threat to the environment may expect to come under increasing social pressure and possibly increasing government regulations. Conversely, firms that produce products and/or provide services that are environmentally neutral or positive can expect to be looked upon more favorably by the consuming public.

* The development of a global community We are far from being one world. But, increasingly we are separated less and less on the basis of political or economic systems. The greater differences will tend to be between the haves and the have-nots, regardless of geographic region. Facilitated by transportation and communication technology, business perspectives have also changed. We have moved from the national firm to the national firm with some international manufacturing and sales and then to the multinational firm with major autonomous operations in numerous countries. We now face the advent of the "stateless" corporation with a totally global perspective.

* Diversity of the workforce As we move toward the year 2000, the population of the U. S. and to a lesser extent some other developed countries will become increasingly diverse. This will have significant impact on the available workforce. The available workforce will consist of a greater proportion of Blacks, of Hispanics, of Vietnamese, and of women, for example. These diverse populations will bring their diverse cultures into the workplace with them. How will organizations develop unity among these diverse cultures?

* The depletion of human resources Winning against global competition requires skilled people utilizing advanced technology, functioning cooperatively and making decisions relatively autonomously. The declining pool of high-school graduates - further reduced by the increasing proportion that are functionally illiterate, numerically incapable, and/or lack basic work values, and the proportion disabled by drug and alcohol addiction - may make critical human skills a scarce resource. Firms with long-term perspectives that want to build their competitive advantage should be developing plans and building coalitions now to impact on the availability of future human resources.

 

INDUSTRY ANALYSIS

The normal starting point for strategy development is industry analysis. Through industry analysis, we attempt to determine the relative attractiveness of the industry (generally the long-term profit potential of the industry) and identify areas of opportunity within the industry.

It is useful to start with an analysis of industry characteristics. These may include market size of the industry, the competitive scope, the market growth rate, industry profitability, stage in the industry life cycle, the degree of fragmentation, industry capacity utilization, and typical capital requirements. An examination of these characteristics gives us an understanding of the basic structure of the industry.

A complementary approach to industry analysis has been proposed by Michael Porter. He proposed a five forces model of industry analysis based on what he calls competitive forces. The forces he identifies are rivalry among existing competitors, the potential entry of new competitors, the threat of substitute products, the power of suppliers, and the power of buyers. In Porter's model, the most attractive industries are those where there is less rivalry among competitors, where there are few substitute products, where entry into the industry by new competitors is difficult and where suppliers and buyers have little power.

While we talk of industry analysis, you should recognize that industries are composed of numerous segments, and much of the analysis is done at the segment level. A segment is a coherent subset of an industry. Segments can be defined around product lines, customer groups, geographic regions, channels of distribution, operational processes, among other options. For example, the computer industry can be segmented along product lines, ranging from micro computers, to minis, to mainframes, to supercomputers. It can also be segmented on the basis of customer groups. DEC, for example, has segmented the industry into 18 segments based around customer groups. These ranged from health care to manufacturing.

We judge the attractiveness of an industry on the basis of its long term financial and strategic strength. Generally, industries, or segments, that have larger market size, greater growth rate and higher industry profitability, and that are at an earlier stage in the life-cycle are judged to be more attractive.

We must be cautious, however, to focus on the future, not on the past. We are attempting to determine the long term profit potential (future) of the industry. We are concerned with the future growth rate, for example, not just the historic growth rate. We scan the environment, looking for driving forces that might change the structure or functioning of the industries.

In addition to examining overall attractiveness, we search for areas of opportunity within the industry or segment. For example, will there be opportunities for:

*New products or services
*Extensions of products or services
*New customers
*New technologies
*New processes to serve customers
*Ways to improve products or services

Our final conclusion regarding industry attractiveness, thus, is a subjective judgment based upon financial and strategic attractiveness and the available opportunities.

(See Exhibit 2 for a set of Standard Analytic Questions that provide guidance for an industry analysis)

 

COMPETITIVE INTELLIGENCE

How are your competitors approaching the industry? What are each of their competitive advantages? What are their unique competencies? Where are they focusing their attention?

Competitive intelligence is one of a company's most important assets. It is important to know your competitors, hopefully to know them better than they know themselves. You buy your competitors' products and dissect them to determine their technology and cost structure. You comparison-shop their services to determine their unique features. You study their advertisements, you read trade journals that talk of their plans and achievements, you scrutinize their annual reports for hints of their strategy and plans and assess their financial strength.

For each competitor, we need to know their competitive strategy, their strengths and weaknesses, from both a financial and a strategic perspective, and any likely moves they might make to improve their competitive position.

In addition to analyzing the internal strength of each competitor, we need to anticipate how they might react to any external environmental changes. Are there driving forces that might improve the competitive position of any of the competitors? Might the driving forces have a negative impact on any of them? Are they likely to move to take advantage of industry opportunities? How will they respond to threats?

On the basis of our analysis, we draw conclusions regarding the future actions and future effectiveness of each competitor. What are they likely to do, and how strong are they likely to be?

(Exhibit 3 provides a set of Standard Analytic Questions to help gather competitive intelligence.)

 

COMPANY STRENGTHS AND STRATEGIC HEALTH

Know Thyself! Just as strategy development starts with an analysis of the external competitive environment, it concludes with an internal analysis of the company. What is the company and what can it be?

Starting with the identification of any current strategies, we need to analyze the historic performance of the company and the strategic strength of the company. We consider sales volume and trends in sales volume. We compare financial ratios with others in the industry to determine relative strength and compare the ratios over time to determine trends. We evaluate the technological strength of the company, considering both technologies related to service or product development and technologies related to process development.

In addition to analysis of the company as a whole, the company's relative strengths and weaknesses in each relevant segment are analyzed. We identify share of market and level of profitability in each segment and note changes or trends. We compare our cost position and our quality position to our competitors and note any changes or trends. We assess our customers' satisfaction with our products or services and note changes or trends.

It is also critical to identify what Prahalad and Hamel call the "core competencies of the corporation." (The Core Competence of the Corporation, Harvard Business Review, May 1990.) For example, Cooper Industries, as noted in the following quote, has clearly identified their core competence.

"We come from as long line of people who forge, cast, drill, bore, grind, heat treat, and fabricate things out of metal. Now we use other materials and processes as well. But it all boils down to manufacturing. We know a lot about that. And we know that our future depends on doing it better than anybody else." (Cooper Industries, promotional brochure, 1989)

What is it that the company can do, and do very well? Like Cooper, it may be manufacturing. Or it may be product development, or customer service, or selecting sites, or responding quickly to customer needs. - the possibilities are limitless. The key thing is that it be what you do best - hopefully better than anyone else.

As we analyze the company, we are searching for areas where we have the strengths and competencies to build on, and areas where we have weaknesses that may create problems for us. Comparing our strengths and our core competencies with the areas of attractive opportunity within the industry helps us define our answer to the first question, "In what segments of the industry will we compete?"

(Exhibit 4 a set of Standard Analytic Questions to help assess strategic health)

 

SELECTING THE BASIS FOR COMPETITION

On what basis can we build a meaningful competitive advantage? Why will customers chose to use our product or service rather than that of our competitors? How will we compete for business? These questions must be clearly answered in any competitive strategy.

McDonald's, for example, in their original strategy said that people would buy their hamburgers because they were cheaper and because of the quick service. The Limited provided designer fashion at a price the working woman could afford - quickly. This was their competitive advantage.

Anything that adds value which is important to the customer can be used as a basis for competitive advantage. In his classic book, Competitive Strategy, Michael Porter (Competitive Strategy, Free Press, 1980) talks of two potential bases for competition: (1) being the lowest cost provider (price) or (2) differentiating the product or service in some way. Actually, this dichotomy is probably a bit too simplistic and not terribly practical. A company can differentiate itself in many ways. The durability of the product, the speed of response to customer wants, customer service, convenience, consistency of performance, community involvement, and environmental consciousness are just a few of the more common.

While the term quality is often used when discussing differentiation, we need to be cautious. Quality has different meanings to different people. Sometimes it is durability. Sometimes it is unique features. Sometimes it means conformance to standards, or "fit and finish" as it is called in the automotive industry.

The root for our competitive advantage is in our core competencies. It must be something that we can do very well. But it must also be consistent with our competitive environment. It must be valued by a significant proportion of the customers in the industry segments we are targeting. Further, it should not duplicate a competitive advantage of a significant competitor. We need to provide something that is of value to customers and do it better than competitors. That is how we gain competitive advantage.

 

IMPLEMENTING STRATEGY

Strategy without action has no value. As noted in the Performance Criteria for Developing Competitive Strategy (Exhibit 5) the outcome of strategy development is an action plan based firmly on and designed to implement the strategy of the company.

In the past, strategic plans were often developed by staff specialists, utilizing sophisticated analytical techniques. Too frequently, this resulted in attractive, bound volumes that sat on the shelves of line managers gathering dust. The strategies, while they might have been ingenious, were not executed.

This is less prevalent today. More organizations are recognizing that the information necessary for developing strategy is equally vital for effectively running a business. Thus, strategy development has become the job of line managers. Frequently, strategy is developed by a team of line managers from different functions, directed by the general manager. In addition to insuring that functional conflicts are minimized, this maximizes the likelihood that the strategy will be effectively implemented. Since they have been involved in its development, participants will be more highly committed to its implementation.

To assist in implementation, the strategy should be incorporated as an integral part of the company's mission statement and clearly communicated, both internally and externally.

From an internal perspective, a clear understanding of the strategy helps to provide a unity of direction. All members of the business need to have a sense of where the organization is going. Particularly as organizations become flatter, as they become more decentralized, as more people have authority to act for the company, an understanding of the future of the business is necessary -- otherwise, how can people throughout the organization make reasonable decisions?

In addition, a clear understanding of strategy has a major impact on the commitment of people in the organization. People cannot be motivated, they cannot be committed to an organization unless they understand the organization. People cannot be committed to a program or plan, a direction, unless they know about the program or direction. Thus, a clear statement of strategy, continually reiterated (not just written down in some dusty volume) will build commitment to the organization and its future.

An understanding of the strategy is also important to external constituencies. For example, customers and suppliers cannot be partners in accomplishment unless they understand what you are trying to accomplish.

MAINTAINING COMPETITIVE ADVANTAGE

In a recent conversation on corporate leadership, Ralph Schey, CEO of Scott Fetzer noted that it is more difficult to stay a leader than to become one. The same is probably true about businesses; it is probably more difficult for a firm to maintain a competitive advantage than to gain one in the first place. There are probably many reasons. One major reason is the financial reporting system. The typical financial reporting system focuses on the past, rather than the future and on operations, rather than on strategy. Thus, it is very easy for a firm that is watching its numbers to feel a sense of security at the very time its competitive advantage is eroding.

There is also a natural human tendency to be satisfied with success, to worry a little less about the future, and to develop a feeling of invincibility. Think of all the old phrases: "If it ain't broke, don't fix it." "Don't mess with success." "Fat and happy." These reflect a contentment that discourages innovation and gives competitors the opportunity to overturn our advantage.

In fact, innovation is the key to maintaining competitive advantage. Any advantage can be imitated; none last forever. The environment is continually changing. Competitors are continually developing. Thus, any company that stops scanning the environment and analyzing driving forces, any company that stops looking for opportunities in its competitive environment, any company that stops innovating will inevitably lose its competitive advantage.

This does not mean that a company must continually make wholesale changes. It does not, regardless of the title of Tom Peters book, Thriving on Chaos, mean that chaos is necessary. In contrast, there needs to be a stability of direction. But, most innovation is not tumultuous, but rather incremental. It is the accumulation of many small insights, many small advances that lead to continual improvement. And it is that continual improvement, the continual evolution and development of the competitive advantage, that leads to long-term success.

Copyright 1990 by J. E. Stinson and W. A. Day

Exhibit 1
Learning Objectives

After completing this module, you should be able to:

Describe the concept of competitive strategy.

Identify an industry.

Identify a firm's competitive strategy.

Describe environmental scanning.

Define driving forces.

Identify significant driving forces that might impact on an industry or business.

Describe the purpose of industry analysis.

Describe the process of industry analysis.

Identify factors to be included in an industry analysis.

Identify an industry segment.

Describe three bases for segmenting an industry.

Explain how industry analysis is used in strategy development.

Describe the purpose of competitive intelligence.

Describe the process of competitive intelligence.

Identify factors to be included in competitive intelligence.

Explain how competitive intelligence is used in strategy development.

Describe the purpose of company analysis.

Describe the process of company analysis.

Identify factors to be included in company analysis.

Explain how company analysis is used in strategy development.

Define core competencies.

Explain how core competencies are used in strategy development.

Describe the concept of competitive advantage.

Identify five potential bases of competitive advantage.

Explain how firms develop competitive advantage.

Describe three factors which influence the implementation of strategy.

Identify two reasons why firms lose their competitive advantage.

Explain what firms should do to maintain competitive advantage.

 

Exhibit 2
Standard Analytic Questions for Industry Analysis *

 

What is the market size of the industry?

What is the scope of competition (regional, national, global)?

How many competitors are there in the industry and what is their relative size?

Is the industry fragmented with many small companies or concentrated and dominated by a few?

Who are the primary customers in the industry? What is their relative size and to what extent do they have power over prices?

Who are the critical suppliers to the industry? To what extent do they have power over costs?

To what extent is backward and forward integration prevalent within the industry?

How easy is it to enter or exit the industry?

What is the rate of technological change in the industry? Does this change impact on product development, process development, or both.

How differentiated are the products or services of firms in the industry? Are they highly differentiated, or is it basically a commodity industry?

Are there substitute products or services competing for customers? How close are the substitutes?

Are there economies of scale in the industry?

What are the capital requirements for the typical firm in the industry?

What is the typical cost structure within the industry? What is the typical fixed cost/variable cost relationship?

What is the degree of capacity utilization in the industry?

Where is the industry in terms of the industry life cycle?

What is the industry growth rate? Are there any trends in the growth rate?

What is the industry profitability? Are there any trends in the rate of profitability?

What are the relevant driving forces? What will be their probable impact on the industry?

What are the potential threats to the industry?

What areas of opportunity are there within the industry?

How do you rate the overall attractiveness of the industry? What are the primary reasons for your rating?

*This checklist can be used to evaluate the industry as a whole and/or any relevant segment of the industry.

Exhibit 3
Standard Analytic Questions for Competitive Intelligence

Who are the significant competitors?

What is the strategy of each competitor?

What is the competitive advantage of each competitor?

What is the growth rate of each competitor? Is there any trend in the growth rate?

How profitable is each of the competitors? Are there any trends in profitability?

How strong, financially, is each of the competitors?

What is the cost structure of each competitor?

What is the quality level of each competitor?

What are the core competencies of each competitor?

What are the significant weaknesses of each competitor?

Will any of the driving forces have a unique impact on any of the competitors? Will the impact be negative or positive?

Are any of the competitors likely to make any significant changes? What will they be?

How would you rate the relative competitive strength of each competitor? What are the reasons for your rating? *

*This rating, and the analysis leading up to it, may have to be done on a segment by segment basis.

 

Exhibit 4
Standard Analytic Questions for Assessing Strategic Health

What is the overall company strategy? Does it differ by segment?

What is the financial strength of the company?

What technologies are used by the company? What is the relative strength in each?

What the core competencies of the company?

What is the sales volume in each relevant segment? Are there any trends in sales volume?

What is the market share in each segment? Are there any trends?

How profitable is each of the segments?

What is the cost position relative to competition? Are there any significant trends?

What is the quality position relative to competition? Are there any significant trends or changes?

How loyal are the customers? How satisfied are they? Are there any trends in customer reaction?

What are the relative response time to changes in customer requirements?

What is the quality of the people in the organization? Do they have the high level of skills and abilities needed for the firm of the future?

What are (can be) the company's competitive advantages?

How would you rate the strategic health of the company? What are the reasons for your rating?


Exhibit 5
PERFORMANCE CRITERIA:
Developing Competitive Strategy

The outcome of strategy development is an action plan based firmly on and designed to implement the strategy of the company.

An outstanding plan will reflect a high degree of creativity; it will not simply copy competitors' approaches. It will reflect breadth of understanding of the business world and the environment in which the particular company is functioning. It will be based on a realistic scenario of the future, promote long-term effectiveness, and consider moral obligations to all relevant constituents of the business.

The strategy identifies the industry segments in which the company will compete, the bases of competition and the competitive advantage(s) to be sought in each of the segments, and the relative priority of each of the segments.

The strategy will clearly establish priorities for action. In particular, it will identify target segments within the industry. These are the segments in which the company will invest resources to attempt to build strong long-term competitive superiority. The target segments are selected considering three factors: (1) the long-term profit potential of the industry segment, (2) the relative strengths of competitors within the segment, and (3) the strengths, or distinctive competencies, of the company. Segments in which the company will maintain position and those in which the company will not compete or will withdraw from competition will also be identified.

The strategy will also clearly identify the bases on which the company will compete in each relevant segment. These are selected based on the strengths or distinctive competencies of the company and are intended to provide competitive advantages for the company within the segment.