COMPETITIVE STRATEGY

Competitive strategy refers to how a company competes in a particular business (note:

overall strategy for diversified firms is referred to as corporate strategy). Competitive
strategy is concerned with how a company can gain a competitive advantage through a
distinctive way of competing.

"What is Strategy?"

Today's dynamic markets and technologies have called into question the sustainability of
competitive advantage. Under pressure to improve productivity, quality, and speed,
managers have embraced tools such as TQM, benchmarking, and reengineering. Dramatic
operational improvements have resulted, but rarely have these gains translated into
sustainable profitability. And gradually, the tools have taken the place of strategy. As
managers push to improve on all fronts, they move further away from viable competitive
positions. Michael Porter argues that operational effectiveness, although necessary to
superior performance, is not sufficient, because its techniques are easy to imitate. In
contrast, the essence of strategy is choosing a unique and valuable position rooted in
systems of activities that are much more difficult to match.

The Competitive Advantage of Corporate CSR or Philanthropy”

When it comes to philanthropy, executives increasingly see themselves as caught between

critics demanding ever higher levels of "corporate social responsibility" and investors
applying pressure to maximize short-term profits. Increasingly, philanthropy is used as a
form of public relations or advertising, promoting a company's image through high-profile
sponsorships. But there is a more truly strategic way to think about philanthropy.
Corporations can use their charitable efforts to improve their competitive context--the
quality of the business environment in the locations where they operate. Using
philanthropy to enhance competitive context aligns social and economic goals and improves
a company's long-term business prospects. Addressing context enables a company not only
to give money but also leverage its capabilities and relationships in support of charitable
causes. Taking this new direction requires fundamental changes in the way companies
approach their contribution programs. Adopting a context-focused approach requires a far
more disciplined approach than is prevalent today. But it can make a company's
philanthropic activities far more effective.

Porter's Generic Competitive Strategies (ways of competing)

A firm's relative position within its industry determines whether a firm's profitability is
above or below the industry average. The fundamental basis of above average profitability
in the long run is sustainable competitive advantage. There are two basic types of
competitive advantage a firm can possess: low cost or differentiation. The two basic types of
competitive advantage combined with the scope of activities for which a firm seeks to
achieve them, lead to three generic strategies for achieving above average performance in
an industry: cost leadership, differentiation, and focus. The focus strategy has two variants,
cost focus and differentiation focus.
 1. Cost Leadership
In cost leadership, a firm sets out to become the low cost producer in its industry. The
sources of cost advantage are varied and depend on the structure of the industry. They may
include the pursuit of economies of scale, proprietary technology, preferential access to raw
materials and other factors. A low cost producer must find and exploit all sources of cost
advantage. 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.

2. Differentiation
In a differentiation strategy a firm seeks to be unique in its industry along some
dimensions that are widely valued by buyers. It selects one or more attributes that many
buyers in an industry perceive as important, and uniquely positions itself to meet those
needs. It is rewarded for its uniqueness with a premium price.

3. Focus
The generic strategy of focus rests on 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.
The focus strategy has two variants.
(a) In cost focus a firm seeks a cost advantage in its target segment, while
in (b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy
rest on differences between a focuser's target segment and other segments in the industry. The target segments
must either have buyers with unusual needs or else the production and delivery system that best serves the target
segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in
some segments, while differentiation focus exploits the special needs of buyers in certain segments.

COMPETITIVE STRATEGY MODEL

Decisions generate action that produces results.  Organizational results are the consequences of the
decisions made by its leaders. The framework that guides and focuses these decisions is strategy. The
framework that guides competitive positioning decisions is called competitive strategy.  The purpose of
competitive strategy is to build a sustainable competitive advantage over the organization’s rivals.  It
defines the fundamental decisions that guide the organization’s marketing, financial management and
operating strategies.

A competitive strategy answers the following questions.

 How do we define our business today and how will we define it tomorrow?
 In what industries or markets will we compete?  The intensity of competition in an industry
determines its profit potential and competitive attractiveness.

 How will we respond to the competitive forces in these industries or markets (from suppliers, riva
new entrants, substitute products, customers)?

 What will be our fundamental approach to attaining competitive advantage (low price,
differentiation, niche)?

 What size or market position do we plan to achieve?

 What will be our focus and method for growth (sales or profit margins, internally or by acquisition

The key to strategy formulation lies in understanding and overcoming the system barriers that obstruct
the attainment of organizational goals.  An effective strategy recognizes these barriers and develops
decisions and choices that circumvent them.

 STRATEGIC APPROACHES

Three basic strategic approaches are possible

 Offensive strategy - overcoming the barriers to goal achievement by changing the systemic
relationships creating them.  This strategy often requires significant capital investment and inclu
the following options.

o       Changing or altering the competitive structure or environment in your industry (forward

backward integration, acquiring competitors, etc.).

o       Anticipating industry competitive structural change and positioning your organization to

exploit this change before others recognize it (developing substitute products, changing the
mode of sale or distribution, etc.).

o       Diversifying into more attractive markets.

 Defensive strategy – accepting the industry competitive forces as a given and positioning your
organization to best defend against them.

o       This could include harvesting and selling the business before competitive conditions cau
its value to drop.

 Guerilla or niche strategy – minimizing or neutralizing barriers by reducing the size of the playing
field and taking an offensive or defensive position in a smaller, more attractive market segment.  

Every business has a competitive strategy.  However many strategies are implicit, having evolved over
time, rather than explicitly formulated from a thinking and planning process.  Implicit strategies lack
focus. produce inconsistent decisions, and unknowingly become obsolete. Without a well-defined strate
organizations will be driven by current operational issues rather than by a planned future vision.    Thi
model provides a process to make your competitive strategy explicit so it can be examined for focus,
consistency, and comprehensiveness.

DEFINING YOUR COMPETITIVE STRATEGY  

Your answers to the following fundamental strategic questions will help you define your competitive
strategy.

DEFINE YOUR BUSINESS:

“The answer to the question, ‘What is our business?’ is the first responsibility of top management. A
business is defined by the want a customer satisfies when he buys a product or service.”  Peter
Drucker, Management- Tasks- Responsibilities- Practices.

1.  What is the purpose of your business?

 Purpose defines why your organization exists.

“To know what a business is we have to start with its purpose.  Its purpose must lie outside of th
business itself.  For in fact, it must lie in society since business enterprise is an organ of
society.  There is only one valid definition of business purpose: to create a customer.”  Peter
Drucker, Management.

2.  What results are you trying to achieve to fulfill your purpose and how will you measure succe

 Your response describes your organizational vision.

3.  What value does your business create for its customers? 

 Who are your customers and where are they located?

 What products and/or services do you provide those customers?

 What customer need or problem do your products and/or services satisfy or solve?

 Why do your customers purchase your products and services rather than a competitor's?

4.  What is your business today?

 Use your previous responses to define your business.  Your answer will provide the focus needed
make your current operations effective.

Note: For more insight on defining your business read Theodore Levitt’s classic article entitled
“Marketing Myopia”, Harvard Business Review, July-August 1960. 

YOUR SKILLS AND COMPETENCIES:

5.  What are your core competencies? 

Core competencies are points of leverage for gaining competitive advantage. They are organizational
competencies that are unique to your organization or are performed better than your competitors and
make a significant contribution to customer perceived value or create a significant cost advantage. 

 Organizational competencies are functional capabilities and experience a firm possesses by virtue
the way it integrates and blends the individual skills of its employees and achieves
results.  Examples of organizational competencies are: 
o Experience in design, fabrication, and testing miniaturized solid-state electronic componen

o Experience in cutting, upsetting, and welding high carbon steel.

o Experience in set up and programming computer controlled cutting machines.

o Experience in planning, budgeting, and controlling costs.

o Experience in attracting, developing, and retaining a highly competent workforce.

o Experience in meeting challenging customer delivery schedules.

 Business organizations need many competencies covering a range of functional activities

(production, marketing, distribution, etc.).

For a more thorough presentation on core competencies readCompeting for the Future by Gary Hamel a
C.K. Prahalad.

Identifying your core competencies.

List the organizational competencies you have that enable you to provide your products and/or services
and compete in your industry?

 Which of these competencies are unique to you or do you perform better than your competitors?
 Which of these competencies create customer perceived value throughout your product line or giv
you a significant cost advantage over your competitors?

o Include the organizational competencies that provide the product characteristics, service
attributes, and intangible features that convince your customers' to purchase your product
service rather than a competitor's. 

Competencies listed in these last two categories are your present core competencies and can be your fo
point for attaining competitive advantage.

6.  What should your business be tomorrow?

 Use your core competencies and assumptions about the future to answer this question.  Your
answer will provide the direction needed to prepare your organization for the future.

Notes: This website provides a model to help you think through your business theory and examin
the assumptions upon which it is based.  See Examine Your Business Theory.

Your answers to these previous questions define your organization's mission.

YOUR SIZE AND MARKET STANDING:

7.  How large do you need to be?

Organizations must be large enough to avoid becoming a marginal player in the marketplace and to
maintain a reasonable balance among their operating functions.

 What sales volume and revenue will provide your required profitability?
 What facilities, equipment, and personnel are needed to provide this volume?

Note: This website provides a model to help you determine your profit requirements.  See A Profi
Planning Model.

YOUR GOALS AND BARRIERS:

8.  Achieving your vision usually requires accomplishing results in a variety of areas.  Goals provide th
mechanism to specify the set of results that will define vision achievement.  In this way goals clarify an
focus your vision.  To accomplish this clarity and focus goals need to describe the operating, financial,
social, and other conditions you must bring about to achieve your vision. Effective goal setting includes
defining how goal achievement will be measured.  This means identifying the indicator or indicators tha
will be used and the quantitative or qualitative value of these indicators that will define goal achievemen

 List the goals that describe the results you want to achieve.
o Goals should encompass all activity that contributes to the attainment of your vision.

 Identify the indicators you use to measure goal performance.

 Specify the quantitative or qualitative values of these indicators that will define goal achievement.

Your answers to these questions clarify your organizational vision and define the results you are
committed to achieve.

9.  What are the barriers you must overcome to achieve these goals?
Barriers are systems obstacles that impede the attainment of your goals.

  Identify the major barriers to achieving each of your goals.

o  Since barriers describe root causes or system relationships they are relatively few in
number.  A single barrier can obstruct multiple goals.
o The competitive structure of your industry presents significant barriers that must be
overcome.  A thorough description of industry competitive structure and competitive forces
can be found inCompetitive Strategy and Competitive Advantage by Michael Porter.

10.  What strategic approach are you using or will use to overcome these barriers? 
Your strategic approach defines how you intend to deal with the barriers to goal achievement.

  An offensive strategy will work if some key barriers can be overcome, altered, or neutralized by th
application of resources that are available to you.
 A guerilla strategy will work if key barriers can be circumvented, minimized, or eliminated by
narrowing the scope of your operations.
 A defensive strategy is called for when none of the above conditions are met.
Identify the strategic approach you will use (offensive, defensive, or niche) and the tactics you employ o
will employ to achieve competitive advantage.  

The barriers you identified, the strategic approach you selected, and your organizational
competencies drive your responses to the following questions.     

YOUR APPROACH TO COMPETITIVE ADVANTAGE:

11.  What is your approach to competitive advantage and the market scope in which you will
compete?

 Does your competitive strategy require lowest price or product differentiation?

o A focused strategy requires that you choose one of these alternatives since each will produc
distinct marketing strategy.

o If you chose product differentiation, define the product characteristics and/or service
attributes that differentiate your offerings.

o If you chose lowest price, describe how you will sustain a cost advantage over your rivals.

 Do you compete in broad markets or focused niches?

o A focused strategy requires that you choose one of these alternatives since each will require
distinct marketing strategy.

o Describe the markets or market segments you serve.   

YOUR FOCUS FOR GROWTH:

12.  What is your focus for growth?

 Do you focus on growth in sales volume or growth in profit margins?

o A focused strategy requires that you choose one of these alternatives since each will require
unique marketing strategy.

13.  What is your primary method of growth?

 Do you intend to grow by internal expansion or by acquisition?

o Each of these choices requires a unique competitive strategy.
o If you chose acquisition, define your acquisition criteria.

14.  What is the scope of your products, services, and markets?

 Indicate the primary focus of your marketing strategy by selecting the appropriate cell in the
following matrix.  Without focus your marketing efforts will be diluted and their effectiveness
decreased.
  
Market Scope  
 
 
Focus on current Develop new
 
  markets markets
 
Scope of Focus on Develop new
Increase
Products current markets for current  
penetration of
and products products and
current markets
Services and services
Offered services
Define your product and market focus in the
Develop Develop new Develop new following matrix.
new products or products or
products services for current services and new Indicate the current products Indicate
and markets markets or services and market segmen
services segments that are targeted for develop
increased penetration. product
being e

Indicate the new products or Indicate

services that are being services
developed and the current develop
market segments being that are
targeted. them.

15.  What are your product and market priorities?

 What market segments have the highest priority and what products/services do you offer to these
segments?

 What market segments and/or products receive routine priority?

 What market segments and/or products receive reduced resources and effort?

 What market segments and/or products are being abandoned?

 What market segments and/or products are being developed for the future?

EXAMINE YOUR RESPONSES TO THESE QUESTIONS.

 If you have difficulty responding to these questions or have not thought through these strategic
issues, your competitive strategy is not comprehensive.
 If your decisions in these areas are not consistent with each other, your strategy lacks focus.

o Choosing a profitability focus for growth and a cost leadership approach to competitive
advantage is an example of inconsistency. 
 o Failing make the growth and competitive advantage choices required indicates lack of focus

 If your strategy does not deal with the barriers to goal achievement it may be ineffective.

 Verify your goals are consistent with your mission and vision.