Positioning within industries

In addition to responding to and influencing industry structure, firms must choose a position within the industry. Positioning embodies the firm's overall approach to competing. In the chocolate industry, for example, American firms (such as Hershey and M& M/Mars) compete by mass-producing and mass-marketing relatively limited lines of standardized candy bars. In contrast, Swiss firms (such as Lindt and Sprü ngli and Tobler/Jacobs) sell mainly premium products at higher prices through more limited and specialized distribution channels. They produce hundreds of separate items, employ top-quality ingredients, and manufacture using longer processing times. As this example illustrates, positioning involves a firm's total approach to competing, not just its product or target customer group.

At the heart of positioning is competitive advantage. In the long run, firms succeed relative to their competitors if they possess sustainable competitive advantage. There are two basic types of competitive advantage: lower cost and differentiation. Lower cost is the ability of a firm to design, produce, and market a comparable product more efficiently than its competitors. At prices at or near competitors, lower cost translates into superior returns. Korean steel and semiconductor producers, for example, have penetrated against foreign competitors using this strategy. They produce comparable products at very low cost, employing low-wage but highly productive labor forces and modern process technology purchased or licensed from foreign suppliers.

Differentiation is the ability to provide unique and superior value to the buyer in terms of product quality, special features, or after-sale service. German machine tool producers, for example, compete with differentiation strategies involving high product performance, reliability, and responsive service. Differentiation allows a firm to command a premium price, which leads to superior profitability provided costs are comparable to those of competitors.

Competitive advantage of either type translates into higher productivity than that of competitors. The low-cost firm produces a given output using

fewer inputs than competitors require. The differentiated firm achieves higher revenues per unit than competitors. Thus competitive advantage is directly linked to the underpinning of national income.

It is difficult, though not impossible, to be both lower-cost and differentiated relative to competitors.⁶ Achieving both is difficult because providing unique performance, quality, or service is inherently more costly, in most instances, to seeking only to be comparable to competitors on such attributes. Firms can improve technology or methods in ways that simultaneously reduce cost and improve differentiation. In the long run, however, competitors will imitate and force a choice of which type of advantage to emphasize.

Any successful strategy, however, must pay close attention to both types of advantage while maintaining a clear commitment to superiority on one. A low-cost producer must offer acceptable quality and service to avoid nullifying its cost advantage through the necessity to discount prices, while a differentiator's cost position must not be so far above that of competitors as to offset its price premium.

The other important variable in positioning is competitive scope, or the breadth of the firm's target within its industry. A firm must choose the range of product varieties it will produce, the distribution channels it will employ, the types of buyers it will serve, the geographic areas in which it will sell, and the array of related industries in which it will also compete.

One reason that competitive scope is important is because industries are segmented. In nearly every industry, there are distinct product varieties, multiple distribution channels, and several different types of customers. Segments are important because they frequently have differing needs; an unadvertised basic shirt and a designer shirt are both shirts, but are sold to buyers with very different purchasing criteria. Serving different segments requires different strategies and calls for different capabilities. The sources of competitive advantage, then, are frequently rather different in different segments, even though they are part of the same industry.⁷ It is quite typical for firms from one nation to achieve success in one industry segment (Taiwan in inexpensive leather footwear) while those from a different nation are successful in another (Italy in fashion leather footwear).

Competitive scope is also important because firms can sometimes gain competitive advantage from breadth through competing globally or from exploiting interrelationships by competing in related industries. Sony, for example, gains important advantages from sharing its brand name, distribution channels, and technological skills across a wide range of electronic products on a worldwide basis. Interrelationships among distinct industries arise from the ability to share important activities or skills in competing in them. I will explore the sources of competitive advantage from competing globally below.

Firms in the same industry can choose different competitive scopes. Indeed,

such differences are typical among firms from different nations. The most basic choice is between a broad scope and focusing on a particular segment. In the packaging machinery industry, for example, German firms offer wide product lines while Italian firms tend to focus on specialized end-use segments. In automobiles, leading American and Japanese companies have wide product lines, while BMW and Daimler-Benz (Germany) emphasize high-performance cars and Hyundai and Daewoo (Korea) focus on compacts and subcompacts.⁸

The type of advantage and the scope of advantage can be combined into the notion of generic strategies, or different approaches to superior performance in an industry. Each of these archetypical strategies, illustrated in Figure 2-2, represents a fundamentally different conception of how to compete. In shipbuilding, for example, Japanese firms follow the differentiation strategy, offering a wide array of high-quality vessels at premium prices. Korean shipyards pursue the cost leadership strategy, also offering many types of vessels but ones of good not superior quality. Korean firms, however, can produce vessels at lower cost than can Japanese firms. Successful Scandinavian yards are focused differentiators, concentrating on specialized types of ships such as icebreakers and cruise ships that involve specialized technology and which command prices high enough to offset higher Scandinavian labor costs. Finally, Chinese shipyards (cost focus), the emerging competitors in the industry, offer relatively simple, standard vessel types at even lower costs (and prices) than the Koreans.

The generic strategies make it clear that there is no one type of strategy that is appropriate for every industry. Indeed, different strategies can coexist successfully in many industries. While industry structure constrains the range of strategic options available, I have yet to encounter an industry in which only one strategy can be successful. There may also be different possible variations of the same generic strategy, involving different ways to differentiate or focus.

Underlying the concept of generic strategies is that competitive advantage is at the heart of any strategy, and that achieving advantage requires a firm to make choices. If a firm is to gain advantage, it must choose the type of competitive advantage it seeks to attain and a scope within which it can be attained.

The worst strategic error is to be stuck in the middle, or to try simultaneously to pursue all the strategies. This is a recipe for strategic mediocrity and below-average performance, because pursuing all the strategies simultaneously means that a firm is not able to achieve any of them because of their inherent contradictions. The shipbuilding industry also illustrates this problem. Spanish and British shipyards have been declining because they have higher costs than the Koreans, lack any basis for differentiation relative to the Japanese, and have failed to identify particular segments (such as Finnish yards have in icebreakers) in which they can gain competitive advantage in a narrower arena. They lack any competitive advantage and exist mainly on captive government orders.