Today the advancing globalisation is affecting more companies than ever, including an increasing number of companies which act only on a national level. The growing competition forces companies demand to adapt their internal structures and processes to the dynamic competitive conditions. The selection and implementation of the right competitive strategy is the key to long-term company success. This article tries to find fitting competitive strategies by looking at some classical theories of Porter’s and others.
Strategy on different business levels
As shown in Figure 1, strategies are usually classified into four levels – industry (industrial policy), company (corporate strategy), business unit (competitive strategy) and functional department (functional strategy).
The industry includes associations and governments as well as companies. Any strategy decision made on this level is considered as industrial policy. Typical topics discussed on this level are financial policy, import and export rules and conditions and labour regulations.
Below the industry level is the company level, here strategies define the general orientation of the company such as the target market segments, company organization and integration of the strategic business units.
On the level of the individual business units a competitive strategy directly addresses the market of specific products. Here decisions concerning the scope of the business unit and internal orientation are being made. The chosen competitive strategy has to ensure the long-term success of the business unit in the specific market segment.
The functional departments try to realise the chosen competitive strategy of the business unit by creating and promoting successful products. Individual functional strategies are derived from the competitive strategy for each unit in the value-chain (e.g. procurement, production, marketing and distribution). Successful products following the desired competitive strategy are the key to the long-term success of the company.
Competitive Strategies according to Porter
The classical Porter’s typology of competitive strategies covers the three generic competitive strategies of cost leadership, differentiation and focus. All strategies are intended to give the company a competitive advantage. However, there are also risks to all of these strategies which are also presented below.
Porter first introduced these three competitive strategies in his book entitled “Competitive Strategy” (Porter (1980)). In that edition all three strategy types were regarded as absolutely independent (singular), i.e. as non-combinable. In 1985, Porter revised his typology of these competitive strategies.
In Porter’s new approach focus is no longer an independent strategy. Instead, the fact that a company can survive against the competition only if achieve a cost or differentiation advantage is stressed. The idea of focusing on a narrow market segment to increase profits is used in his current typology merely as a criterion to define the boundaries of the target market segment. The market share is used to decide whether to pursue a more focused (differentiation-focus, cost-focus) or broader (differentiation, overall cost leadership) market approach. Porter continues to reject the possibility of generating hybrid strategies through a combination of differentiation and cost leadership. To justify his typology Porter gives three hypotheses.
The strategy of cost leadership is usually linked to a high market share as economies of scale can be achieved in the manufacturing process of standardized mass products. One example of economies of scale is the learning process during the production. The growth in experience allows a decrease of the unit cost of 20 – 30% once the cumulative production is doubled.
However, a differentiation strategy is often associated with small market shares because Porter assumes that exclusive brand names are not compatible with high market shares (Porter (1988).
Figure 2 illustrates Porter’s first hypothesis. In this model only a singular strategy can generate a high ROI. The convex shape of the graph is the origin of the term “convexity hypothesis”. In Porter’s typology it is implied that differentiation and cost leadership are not possible with the same market share.
Figure 2: Convexity Hypothesis (Porter, 1988)
Porter’s convexity hypothesis has been questioned by several publications. Studies have shown that a significant learning-curve does not exist in all kinds of processes, especially in established processes which are typical for mechanical engineering. In addition some authors claim that there is only a significant effect in the initial phase of a process and no further reduction of costs is possible (cf. Alchain (1963), Baloff (1966) or Hall/Howell (1985)). Other studies show that the minimum-cost-effective size for a given industrial sector can be as low as 0.2 % market share (Scherer at al. (1975)) which also proves Porter’s convexity hypothesis wrong or at least undermines its universal validity.
Porter (1985) introduces the so-called principle of concentration as a further argument for the singularity of competitive strategies. The principle of concentration states that a company has to concentrate its resources, structures and especially its functional strategies on one of the competitive advantage categories (differentiation or cost leadership) in order to reach a leading position. If a company violates this principle by implementing a hybrid strategy, it will meet competitors who, by virtue of their singular competitive strategies, have either a cost or a differentiation advantage. Therefore according to Porter it is not possible to create a profitable business.
The combination of both differentiation and cost leadership in a hybrid competitive strategy makes it more difficult to determine and especially implement functional strategies because conflicts of objectives will occur more often. Porter describes this problem in his consistency hypothesis as a third argument for the incompatibility of differentiation and cost leadership.
Competitive Strategies according to Wright
Wright, Pringle and Kroll (1992) have presented a different typology of competitive strategies than Porter. They advocate the existence of hybrid competitive strategies and underline their thesis by several company activities that support both cost leadership and differentiation aspects at the same time:
1. Focus on quality
A consistent, continuous improvement of product quality not only increases the quality but also reduces the cost of disposal, guarantee obligations and after-sales service.
2. Innovative processes
Innovative processes can often bring about cost-efficient production processes. In an ideal case the degree of differentiation can also be increased, for example by increasing flexibility and quality through a new flexible assembly system. Wright et al. (1992) give several examples in their work.
3. Innovative products
Product innovations can have a cost reduction effect, too. New products can for example be easier to manufacture and assemble without losing any of their quality attributes.
4. System innovations
System innovations in the value-added chain are another instrument to support different competitive strategies. Through outsourcing, some companies have managed to achieve a reduction in costs as well as an increase in product quality.
5. Multiplication of advantages through multiple skills
Highly differentiated companies may offer their design and development resources to other companies to reduce fixed costs and reduce their manufacturing costs through outsourcing of the production. Figure 3 below shows the typology suggested by Wright et al (1992).
Wright et al. (1992) believe that a hybrid competitive strategy combining cost leadership and differentiation can be a successful strategy. Their typology has the advantage of taking into account a broader spectrum of competitive strategies. However it becomes more difficult to apply such a hybrid strategy to questions on the functional level of a company.
Competitive strategy as the basis for evaluation
The evaluation of in-company processes has to rely on a typology of competitive strategies. Even though Porter’s typology is not entirely convincing it is a good starting point for the generation of functional strategies in relation to in-company standardisation. Deriving functional strategies from a hybrid competitive strategy can turn out to be extremely difficult. Nevertheless Porter’s typology can also be transferred to companies with hybrid strategies by mixing generic functional strategies. Just like mixing colours it is possible to combine generic functional strategies to a new hybrid strategy. How this is done depends on the individual preferences of the management.
The article has shown that singular competitive strategies facilitate the development of functional strategies. Although Porters’ typology which excludes hybrid competitive strategies is not fully convincing, it can be used to analyse the effect of in-company standardisation on processes and functional strategies. Hybrid typologies can then be generated easily by mixing generic competitive strategies.
Porter, M. E., 1980. Competitive strategy: techniques for analyzing industries and competitors. New York: Free Press.
Wright, P., Pringle, C. D. and Kroll, M. J., 1992. Strategic Management: text and cases. Boston: Allyn and Bacon.