Creating a defendable position

2. . B Ba as si ic c i id de ea as s 2

2.1. Porter's five forces

A company is not isolated, but exists in a complex network. "The five forces framework

helps identify the sources of competition in an industry or sector" ¹ and the important

factors in the environment of a company are: Competitive Rivalry, purchasing power of

supplier, purchasing power of buyer, threat of new entrants and of substitutes ² ( Figure

1).

2.2. The three strategies

2.2.1. Fight back with strategy

To "find a position in the industry where the company can best defend itself against" ⁴ the

"competitive forces" is a key issue of management. But to achieve this "defendable

position" ⁵ a strategy must be accomplished, regarding processes, structure and policy.

"Strategy is the direction and scope of an organisation over the long term, which achieves

advantage (...)." 6 There are three generic strategies ⁷ building on different competences:

¹ Johnson (2002), p. 112.

² Porter (1980).

³ Adapted from Porter (1980), p. 4, and Johnson (2002), p. 113.

⁴ Porter (1980), p. 4.

⁵ Porter (1980), p. 29.

⁶ Johnson (2002), p. 10.

⁷ Porter (1980), p. 35.

Page 2 of 15

overall cost leadership, differentiation and focus. The criteria on which separation is based are the target market and type of advantage ( Figure 2). The strategies are mutually exclusive. Though only products are mentioned in the following, the concepts could also be applied to services.

Figure 2 - The three generic strategies 8

2.2.2. Cost leadership

The cost leader is operating with the lowest costs of all and there can only be one in a market. The company can sacrifice its profit margins, finance production through subsidies from other units or be the lowest cost producer ⁹ . Activities to achieve cost efficiency are the exploitation of economies of scale (mass production), the reduction of inventory and time-to-market or the exploitation of the experience curve (best practices) ¹⁰ . The cost leader sells standardized products in the whole market with the same value like competitors, but at lower costs. So profits should be above the average ( Figure 3).

⁸ Adapted from Porter (1980), p. 39, figure 2.1.

⁹ Bowman (1996), p. 38.

¹⁰ Parts from Bowman (1996), p. 38-40.

Figure 3 - Increased profits of cost leader 11

2.2.3. Differentiation

"A differentiation strategy seeks to provide products or services unique (...) in terms of dimensions widely valued by buyers" ¹² . The company is best in satisfying the needs of specific customer groups in the whole market with the underlying concept of market segmentation ¹³ . Due to the product's uniqueness, the customers have no alternative to the product or high switching costs. So they pay a premium price compared to the average in the market because they "believe the product's differentiated qualities to be worth the difference" ¹⁴ .

Differentiation can be archived for example through: using high quality or "luxurious materials" ¹⁵ providing "better levels of service" ¹⁶ branding, excellent design and company image ¹⁷ innovation and research.

Though these activities create extra costs, the differentiator must try to keep the cost near of the average costs in the market. It "is crucial that costs are only added in areas that customers perceive as important" ¹⁸ . The difference between the premium price and the increased costs is the greater than average profit ( Figure 4).

¹¹ Adapted from Lynch (1997), p. 488.

¹² Johnson (2002), p. 329.

¹³ Lynch (1997), p. 488.

¹⁴ Hill (1995), p. 174.

¹⁵ Lynch (1997), p. 488.

¹⁶ Lynch (1997), p. 488.

¹⁷ Gordon (Jul/Aug 2002).

¹⁸ Thompson (1993), p. 218, 216.

Figure 4 - Increased profits of differentiator 19

2.2.4. Focus

"A focus strategy occurs when the organisation focuses on a specific niche in the market place and develops its competitive advantage by offering products especially developed for that niche" ²⁰ . So it is easier to optimize structures and processes to the needs of that segment. The "essence of focus is the exploitation of a narrow target's differences from the balance of the industry" ²¹ . There are two main types of focus related to the previous low cost and differentiation strategies ²² .

The focuser competes against the overall cost leader or the overall differentiator in the relevant niche, dependent if doing cost or differentiation focus. A focussed company can follow both strategies at the same time ²³ . Focus is an opportunity especially for entrepreneurs to "exploit a gap in the market by developing an innovative product" ²⁴ .

2.2.5. Creating a defendable position through competitive advantage

In order to defend the firm against the outside forces, resources to create a "sustainable competitive advantage" ²⁵ are fundamental. The competences and capabilities have to be unique "to yield a competitive advantage" ²⁶ . So they must be difficult to imitate by

¹⁹ Adapted from Lynch (1997), p. 489.

²⁰ Lynch (1997), p. 489.

²¹ Lynch (1997), p. 490.

²² Porter (1980), p. 39.

²³ Porter (1980), p. 39.

²⁴ Hill (1995), p. 180.

²⁵ Porter (1980).

²⁶ Cool (2002), p. 57.