Basic Competitive Strategies

Almost three decades ago, Michael Porter suggested four basic competitive positioning strategies that companies can follow—three winning strategies and one losing one.® The three winning strategies include:

• Overall cost leadership: Here the company works hard to achieve the lowest production and distribution costs. Low costs let it price lower than its competitors and win a large market share. Texas Instruments, Dell, and Wal-Mart are leading practitioners of this strategy.

• Differentiation: Here the company concentrates on creating a highly differentiated product line and marketing program so that it comes across as the class leader in the industry. Most customers would prefer to own this brand if its price is not too high. IBM and the equipment-maker Caterpillar follow this strategy in information technology and services and heavy construction equipment, respectively.

• Focus: Here the company focuses its effort on serving a few market segments well rather than going after the whole market. For example, the hotel chain the Ritz-Carlton focuses on the top 5 percent of corporate and leisure travelers. Tetra Food supplies 80 percent of pet tropical fish food. Similarly, Hohner owns a stunning 85 percent of the harmonica market.10

Companies that pursue a clear strategy—one of the above—will likely perform well. The firm that carries out that strategy best will make the most profits. But firms that do not pursue a clear strategy—middle-of-the-roaders—do the worst. Retailer Sears and the Holiday Inn hotel chain encountered difficult times because they did not stand out as the lowest in cost, highest in perceived value, or best in serving some market segment. Middle-of-the-roaders try to be good on all strategic counts, but end up being not very good at anything.

Two marketing consultants, Michael Treacy and Fred Wiersema, offer a more customer-centered classification of competitive marketing strategies.11 They suggest that companies gain leadership positions by delivering superior value to their customers. Companies can pursue any of three strategies—called value disciplines—for delivering superior customer value. These are:

• Operational excellence: The company provides superior value by leading its industry in price and convenience. It works to reduce costs and to create a lean and efficient value-delivery system. It serves customers who want reliable, good-quality products or services, but who want them cheaply and easily. Examples include Wal-Mart, Ryanair, and Acer.

• Customer intimacy: The company provides superior value by precisely segmenting its markets and tailoring its products or services to match exactly the needs of targeted customers. It specializes in satisfying unique customer needs through a close relationship with and intimate knowledge of the customer. It builds detailed customer databases for segmenting and targeting, and empowers its marketing people to respond quickly to customer needs. Customer-intimate companies serve customers who are willing to pay a premium to get precisely what they want. They will do almost anything to build long-term customer loyalty and to capture customer lifetime value. Examples include House of Fraser, Lexus, American Express, British Airways, and Ritz-Carlton hotels.

Market leader

The firm in an industry with the largest market share.

Market challenger

A runner-up firm that is fighting hard to increase its market share in an industry.

Market follower

A runner-up firm that wants to hold its share in an industry without rocking the boat.

Market nicher

A firm that serves small segments that the other firms in an industry overlook or ignore.

Competitive Market Positions and Roles

• Product leadership: The company provides superior value by offering a continuous stream of leading-edge products or services. It aims to make its own and competing products obsolete. Product leaders are open to new ideas, relentlessly pursue new solutions, and work to get new products to market quickly. They serve customers who want state-of-the-art products and services, regardless of the costs in terms of price or inconvenience. Examples include Nokia and Apple.

Some companies successfully pursue more than one value discipline at the same time. For example, FedEx excels at both operational excellence and customer intimacy. However, such companies are rare—few firms can be the best at more than one of these disciplines. By trying to be good at all of the value disciplines, a company usually ends up being best at none.

Treacy and Wiersema found that leading companies focus on and excel at a single value discipline, while meeting industry standards on the other two. Such companies design their entire value delivery network to single-mindedly support the chosen discipline. For example, Wal-Mart knows that customer intimacy and product leadership are important. Compared with other discounters, it offers very good customer service and an excellent product assortment. Still, it purposely offers less customer service and less product depth than do Nordstrom or Williams-Sonoma, which pursue customer intimacy. Instead, Wal-Mart focuses obsessively on operational excellence—on reducing costs and streamlining its order-to-delivery process in order to make it convenient for customers to buy just the right products at the lowest prices.

By the same token, Ritz-Carlton Hotels wants to be efficient and to employ the latest technologies. But what really sets the luxury hotel chain apart is its customer intimacy. Ritz-Carlton creates custom-designed experiences to coddle its customers (see Real Marketing 18.1).

Classifying competitive strategies as value disciplines is appealing. It defines marketing strategy in terms of the single-minded pursuit of delivering superior value to customers. Each value discipline defines a specific way to build lasting customer relationships.

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