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experience, the decisions regarding the definition of competitive strategy fall within three
large categories requiring choice by the firm and total commitment to the choices made:
1- Where should I compete?
2- How should I compete?
3- How should I implement these decisions?
If we visualize competitive strategy as the triangle in Figure 1, the vertexes in the figure
stand for the responses to these three questions. Together, the first two vertexes define
the firms strategic positioning, while the third deals with the way it must be implemented.
Figure 1
The Three Vertexes of Competitive Strategy
Industrial sector
Market segments
Geographic scope
Products and services
Vertical/horizontal scope
COMPETITIVE
STRATEGY
The choice of markets and market segment to be served is particularly painstaking. Even
though, by defining the industry, all potential market segments are defined, within its
strategy a company must consciously choose the markets/market segments it wishes to
serve or finds convenient to deal with. Many a time this decision can imply defining what
groups of customers must not be served, which, of course, challenges conventional
corporate behavior.
For years, a leading Latin American home appliance group had engaged in retail
marketing and, more recently, it had begun importing on a direct fashion. Then it identified
an opportunity to establish a wholesale operation selling to its own retail chain and to third
parties. A separate analysis of the two businesses showed that, even though both were
within home appliance marketing, they belonged in different market segments, namely,
retail and wholesale selling. Each operation faced not only different competitors, but also it
dealt with customers showing different behaviors, characteristics, and goals. The group
determined that the abilities to successfully deal with each market were different and,
consequently, a specific strategy for each business was defined.
Another competitive field aspect closely related to market/market segment choice is the
firms geographical scope, i.e., the territories to be served, and the choice of what is to be
sold to the chosen segments, that is, the product/service line to be offered. In this latter
point, the firm must focus on the chosen market segments current or potential demand,
quite independently from its current supply of products and services. Finally, the firm must
evaluate and decide regarding its vertical or horizontal integration scope in its industry.
By late 2003, the U.S. airline Southwest Airlines (SAL) had attained the highest ROE in
the airline industry for over 30 years in a row. Since its onset, Southwest Airlines defined
its competitive field as short hauls between relatively close cities in the Southwestern
United States, using secondary, usually less-crowded airports. Also, it offered no-frills,
low-price service to its customers. Thus, no seats are assigned and no in-flight food
service is provided. No-frills service entails reservations only with the airline, more tickets
sold directly at the airports and, as of late, the use of ticket-selling machines, which avoids
paying travel agency fees. Southwest Airlines makes no baggage transfers or connections
to other airlines. This allows it to offer more frequent, reliable departures, a major
satisfaction factor in its target segments, to wit, frequent and business travelers.
Vertex II: How should I compete?
The second vertex in competitive strategy is both choosing a strategy and developing
abilities and taking actions leading to successfully implementing it at the chosen
competitive field. On the one hand, this strategy must correspond to a general approach to
addressing and designing all of the firms critical actions and activities. On the other, a
large number of actions will make hard to duplicate the firms established strategy.
There are two types of generic strategies. 1
In our experience this conceptual framework, originally developed by Professor Michael Porter, is
tremendously valuable and sheds a lot of light on the way to decide about a complex issue such as this.
Cost leadership
Cost leadership implies arranging a business firms activities to ensure the firms delivery
of a product or service at the lowest possible cost in its competitive field. Of course, this
entails identifying critical activities from a cost viewpoint, and developing the most
expertise in the industry in relation to those activities, or else delegating them to whoever
can deal with them that way.
Southwest Airlines choice of its competitive field was supplemented by a cost-leadership
strategy for frequent and business travelers who overwhelmingly used land
transportation. With this, Southwest Airlines completed its strategic positioning to
successfully compete not only with other airlines but also with land transportation. How
can Southwest Airlines offer such low prices and still be profitable? Simple. It has attained
a unique combination between its competitive field, its strategy, and its chosen abilities
and actions. For instance, Southwest Airlines has standardized its airplane fleet, which
has had a tremendous impact on its pilots learning curve, as well as on that of its
maintenance and spare-part handling staff. The high productivity rate of Southwest
Airlines personnel results from investments in recruiting, training, motivation, stock
options, and flexible union contracts, among others. In the final analysis, Southwest
Airlines product only makes sense in short hauls but, being specifically designed for that
purpose, it allows the firm to make good its promise of being the low-rate airline.
One more group of actions that must be aligned to the firms strategic positioning is the
development of the firms key systems. These include technology and information
systems, market intelligence, warehousing and distribution systems, personnel recruitment
and selection, rewards as a function of results, and a large number of other items that
can/cannot be key success factors for a firm, depending on the strategic decisions it has
made in the two previous vertexes.
Finally, two significant corollaries. First, the strategy is defined for the long term. It does
not change year after year since, as we have seen, competitive advantage is built through
actions that can take long to consolidate. However, since strategy corresponds to
assumptions or realities adopted in its formulation, significant changes in those
assumptions can require changes in strategic positioning (e.g., development of new
technologies or trends leading to structural change of the industrial sector where the firm
competes.) In our experience, this does not take place often. Rather, generally a response
through adjustments to well-defined strategic actions is enough. Second, competitive
advantage erodes over time. It is neither permanent nor ultimate. Even if the assumptions
underlying it have not changed, competitors tend to imitate. Even though advantage is
reached over the long term, firms must be attentive to the analysis of their environment,
industry, and competitors, to determine the need to take new strategic action making their
strategic positioning sustainable for longer.