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vanced competitors: purchases of patents and know-hows, a
licensed production, etc.
Literature
1. Azoyev, G. L. Competition: analysis, strategy and
practice. — M. : Center of economy, 1996. — 350 p.
2. Azoyev, G. L., Chelenkov, A. P. Competitive ad-
vantages of firm. — M.: Mezhdunar. otnosh., 2005. — 157 p.
3. Ivanov, I. D. Modern monopolies and competition. —
M. : Thought, 2000. — 457 p.
4. Karlof, B. Business strategy: purposes, elements, con-
tents. — M. : Economy, 2007. — 420 p.
5. Knysh, M. I. Competitive strategy. — SPb : St. Peters-
burg, 2000. — 204 p.
6. Kosyrin, A. N., Shepenko, R. A. The competition in in-
ternational markets. — M. : Mezhdunar. otnosh., 1999. — 147 p.
Questions for self-check
1. What industries usually constitute the strategic centre
of the firm?
2. Define the notion of the competence centre. In what
way is it different from the strategic centre of the firm?
3. Define the notion of diversification (of a firm).
4. In what way does the scale diseconomy manifests itself?
5. In what case does the scale diseconomy occur?
6. Does the necessity to suffer high fixed costs help
small-sized enterprises in their struggle against the leaders?
91
7. Is the problem of the capacity utilization among the
most important ones for the strategy of the violent firm?
8. Do giant firms achieve their goals by putting pressure
on the market or through the creation of different "incentives"
for their consumers?
9. What can explain the phenomenon of an amazing stability of leading corporations?
10. What is the contradiction of the situation of the
"vice-leader"?
11. Which factor can a violent firm be guided by — lo-
cal or accidental demand?
12. At what stage of the development a violent firm is
characterized as highly sustainable?
13. What factors ensure the stability (sustainability) of a
violent firm (3 factors)?
14. What can Hinterkhuber's matrix "competitive-
ness/value of production" be used for?
15. What price policy is adequate for a violent firm?
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CHAPTER 5.
COMPETITIVE ADVANTAGES
OF FOCUSED SPECIALIZATION
5.1. PRODUCT DIFFERENTIATION
AS AN EFFECTIVE METHOD OF COMPETITION
FOR CUSTOMERS
The basis of the patient strategy is constituted by the two
main components:
• product differentiation;
• the need for centering maximum efforts around the fo-
cused segment of the market.
While considering the notion of the violent strategy
above, we have shown that the most effective thing under the
conditions of this strategy is the production of average, standard products.
In the case of differentiated products, a loss of production
efficiency can be balanced by an increase in consumption en-
hancement (efficiency). In this case, the consumption value of
differentiated product exceeds the value of standard goods to
the extent that the consumer is ready to pay more to the pro-
ducer, meeting all extra expenses (connected with diverging
from the standard) of the latter.
In the case of standard production, the competitive poten-
tial of the good is mainly provided with low costs of production, whereas with regard to the specialized production the
competitive potential is typically ensured by the high consump-
tion value of goods.
Benefits of the producer of differentiated products are as
follows.
Prices. Differentiation of goods makes a single market
split into separate, relatively independent segments. Conse-
93
quently, there appears an opportunity to impose prices to a reasonable degree and to get higher returns.
New groups of customers. Differentiated goods are able
to better satisfy certain needs and, therefore, often attract buyers who could be indifferent to the standard product.
It is especially important that product differentiation
should often facilitate an access to high-income customers.
1. Brand loyalty. Having created a special image of the
product, the firm makes its customers have certain preferences.
Regular taste, smell, shape, packaging, etc. are of no less im-
portance to consumers making their choice than more reasonable motives.
2. Protection against competitors. Product differentiation
is one of the most effective methods of protection against com-
petitors.
5.2. FACTORS OF PRODUCT
DIFFERENTIATION
As product differentiation facilitates competitiveness,
producers are interested in its maintaining and, thus, take certain actions in this respect. Basic reasons for product differenti-
ation are the differences between various products. Those can
be the differences in:
• quality;
• service;
• advertizing.
Quality. The main factor of product differentiation is,
undoubtedly, the quality of a product. Quality is a heterogene-
ous characteristic thta has many parameters.
According to the compensation principle, all these prop-
erties cannot be integrated into one product in the best possible
way, as a rule. Therefore, through prioritizing the main con-
94
sumption qualities one can get an opportunity for a wide varie-
ty of products.
The basis for product differentiation according to the
quality criterion includes the following components:
• additional consumption properties, i.e. those features
that make the goods comfortable and easy to use (for example,
different sizing and packaging, etc.);
• taking or not taking to the account special requests of
separate customer groups (a textbook example is food for
diabetics);
• location of goods (geographical location is of primary
importance for retail traders and providers of different services);
• imaginary qualitative distinctions between products
(from the consumer’s point of view, it does not matter whether
the goods are really different; the thing that really matters is
that various products seem to be different).
Service. Differences in service make the second largest
group of factors of product differentiation (after the quality). A
number of products, in particular technically sophisticated
goods as well as many capital goods, are characterized by longterm relations between the seller and buyer.
The complete cycle of service includes:
• pre-sale service (assistance in choosing the necessary
product);
• service for the moment of purchasing (checking, de-
livery, adjustment);
• after-sale service (warranty and post-warranty repairs,
an availability of current upgrading, recommendation on using
the product in the best possible way).
Each of these operations can be completed to a different
extent (or cannot be performed at all). As a result, the same
product is diversified into a whole range of variants that differ
from each other in their service characteristics and, thus, seem
to be independent products.
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Advertizing. First, advertizing shows the differences be-
tween the product and its analogs. Secondly, it facilitates new
needs to arise. Thirdly, advertizing creates product differentiation even if there is no real difference between them.
All the product differentiation factors listed above are de-
liberately taken into account by the firms creating its market
niche. There are standard marketing procedures for this purpose. For example, the morphological analysis provides a possibility to chart the main qualities of the product. A marketer
checks whether all possible combinations of qualities are repre-
sented in the market. After that, he or she tries to find the reason why goods with this or that combination of properties are
not on sale.
5.3. COMPETITIVE STRATEGIES
OF SPECIALIZED (SMALL NICHE) FIRMS
Product differentiation is a universal method of non-price
competition. Tis method is used not only by patient firms
(though it is especially important to them), but also by firms of
other types. The idea of the patient strategy is that product differentiation is supplemented with focused (niche) specialization. This combination protects the firm against its competitors
quite well.
Additional protection is guaranteed by the narrow focus
of the market segment (controlled by the patient firm) that:
• reduces its attractiveness for competitors;
• protects a patient firm from more powerful competi-
tors for one more reason — in markets like these, benefits of a
large-scale production are depreciated. What helps here is not
the production standard and sequence, but rather an individual
approach.
Thus, a major company cannot conquer the market of a
patient firm if the former uses typical production capacities,
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margins of proven designs, an average advertising-and-sales
network, etc. All competitive advantages should be created
again through suffering high financial and intangible expenses
without knowing the result of the competition. Besides, the patient firm has a large number of benefits: the experience obtained, the trademark credibility, etc.
It is not only large violent firms that do not want to compete
with specialized companies. It is also practically impossible to
find several patient firms that occupy an identical market niche.
The situation when two firms occupy the same market niche at
one and the same time, is fragile. After all, if goods aim at satisfying similar needs, it will be easy for a consumer to decide which
of them is better, and to make an adequate choice.
A good example of the competitive exclusion principle in
the field of a focused production is the phenomenon of the nationwide or even worldwide leadership of small companies.
5.4. EVOLUTION OF PATIENT FIRMS
Despite the benefits of small-niche specialization, a typi-
cal development of a patient company is not easy.
The first stage of a patient firm’s development is creating
a niche.
If the patient firm has not created a market niche by
means of using innovations or a prestigious trademark — a fo-
cused specialization should be created through gradually transforming regular goods produced by the firm in this respect. M.
Porter offers to take the following actions for this purpose:
• to understand who is the consumer of your products;
• to specify in what way and for what purposes the con-
sumer uses the product;
• to determine the degree of importance of different
properties of the product for the consumer;
97
• to find out the potential of the firm in terms of the prod-
uct differentiation introducing extra benefits to the consumer;
• to see how much the firm will have to pay for each
way to introduce extra benefits to the consumer;
• to choose the method of the product differentiation
that provides the customer with maximum extra benefits per
cost unit of the firm;
• to find out whether it will be possible to preserve this
differentiation level;
• to cut down the expenses for those quality characteris-
tics of the product that do not reduce extra benefits created by
the differentiation.
The second stage of the patient firm’s evolution is ma-
turity. As the firm gains experience and centers its resources
around some focused (small-niche) area, the market niche is
becoming a more and more reliable method of protection
against the competitors’ invasion. This period of the patient
firm’s development is characterized by a rapid rise in the turn-
over. The firm chooses all the latest achievements made in different industries to apply them in its focused area. Its products
are not only of high quality, but are offered at a high price as
well. As for the company itself, it’s being not really big in size,
turns out to be highly profitable.
However, at the same time, dangers double. First, the
company’s patents, technology, specialized sales network, and
other things carry a value only until there are special market
needs that they are supposed to satisfy. The patient firm be-
comes a "prisoner" of the market niche it has occupied or cre-
ated. While it exists, the patient firm has a number of benefits.
However, the firm has made too heavy investments in the fo-
cused production field, that’s why transformations of the pro-
duction profile are almost impossible. Patient firms ruin them-
selves not because they produce bad products and not because
they lag behind the technical progress in the area. They ruin
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themselves because as things have changed, their special
knowledge falls in value.
Secondly, the firm is wide open for being conquered.
When the patient company is already rather big in size and has
gained valuable experience, to overtake it can be the only way
to get access to its patents, know-hows, specialized sales network. At the same time, a specialized firm’s takeover does not
usually result in its total acquisition by a more powerful conquering corporation. Therefore, an ex-patient firm that was independent earlier is now being controlled as a subsidiary company enjoying a high degree of autonomy.
The patient firm that hasn’t been overtaken can go
through the following periods:
• stagnation or moderate development of both the firm
and the niche it has occupied;
• choosing another strategy by the firm and its trans-
forming into a large violent company.
At the third stage of the evolution (stationary develop-
ment), the firm does not develop, but moves into a steady state.
If the size of the market segment it occupies decreases, the firm
also stops developing. If the market niche increases (certain
specialized goods grow in popularity), the patient firm can also
have a little increase in size. In this specific state, the implied
disadvantage of the patient strategy — small sizes of the market niche where the specialized company works — manifests
itself.
The fourth stage is a strategy change. For it to take place,
what is needed is something more than the patient firm’s efforts. The necessary thing here is a favorable combination of
circumstances.
First, the patient firm gets a chance to move into the
fourth stage when its selected niche is very perspective, and on
its basis there arises a mass market where it is possible to main-
tain leadership.
Secondly, the patient firm gets a chance to move into the
fourth stage when it goes outside the market niche.
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5.5. CHARACTERISTICS OF PRICING POLICIES
Price
Quality
low
average
the high
9 The policy of
OF BOTH VIOLENT AND PATIENT STRATEGIES
The firm’s choice of either the patient strategy or the vio-
lent one is predetermined by its pricing policy as well as by the
product quality policy. The matrix "price–quality" provides the
main possible actions of firms.
1 The robbery
high
policy
4 The show-
ing-off policy
average
7 The low
low
value policy
Scheme 5.1. Matrix "price–quality"
2 The overes-
timated price
policy
5 The
average level
policy
7 The high
quality policy
3 The price
premium policy
3 The policy of
deep market
penetration
maximizing the
market share
The violent strategy. Attraction of customers of many
groups is implied in policy № 5 (buyers of average-quality products sold at average prices are always in the majority). However,
this policy is not always the best method to win the most popular
segment of the market. Target clients of the firm who chose the
average-level policy will sooner or later give preference to pro-
ducers using the high-quality policy (№ 8) as the goods offered by
the latter are of no lower quality and are sold at lower prices.
Therefore, violent firms aim to use policy № 8. Average-quality
products aim at reaching average consumers, and low prices make
the client choose this firm for sure.
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