308 • Chapter 9 • Strategic Positioning for Competitive Advantage

Chapter 2 discussed the implication of point 1 for the horizontal and vertical boundaries of the firm. Points 2 and 3 have important implications for the sustainability of competitive advantages built on organizational capabilities and will be discussed more fully in Chapter 11.

STRATEGIC POSITIONING: COST ADVANTAGE

AND BENEFIT ADVANTAGE

Generic Strategies

Competitive advantage cannot be reduced to a formula or an algorithm. Even if such formulas or algorithms could be concocted, describing them in a textbook such as this would make them valueless to firms because they would be accessible to everyone. Although there is no single formula for success, we can discern broad commonalities across industries in the different ways that firms position themselves to compete. For example, in sporting goods retailing, Sports Authority is a broad-based competitor, whereas Second Wind Fitness specializes in exercise equipment such as treadmills and weight benches. To take another example, Dell computer serves a wide array of customers, including business, government, and individual buyers, whereas Alienware specializes in high-end computers for hard-core gamers.

In the language of strategic management, Sports Authority and Dell on the one hand, and Second Wind Fitness and Alienware on the other, represent different types of generic strategies, a concept first introduced by Michael Porter.16 A firm’s generic strategy describes, in broad terms, how it positions itself to compete in the market it serves. Figure 9.8 illustrates Porter’s generic strategies—benefit leadership, cost leadership, and focus—and briefly describes their economic logic.17

In the remainder of this chapter, we explore the economic logic of these generic strategies. We first consider the logic of positions based on cost leadership and benefit leadership. We then discuss the logic of focus strategies.

The Strategic Logic of Cost Leadership

A firm that follows a strategy of cost leadership creates more value (i.e., B 2 C) than its competitors by offering products that have a lower C than its rivals. This can happen in three qualitatively different ways. First, the cost leader can achieve benefit parity by making products with the same B but at a lower C than its rivals. The competitive advantage achieved by low-cost producers in commodity markets (e.g., Mittal Steel in the global steel industry) is an example of this. Second, the cost leader can achieve benefit proximity, which involves offering a B that is not much less than competitors. This could occur if the low-cost firm automates processes that are better performed by hand, hires fewer skilled workers, purchases less expensive components, or maintains lower standards of quality control. Yamaha’s cost advantage over traditional piano producers, such as Steinway, is a good example of this. Finally, a cost leader may offer a product that is qualitatively different from that of its rivals. Firms can sometimes build a competitive advantage by redefining the product to yield substantial differences in benefits or costs relative to how the product is traditionally defined. For example, a formerly high-margin product may be redefined to allow for economies of scale in production and distribution while still providing benefits to consumers. The Timex watch and the 19-cent Bic crystal pen are well-known historical examples.

310 • Chapter 9 • Strategic Positioning for Competitive Advantage

FIGURE 9.9

The Economic Logic of Cost Leadership

P, C

(Price, unit cost) Indifference curve

E

PE

F

PF

CE

C

q

CF

q (Quality)

qF qE

All firms except the cost leader offer a product with a cost CE and price–quality position at point E. The cost leader offers a product with a lower-quality level, qF, but a substantially lower cost, CF, resulting in a cost advantage of DC. Consumer surplus parity is achieved when the cost leader operates at point F by charging a price PF. At point F, PE 2 PF , CE 2 CF, or, rearranging terms, PF 2 CF . PE 2 CE. This tells us that despite its quality disadvantage, the cost leader achieves a higher profit margin than its higher-cost competitors.

parity is achieved when the cost leader operates at point F by charging a price PF. At point F, PE 2 PF , CE 2 CF, or rearranging terms, PF 2 CF . PE 2 CE. This tells us that despite its quality disadvantage, the cost leader achieves a higher profit margin than its higher-cost competitors.

The Strategic Logic of Benefit Leadership

A firm that follows a strategy of benefit leadership creates more value (i.e., B 2 C) than its competitors by offering products that have a higher B than its rivals. This can happen in three qualitatively different ways. First, the benefit leader can achieve benefit parity by making products with the same C but at a higher B than its rivals. A good example is the Japanese automakers in the 1980s, whose family sedans (e.g., Honda Accord) were no more costly to produce than American-made models but offered superior performance and reliability. Second, the benefit leader might achieve cost proximity, which entails a C that is not too much higher than competitors. This characterizes the Japanese car makers today relative to their Korean competitors. Finally, a firm could offer substantially higher B and C, which arguably describes BMW’s and Audi’s compact sports sedans.