los tres vertices de la estrategia competitiva-ingles

7/23/2019 Los Tres Vertices de La Estrategia Competitiva-Ingles

http://slidepdf.com/reader/full/los-tres-vertices-de-la-estrategia-competitiva-ingles 1/7

The Three Vertexes of Competiti ve Strategy

By Esteban R. Brenes and Mauricio Mena G.

In this article we are establishing a conceptual framework called “ the three vertexes of

competitive strategy” to facilitate understanding and validating a company’s competitivestrategy. We will study the three groups of decisions that must be addressed whendefining a strategy, in order to help managers and businesspeople to determine whetheror not their organizations have really effective strategies.

A. The concep t o f s trategy

Strategy must always be understood within a competitive context. Thence, the firstfoundation for our approach combines the concepts of “strategy” and “competitivestrategy”, understanding both as:

A consc ious search for an action plan allowing an organization to position itselfat an industrial sector to attain sustainable competitive advantage and higherreturns in the long term.

In the first place, every company can be said to have a strategy. However, not everycompany has consciously engaged in the task of defining it. The failure to do so meansthat the strategy can be found only in the mind of the firm’s owner or manager. This mighthave a negative impact on the firm’s performance in the form of inconsistencies,omissions, or other problems resulting from a strategy not shared or understood byeveryone in the organization.

Second, the strategy must aim at giving the firm a unique positioning, hard to imitate in

the industry where the firm will compete. By “positioning” we mean the firm’s being able toestablish itself in the industry differently from all others, featuring its own innovative,unique attributes. As we shall see later, to reach a unique positioning the firm must choosewhere and how to compete.

Third, the goal of strategy must be giving the firm a competitive advantage that issustainable in the long term. Competitive advantage is attained by developing abilitiesand taking a number of specific actions aligned to the strategic positioning chosen. Thiswill allow the firm to develop a hard-to-duplicate competitive advantage making it moresustainable over the years.

Finally, the ultimate goal of strategy is attaining returns on equit y (ROE) above the

average of its industry. In addition to serving as an excellent long-term indicator offinancial health, the ROE is the source of prosperity for all of the firm’s stakeholders, i.e.,stockholders, employees, business partners, and the society as a whole.

B. The Three Vertexes of Competitive Strategy

Although an understanding of the concept of strategy is key, it is only the first step indeveloping successful strategies. The next step is formulating the strategy itself. In our



experience, the decisions regarding the definition of competitive strategy fall within threelarge 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 figurestand for the responses to these three questions. Together, the first two vertexes definethe firm’s strategic positioning, while the third deals with the way it must be implemented.

Figure 1The Three Vertexes of Competiti ve Strategy

Strategy: How should I compete?

Cost or hig perceived value leadershiph-

Strategic action and abilities to bedeveloped

Implementation: How shou ld I implement these decisions?

Organization and structure

Policies, systems, and processes

Strategic investment and/or sinvestmentdi

People, Culture, Leadership

Competitive Field = Where should I compete?

Industrial sector

Market segments

Geographic scope

Products and services

Vertical/horizontal scope

CCOOMMPPEETTIITTIIVVEE SSTTRR A ATTEEGGYY

Vertex I: Where should I compete?

This first question entails defining the firm’s competitive field by clearly responding whatindustry the firm wants to compete in. This definition is the basis for the industrial analysisallowing us to clearly understand, among other things, key success factors, potentialcustomers, competitors, and the industry’s specific structure and major competitive forces.

The carbonated soft drink and beer companies, for instance, are faced with an interestingdilemma. In developed countries such as the United States, these two industries are not

intertwined, chiefly for legal reasons. However, in less developed countries they tend tointertwine, and currently companies in both industries unite to compete by developingsignificant synergies, mainly in distribution. Obviously, a clear definition of the relevantindustry in each case is very important, since it can go from just carbonated soft drinks orbeer to a much wider definition, such as massive distribution of drinks.

Other choices related to the competitive field include markets or market segments to beserved; the firm’s geographical scope, product line and services, and the degree of verticalor horizontal integration.



The choice of markets and market segment to be served is particularly painstaking. Eventhough, by defining the industry, all potential market segments are defined, within itsstrategy a company must consciously choose the markets/market segments it wishes toserve or finds convenient to deal with. Many a time this decision can imply defining whatgroups 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 retailmarketing and, more recently, it had begun importing on a direct fashion. Then it identifiedan opportunity to establish a wholesale operation selling to its own retail chain and to thirdparties. A separate analysis of the two businesses showed that, even though both werewithin home appliance marketing, they belonged in different market segments, namely,retail and wholesale selling. Each operation faced not only different competitors, but also itdealt with customers showing different behaviors, characteristics, and goals. The groupdetermined 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 thefirm’s geographical scope, i.e., the territories to be served, and the choice of what is to besold to the chosen segments, that is, the product/service line to be offered. In this latterpoint, 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 mustevaluate 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 inthe airline industry for over 30 years in a row. Since its onset, Southwest Airlines definedits competitive field as short hauls between relatively close cities in the SouthwesternUnited 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 ticketssold directly at the airports and, as of late, the use of ticket-selling machines, which avoidspaying travel agency fees. Southwest Airlines makes no baggage transfers or connectionsto other airlines. This allows it to offer more frequent, reliable departures, a majorsatisfaction 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 developingabilities and taking actions leading to successfully implementing it at the chosencompetitive field. On the one hand, this strategy must correspond to a general approach toaddressing and designing all of the firm’s critical actions and activities. On the other, a

large number of actions will make hard to duplicate the firm’s established strategy.

There are two types of generic strategies.1

− Cost leadership, and

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.



− High perceived value.

Cost leadership

Cost leadership implies arranging a business firm’s activities to ensure the firm’s deliveryof 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 mostexpertise in the industry in relation to those activities, or else delegating them to whoevercan deal with them that way.

Southwest Airlines’ choice of its competitive field was supplemented by a cost-leadershipstrategy for frequent and business travelers who overwhelmingly used landtransportation. With this, Southwest Airlines completed its strategic positioning tosuccessfully compete not only with other airlines but also with land transportation. Howcan Southwest Airlines offer such low prices and still be profitable? Simple. It has attaineda unique combination between its competitive field, its strategy, and its chosen abilitiesand actions. For instance, Southwest Airlines has standardized its airplane fleet, whichhas 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, stockoptions, and flexible union contracts, among others. In the final analysis, Southwest

Airlines’ “product” only makes sense in short hauls but, being specifically designed for thatpurpose, it allows the firm to make good its promise of being “the low-rate airline.”

High perceived value leadership

On the other hand, we have a strategy committed to creating additional customer valuewhich, of course, must be recognized and appreciated by customers to make them willingto pay more than the actual cost of developing the product or service.

The Central American firm Café Britt Coffee Corporation (CBCC) pioneered as the firstgourmet coffee firm with local processing. By the mid 80s, it made an excellent productavailable both to local consumers and the growing tourism industry. This way, it not onlycreated a new market segment but also thoroughly changed the consumers’ and the localindustry’s habits. Even though a key success factor was coffee high-quality and goodtaste, the firm had to take a large number of actions, including packaging able to keepundiminished the product’s taste and aroma, top-quality industrial processing, fullybilingual personnel showing significant business skills, a customized distribution system,and a mail-order system (first through phone calls and then through the Internet) coveringthe entire world. These abilities and actions combine to position the firm as a consumermarket leader, at both local and international level, with customers happy to pay

significantly higher prices for the firm’s products.

Even though cost and high-perceived value strategies can share some abilities andactions, a firm must commit itself to one of them and make all subsequent decisions on thebasis of that choice. For this reason a firm cannot pursue both generic strategiessimultaneously, as it will find implementation inconsistencies that will make it hard to attainsustainable competitive advantage in the long term.



Vertex III: How should I implement these decisions?

Although strategic positioning is attained by clearly defining the two previous vertexes,competitive advantage is only achieved through effective implementation of all thestrategic actions defined. These actions are very specific to each firm and theirimplementation, as shown in the third vertex of Figure 1, has to do with at least four major

management areas.

1. Organization and structure. This action must be taken at two different levels. First, abusiness organization level to determine whether businesses will be managed within asingle business unit, whether two or more separately-managed firms will take charge ofthem, or if corporate organization is appropriate. The second level is that of the internalorganizational structure of resulting firms. In other words, the definition of functions,responsibilities, and interrelationships required in each firm to deal with all the implicationsof the selected strategic positioning.

The most important thing is ensuring top performance in key success functions, accordingto the chosen positioning, determining which of them must be definitely reinforced. For

instance, and Ecuadorean firm engaged in the business of office supplies and book salesat a retail level through bookstores and wholesale paper marketing recognized the need toreinforce its organization differently, depending on each business activity. In the case ofbookstores, it chose to reinforce abilities such as store location, point-of-sale development,employee training in serving customers, management of a wide product line, advertising,and promotion. For wholesale paper marketing it chose to strengthen two different areas,to wit, purchase management, through a manager with experience in the internationalmarket for the product’s raw material, and its marketing department, through specializedsalespeople with extensive knowledge on a per-customer basis.

2. Policies, processes, and systems. The company must reformulate its strategicpolicies, such as leverage level, profit retention, sources of funding, executive rewards,

and other human resources policies, to ensure all of them are aligned –as much aspossible– to its strategic positioning. In the first three items mentioned, the economic effortof the organization must be backed by the Board of Directors in order to take all actionsrequired to consolidate the firm’s competitive position.

One more key thing is to ensure attaining higher expertise and standing than competitorsin processes identified as critical to the chosen strategic positioning. Process redesignefforts make sense when focused chiefly on key success factors. Activity and processoutsourcing must be evaluated in this context. For instance, it is not uncommonoutsourcing non-central processes. However, in other instances alliances with experts canbe designed to provide improved performance in key processes and simultaneously toprovide unique access to know-how and experience so that real competitive barriers are

created.

One more group of actions that must be aligned to the firm’s strategic positioning is thedevelopment of the firm’s key systems. These include technology and informationsystems, market intelligence, warehousing and distribution systems, personnel recruitmentand selection, rewards as a function of results, and a large number of other items thatcan/cannot be key success factors for a firm, depending on the strategic decisions it hasmade in the two previous vertexes.



3. Strategic investment/disinvestment. Strategy must also serve as a filter to determinewhat tangible and intangible assets must be controlled by the firm. On the other hand, itmust serve to determine which assets are no longer central because they do no longeradd value to the firm or take it away from the focus of its strategic positioning. Thesedefinitions imply decisions on growth or consolidation and the time period allocated to

these activities. In the case of growth, this might entail independent or joint investments,acquisitions, mergers, and strategic alliances to ensure control of critical resources. Inother cases, these definitions can lead to generally difficult consolidation decisions, suchas selling assets, whole divisions, related companies, or other resources that are nolonger critical or have very limited chances for success both under current and futurecircumstances.

Anticipating a higher degree of international competition on cement, a Latin Americancement production firm competing for cost leadership decided for vertical forwardintegration by acquiring a concrete products company. The firm recognized that, in thenear future, it could lose market share and profitability since cement is a generic goodlinked to significant economies of scale enjoyed by its potential competitors. Thus the

original company became a corporation with two independent business units. One of themcompeted on cement through cost leadership. The other competed on concrete products,pursuing a high perceived value strategy. This way the company had better chances tomaintain its profitability levels, together with growth and lower potential risk.

On the other hand, a Central American meat corporation decided that one of its divisions,even taking into consideration different strategic alternatives, had very few chances toattain competitive advantage and that it was making it depart from its major focus, thuswasting critical resources. The firm decided to eliminate the division, fire a full one third ofthe entire corporation employees, and sell its physical assets to a former competitor.Something similar occurred in a foodservice company. Although this started its business atretail level, it recently decided to focus its efforts on the institutional segment of hotels and

restaurants. Since store location was not relevant for this segment, the company chose toshut most of its stores and, instead, build a warehouse and distribution center.

4. People, culture, and leadership. Other significant components of strategyimplementation are (1) human resources; personnel and talent types the firm mustattract/retain, (2) culture, principles and values to be developed, and (3) the type ofleadership required to lead them. These actions are not aligned to management fashionsor immediate needs. Rather, they are aligned to the requirements for abilities and skillsrequired by the strategic positioning chosen by the firm.

Here we can remember the example of CBCC incorporating bilingual personnel in everyposition under the premise (proven by experience) that they reinforce an international

culture, highly important in the tourism sector and at a business with a global vision.Southwest Airlines has developed a passion for productivity and punctuality. On the otherhand, the appliance firm leading on costs promotes an austere culture of control. Inaddition, these companies feature a clear leadership oriented toward motivating in theright direction for the strategic choices made. It is hard to imagine CBCC without a creativeleadership that challenges the industry’s and the company’s paradigms. Likewise, it ishard to promote an austerity culture without a leader living it, as do Southwest Airlines andthe appliance firm mentioned above.



Finally, two significant corollaries. First, the strategy is defined for the long term. It doesnot change year after year since, as we have seen, competitive advantage is built throughactions that can take long to consolidate. However, since strategy corresponds toassumptions or realities adopted in its formulation, significant changes in thoseassumptions can require changes in strategic positioning (e.g., development of newtechnologies 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 responsethrough adjustments to well-defined strategic actions is enough. Second, competitiveadvantage erodes over time. It is neither permanent nor ultimate. Even if the assumptionsunderlying it have not changed, competitors tend to imitate. Even though advantage isreached 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 theirstrategic positioning sustainable for longer.

los tres vertices de la estrategia competitiva-ingles

Documents