Your Competitive Marketing Strategy
The competitive marketing strategy serves one main goal, the creation of a competitive advantage that will help sales of the company. The management has to approach the creation of such a strategy from the point of view of the company’s strengths and weaknesses. The strategy has to be unique as each company possesses a unique combination of strengths and has to cope with an individual set of problems. Thus, in my view, the key to the development and implementation of a competitive marketing strategy has to be uniqueness, thus, the strategy has to be custom-made.
For this reason, the formulation of competitive marketing strategy should only happen after careful analysis of the company’s external and internal environment. It is possible that the company that has been in the market for a long time has lost realization of what is going on around and inside. For example, once the company was innovative and a leader in change, but now it faces a challenge from its smaller competitors who are trying to innovate at a faster rate. Alternatively, the management may not know what employees think of them, their work conditions and the potential of their business.
Thus, the company needs to evaluate what
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Most importantly, the company has to review strategies used by competitors and try to come up with something of their own. For instance, one should be aware of generic competitive strategies used by most companies. Porter defines them as “cost leadership, differentiation and focus” (Douglass, Rhee 1989). These strategies differ on two basic dimensions, “namely the scope of the target market, i.e., broad-line vs segment focus, and the strategic competitive advantage, i.e., lowest cost position vs perceived product differentiation” (Douglass, Rhee 1989). This means that the company has to make two basic decisions: Will it market to a narrow segment or use mass marketing? Will it try to get ahead of its competition by offering lower price or by differentiating their product from the rest? Without these two basic decisions, the company cannot continue to map out their strategy because they will be lost on details without basic guidelines. Porter indicated that the firm must choose either product differentiation or the lower price because “attempting to pursue simultaneous competitive advantages will result in “strategic mediocrity,” except for firms in unusual industry niches” (Flynn, Flynn 1996).
Thus, the company has to evaluate its strengths and decide where it can have the greatest advantage – by lowering prices or by differentiating the product from the competition. However, the greatest mistake is to think that the company can do this analysis once and forever. In contrast, the company has to continue with this analysis so as to make its strategy dynamic and adapt it to the needs of the changing market environment. That is why the company should always try to have a Plan B, which specifies what to do if Plan A does not work out for some reason. Therefore, the key to success is to continue with the analysis of the internal and external media and to modify the plan according to changes in both these environments.
The company also has to define where it stands in terms of product development – whether it wants to be one of the prospectors “who pioneer new products or market development”, defenders, following others, or “analyzers, who make fewer innovations than prospectors, but are more dynamic than defenders” (Douglass, Rhee 1989). It probably does not want to be a reactor, the least advanced of the four types because a reactor does not really have a stable strategy. Making all these decisions will help the company to map out its competitive marketing strategy.
Douglas, Susan P. and Don Ke Rhee. “Examining Generic Competitive Strategy Types in U.S. and European Markets.” Journal of International Business Studies 20.3 (1989): 437+. 3 December 2005 <http://www.questia.com/PM.qst?a=o&d=5000116605>.
Flynn, Barbara B., and E. James Flynn. “Achieving Simultaneous Cost and Differentiation Competitive Advantages through Continuous Improvement: World Class Manufacturing as a Competitive Strategy.” Journal of Managerial Issues 8.3 (1996): 360+. 3 December 2005 <http://www.questia.com/PM.qst?a=o&d=5000425664>.
Douglas, Susan P. and Don Ke Rhee. “Examining Generic Competitive Strategy Types in U.S. and European Markets.” Journal of International Business Studies 20.3 (1989): 437+. 3 December 2005 <http://www.questia.com/PM.qst?a=o&d=5000116605>.
Examining generic competitive strategy types in U.S. and European markets.
by Susan P. Douglas , Don Ke Rhee
EXAMINING GENERIC COMPETITIVE STRATEGY EngineS IN U.S. AND EUROPEAN MARKETS Recent years have witnessed a growing intensity of competition in virtually all areas of business, whether at home or abroad, in markets upstream for raw materials, components, supplies, capital and technology as well as in markets downstream for consumer goods and services [Henderson 1983; Wind and Robertson 1983]. This has resulted in greater attention to analyzing competitive behavior and competitive strategies effective under different environmental conditions. Typologies of generic competitive strategies or “strategy types” have, for example, been proposed [McGee and Thomas 1986; Miles and Snow 1978; Porter 1980] and empirically tested [Dess and Davis 1984; Galbraith and Schendel 1983; Hambrick 1983a,b; Miller 1986; White 1986]. Levels of performance associated with these strategy types have been examined, as also their organizational characteristics and the type of environmental conditions under which different types of competitive strategy are most likely to be pursued.
The vast majority of research on competitive strategy, especially relating to generic strategy types has, however, been conducted in relation to businesses in the U.S. Less interest appears to have been docused on examining the extent to which these findings are generalizable to markets outside the U.S. To assume that such typologies are universally valid without explicit investigation is, however, analogous to the adoption of a pseudo-etic approach in cross-cultural attitudinal research [Triandis 1972; Pike 1966]. This widely criticized approach was founded in the assumption that attitudinal scales, intelligence and personality tests developed in the U.S. would provide unbiased measures of attitudes, intelligence or personality in other countries [Gordon and Kikucki 1966].
Yet, both empirical research findings and anecdotal evidence give reason to believe that differences may occur in competitive strategies from one country or region of the world to another. Companies of different national origins or organizational types may, for example, pursue different competitive straegies due to different management philosophies, or goals and objectives. Companies may also use different strategies to penetrate overeseas markets due to differences in the competitive market environment. Market characteristics, such as the stage in the product lfie cycle, rate of market growth, technological change, patent protection, the flow of imports or exports, may also vary from one country to another, thus impinging on the choice of competitive strategy.
The purpose of the present study is thus to explore the nature of generic competitive strategies in an international context, based on a sample of industrial businesses serviing markets in the U.S. and Europe, drawn from the PIMS database. More specifically, it aims:
* to assess whether the relevant underlying dimensions of competitive strategy are the same for businesses in European markets as in the U.S.;
* To examine generic competitive strategies in the U.S. and Europe and the levels of performance and firm characteristics associated with each;
* to assess whether levels of performance associated with different types vary with the nature of the business environment.
The paper is divided into four main parts. First, the key themes of previous research relating to competitive strategy are highlighted, including their international extensions. The nature of PIMS database and the sample used in the study are then described, and the research methodology outlined. The key findings relating to the underlyingdimensions of competitive strategy, and generic competitive strategy types are then discussed, together with the profiles of these types. Finally, some conclusions are drawn concerning differences in competitive strategy types in markets outside the US, and some directions for future research indicated.
PREVIOUS RESEARCH RELATING TO
GENERIC COMPETITIVE STRATEGIES
In the industrial organization and business strategy literature, considerable interest has been centered on identifying generic business strategies or strategy types based on strategy components, such as the scope or domain of the business, resource deployment in marketing, production and R&D, asset management or parsimony, degree of vertical integration, etc. [Hambrick 1983b; Hofer and Schendel 1978; miles 1982; Miller 1986; White 1986]. The primary emphasis has been on examining the link between strategy, environment and performance, to determine the appropriate investment strategy or direction for the business, i.e., invest, maintain or harvest.
A number of typologies or taxonomies of business and competitive strategies have been identified, some based on a priori conceptual frameworks, others on empirical studies. The number and precise nature of the strategy types identified varies widely, depending on the specific components or variables included, as well as the exact methodology employed. Here, for purposes of simplicity, two of the most widely accepted of these conceptual frameworks are highlighted, namely the Miles and Snow  typology and Porter’s three generic competitive strategies , together with empirical research related to these frameworks.
The Miles and Snow  typology identifies three successful strategic types based on field studies in four industries. They postulate that these strategies can be pursued equally effectively in any industry, i.e., irrespective of the market environment. The three types are: defenders, businesses who engaged in little or no product market development, competing primarily on basis of price, quality, delivery or service; prospectors, who pioneer new products or market development; and analyzers, who make fewer innovations than prospectors, but are more dynamic than defenders. One low performing type–reactors, who do not develop a stable coherent strategy, is also identified. The key dimension underlying the typology is thus the degree of innovation in product or market development.
Subsequent research [hambrick 1983; Miller 1986; Snow and Hrebiniak 1980] has investigated the functional attributes or policies, i.e., in production, management, capital asset management, etc., characterizing these strategy types, as also their effectiveness and performance under different environmental conditions such as different stages of the product life cycle, high- vs low-growth markets, or industries characterized by high vs low product innovation. Here, it was generally concluded that not only were different strategy types associated with different functional attributes or policies, notably in product R&D and marketing expenditures, but also that there were differences in the effectiveness of the various strategies depending on the environment. A prospector strategy was, for example, found to be more effective in an innovative industry, though not necessarily in a high-growth environment.
Porter’s conceptual typology [1980, 1985] also identifies three generic competitive strategies–cost leadership, differentiation and focus, which are viewed as ways of developing a sustainable competitive advantage so as to ‘out compete” other businesses in the industry. Here, two underlying dimensions may be distinguihsed, namely the scope of the target market, i.e., broad-line vs segment focus, and the strategic competitive advantage, i.e., lowest cost position vs perceived product differentiation.
Again, a number of empirical studies [Dess and Davis 1984; Galbraith and Schendel 1983; Hambrick 1983a] have been conducted to test the validity of Porter’s generic strategies. Since these generic strategies are essentially “ideal” types, and hence somewhat difficult to operationalize, these typically rely on his conceptual framework to identify strategic components or dimensions of relevant strategic variables. The high performance or successful strategy types identified in these studies tend frequently to correspond to Porter’s strategy types. More specifically, these show that high levels of profitablity tend to be associated with (as hypothesized) broad market scope, product differentiation and innovation, cost leadership and efficient asset management.
The vast majority of research on generic business or competitive strategy types has, however, been conducted in the U.S. and in relation to U.S. businesses. A limited number of studies have been conducted outside the U.S. [Cowling 1972; Scherer 1980], predominantly in Canadian or European markets, following the classic structure, strategy, performance paradigm. Attention has, however, centered on examining the link between market structure and performance variables such as market share and profitability [Hart and Morgan 1977; Jacquemin and Phillips 1976; Jenny and Weber 1976; Lambin 1976] rather than on examining the intervening competitive strategy variables and strategic types.
Various empirical studies suggest, however, that the competitive strategies pursued by U.S. firms in foreign markets, as also those of businesses of other national origins may differ from those of domestic businesses in the U.S. U.S. firms have, for example, been found to place greater emphasis on product quality, and less on new product development, promotional expenditure or pricing in overseas markets [Craig, Douglas and Reddy 1987; Douglas and Craig 1983; Scheeweis 1983]. Companies of other national origins have also been found to pursue different competitive strategies from U.S. businesses [Franko 1976; Samiee 1982]. U.K. companies have, for example, been found to be less aggressive and innovative than U.S. and Japanese companies, both in their domestic markets and in overseas markets [Stopford and Turner 1985; Doyle, Saunders and Wong 1986]. Evidence from case studies also supports the view that firms of different national origins will tend to pursue different competitive strategies [Hamel and Prahalad 1985; Hout, Porter and Rudden 1982]. This may reflect different organizational cultures [Hofstede 1980; Haire, Ghiselli and Porter 1966], or alternatively, the formulation of competitive strategy in response to environmental conditions in the domestic market, which are then carried over to foreign markets.
Differences in environmental conditions in different country markets, in terms, for example, of market size and growth, rate of technological change, or barriers to entry, may also lead to differences in strategy. For example, where overseas markets are smaller in scope or volume than the U.S. domestic market, product lines may be broader in order to cover investment or infrastructure costs and match distribution requirements [Douglass and Craig 1983; Keegan 1984; Vachani 1985]. Similarly, where markets are dissimilar or characterized by a high degree of risk, firms may be less likely to integrate distribution, as management techniques may not transfer readily a different environment [Anderson and Coughlan 1987; Gatignon and Anderson 1987; Keegan 1984; Kogut 1984].
This raises a number of issues with regard to the nature of competitive strategies in markets outside the U.S., and in particular, the extent to which findings about competitive strategy in the U.S. market also apply to other markets. In the first place, the question arises as to whether the same generic competitive strategies or strategy types are to be found in markets outside the U.S. Secondly, even if the same strategy types can be identified, differences in the market environment, in terms of size, growth or stage of development, may affect the frequency with which these are pursued, or their relative effectiveness. Finally, different types of businesses such as pioneers may tend to differ in the frequency with which they pursue or adopt various competitive strategies.
The present study aims to explore these issues based on an examination of generic competitive strategies in the U.S. and Europe. Levels of performance and business characteristics associated with these strategy types are also examined, as well as the extent to which these appear to be conditioned by certain environmental characteristics.
The present investigation of competitive strategy in international markets is based on a sample of industrial businesses drawn from the PIMS (Profit Impact of Market Strategy) project, a large ongoing study of the performance, strategy and competitive characteristics of individual product businesses, conducted by the Strategic Planning Institute. (the definition of a product business is included in Appendix 1.) The nature of this sample, and the database is next described in more detail, followed by a discussion of the procedures used to analyze the data.
The PIMS project provides an extensive database constructed from information provided by member companies on selected product businesses using a set of standardized data forms. It covers a wide range of variables relating to various aspects of competitive strategy and positioning such as investment strategy, relative cost position, technology leadership, timing of market entry, new product introduction, product quality, marketing expenditures relative to competitors, as well as characteristics of the served market and the market environment, the nature of competition, barriers to market entry, and operating results and financial performance of each business.
The international portion of this database has been expanded in recent years, and now includes over 500 product businesses serving markets in the U.K., continental Europe, and other parts of the world. These include some businesses whose corporate headquarters are located in Europe, approximately half of which are in the U.K. Only industrial businesses (see Appendix 1 for a definition) were included in this study, since consumer markets differ from industrial markets in terms of certain characteristics such as the number, size and concentration of buyers, the nature of demand and of purchasing behavior, such as price, production, etc., thus entailing differences in relative importance and emphasis on strategy variables [Wind and Webster 1972; Kotler 1988].
Since a prime objective of the study was to examine whether similar competitive strategy types could be identified among businesses operating in Europe as in the U.S., two subsamples were constructed. The first consisted of 250 businesses with corporate headquarters in the U.S., serving markets in the U.S. The second consisted of 187 businesses serving markets in Europe, of which 120 had corporate headquarters in Europe, and 67 in the U.S.
These data were analyzed in three principal phases. First, the key underlying dimensions of competitive strategy were identified by means of a series of factor analyses. These were conducted separately for businesses in the U.S., and in European markets. In each case this resulted in the identification of seven highly similar dimensions or factors. In the second phase of the analysis, each set of factor scores was submitted to a separate clustering routine in order to identify groupings of businesses based on their competitive strategy. In both cases this resulted in the identification of six clusters or strategy types. The comparability of the results of the two cluster solutions was then examined. The performance of the six clusters in each solution was compared based on both financial and marketing measures, and key business characteristics were identified. In the third phase, the market environment characterizing each of the clusters was also examined, as well as performance under different environmental conditions. The methodology used in each phase is next described in more detail.
In the first phase of the analysis, seventeen variables relating to various aspects of marketing strategy were selected to measure a business’s competitive posture. The variables are listed in Appendix 2. These were not intended to operationalize specific generic competitive strategies such as cost leadership, or differentiation, but rather to capture the complexity of competitive marketing strategy. The variables therefore covered three key components of competitive marketing strategy; relative emphasis on various marketing mix variables such as product quality, percent of new products; relative market scope or product line breadth; and the degree of vertical integration and synergy with other product businesses in the company. The first two components tap the two dimensions underlying the Miles and Snow and Porter typologies, while the third component reflects the vertical (as opposed to horizontal or market) scope of the business, and hence the degree of control and allocation of resources to market distribution [Anderson and Coughlan 1987; Kogut 1984]. These variables have also been widely used in previous empirical research examining generic competitive strategies [Galbraith and Schendel 1983; Hambrick 1983a, b].
After standardization of the seventeen original variables, a principal components factor analysis of these variables was conducted for each of the two samples, using the AQD package [Schlaifer 1981]. A varimax rotation was conducted and the standard criterion of an eigenvalue [is greater than] 1 was applied to determine the appropriate factor structure. In each case, seven highly similar factors were identified, accounting for 80% of the variance for the U.S. sample, and 88% for the European sample.
These seven factors were also easily interpretable, and appeared to represent distinct strategy components. Consequently, the factor scores were used as input in subsequent phases of the analysis. This procedure has been employed in a number of classic marketing studies [Frank and Green 1968; Green, Frank and Robinson 1967; Morrison 1967]. While it results in some loss of information, it nonetheless has the advantage of generating orthogonal dimensions for subsequent analysis. This reduces potential problems of “noise” due to interdependence in input data.
In the second phase of the analysis, following similar procedures used in other studies [Galbraith and Schendel 1983], the seven factor scores for the 250 U.S. businesses were submitted to the hierarchical clustering routine in the AQD package [Schlaifer 1981]. The same procedure was then repeated for the 187 European market businesses. in both cases this resulted in the identification of six clusters. A Euclidean distance measure was used in conjunction with the minimum squared error method to define the clusters. The appropriate cluster solutions were selected by applying two criteria–drop in mean squared error, and approximately equivalent cluster size–both standard criteria used to determine the appropriate number of clusters [Schlaifer 1981]. The profiles of the businesses in each cluster were also examined for each sample in order to determine whether specific types of businesses were more likely to adopt certain competitive strategies. This included characteristics such as the type of business, in the case of the European market sample, the location of corporate headquarters, i.e., U.S. vs European, the timing of market entry, i.e., pioneer vs follower. The significance of differences in these characteristics between the six clusters was examined based on chi square statistics.
The performance of the six clusters in each sample was also examined based on three measures of financial performance, i.e., ROI, ROS, and cash flow, and one of marketing performance, i.e., market share, and company image. The financial measures (as other variables) were based on four-year averages to eliminate the impact of year-to-year fluctuations. ROI, cash-flow and market share are all widely used as indicators of performance, and are also key variables in product portfolio assessment [Buzzell, Gale and Sultan 1975; Day 1977; Hambrick, McMillan and Day 1982; Gale and Branch 1981; Jacobson and Aaker 1985; McMillan, Hambrick and Day 1982; Venkatraman and Ramanujam 1986]. More detailed definitions of each of the performance variables are contained in Appendix 3. Differences in performance between the six clusters were examined for each sample based on F-tests.
Finally, the impact of market environment characteristics on the performance of each strategy type was examined [Hofer 1975]. Here, twelve variables tapping aspects of the environment shown in previous studies to be related to competitive strategy and perforamnce [Hambrick 1983a, b], were submitted to a factor analysis. This resulted in the identification of four dimensions, rate of market growth, technological pressure, market concentration, and purchase concentration. A contingency analysis was then conducted, based on the top-loading variables on each of these factors. For each of these variables, both samples were split in half, i.e., high and low for each variable, and the performance of the six strategy types in each half compared for both U.S. and European market businesses. In each case, differences between the sample splits for each strategy type were examined based on T-tests. The AQD package to which PIMS researchers are restricted, contains an extremely limited number of multivariate procedures, and in particular, no multinominal logit nor multiple discriminant procedures. Consequently, ability to examine interactions in the data and between strategy variables and environmental conditions was extremely limited. Although not unsurprisingly, high market concentration was associated with high market share, significant effects were observed only in the case of the high/low growth environmental split. Thus, only the results of this latter analysis are reported in detail.
Identification of Key Competitive Strategy Components
The findings of the first phase of the analysis confirmed the existence of three major components of competitive marketing strategies, for both U.S. and European market samples. As hypothesized, these related to: 1) marketing tactics, i.e., product strategy and promotional expenditure, 2) market scope, and 3) business synergy. The results of the two principal components analyses of the 17 strategy variables for the 250 U.S. businesses and the 187 European market businesses are shown in Tables 1 and 2. In each case seven factors were identified, accounting for 80% and 88% of the variance respectively. These are next discussed in more detail.
Three factors related to marketing tactics. These were: promotional expenditure relative to competitors; product quality and price relative to competitors; and the percent of new products relative to competitors. In the case of the U.S. businesses, these accounted for 13%, 10%, and 7% of variance, compared with 14%, 13% and 7% for the European market businesses. In both cases, relative advertising, sales force and promotional expenditure were all closely related, and unrelated to the other marketing mix variables. This component may, therefore, be viewed as a surrogate indicator of a product differentiation strategy as has been hypothesized in other studies [Hambrick 1983c]. The second component, product quality, was closely related to relative price, suggesting the existence of a “relative value” component, or in other words, that price was invariably aligned with perceived value. The percent of new products formed a separate and distinct component, which was later found to characterize a small but highly distinctive number of businesses in both samples.
Two factors appeared to tap strategy relating to market scope, i.e., the breadth of the served market, and the degree of market fragmentation. These accounted for 21% and 12% of the variance for the U.S. businesses, and 26% and 11% for the European market businesses. The breadth of the served market was defined in the terms of the number of customers and the breadth of product line relative to competition as well as the number of different customer types. Market fragmentation, on the other hand, was based on the concentration of immediate customers and end-users relative to competition. Both these components were often crucial in differentiating strategy clusters, and thus confirm the importance of one of Porter’s underlying dimensions in defining strategy.
The final two factors related to interrelation with other businesses and aspects of operations. These were the degree of forward vertical integration, and shared marketing effort with other businesses, which accounted for 9% and 8% of variance for the U.S. businesses, and 8% and 9% for the European market businesses. These components thus appeared to reflect the extent to which the business internalized marketing operations and attempted to achieve internal operating efficiencies and distribution control.
Not unsurprisingly, the strategy components identified are highly similar to those identified in previous studies utilizing the PIMS database [Galbraith and Schendel 1983; Hambrick 1983a]. Some differences do occur, but these are principally a function of differences in the initial set of variables included. Other studies included some cost and asset management variables that were not included here, since the main focus of the study was on examining marketing strategy variables, rather than asset management.
The six Competitive Strategy Clusters
Following the identification of seven highly similar factors for both samples, each was then clustered based on these components. As noted previously, in both cases, the six-cluster solution was selected as best defining key competitive strategy types. The average factor scores for the six clusters in each solution are shown in Tables 3 and 4.
The six strategy types identified in each of the two samples were highly similar in their key characteristics. In both cases, a “broad liner” cluster, characterized essentially by its broad market scope and highly quality, was identified. A second distinctive cluster, “the innovators,” was composed of businesses with an exceptionally high proportion of new products. A third group was characterized by a focused niche strategy and narrow market scope. In the case of the U.S. businesses, this was coupled with high product quality, though not in the case of the European businesses. Another group, “the synergists,” also had somewhat narrow scope, and in addition, high levels of shared expenditure. The two remaining groups had less clear cut profiles. In both samples, a group characterized by a high degree of vertical integration, was apparent. In the U.S., these businesses also had broad market scope, but not in the European market sample. the final cluster appeared to have no clarely directed strategy. In the U.S. these businesses had low quality, low levels of shared expenditure and narrow market scope, while in European markets, their low quality and low level of shared expenditures were coupled with low vertical integration.
Thus, while the main features of the six were highly similar in the two samples, especially for the more distinctive clusters, there were some differences with regard to other characteristics. There were also some differences in their levels of performance, and in the business characteristics of the clusters, especially with regard to the proportion of pioneers, and businesses of U.S. origin in the European market sample. The profiles of the six U.S. market clusters are next examined in more depth, and then contrasted with those of the European market businesses.
The Six U.S. Strategy Types
The Quality Broad-Liner
This group contained forty-nine businesses or 15% of the sample. It was characterized primarily by its broad market scope, and high product quality. The served market was broad in terms of number and type of customers as well as breadth of product line, and also reached a wide range of customers. Product quality was also the highest of any of the clusters, suggesting the broad based quality strategy of a market leader. Synergies with other businesses tended to be high, no doubt due to customer fragmentation. Consistent with their broad market scope/product quality strategy, the broad liners had high levels of market share, and the highest ROI and cash flow of any of the groups. These businesses cam from all types of industries. A distinctive feature of this cluster was, however, a relatively high proportion of pioneers. This tends to confirm findings of previous studies that pioneers are likely to have higher market share, broader product lines, and higher product quality than late entrants [Robinson and Fornell 1985; Robinson 1988].
The innovators were a small but highly distinctive group, the last to merge into the overall cluster solution. They were characterized essentially by the extremely high proportion of new products in their product line. However, somewhat surprisingly, relative product quality was only slightly above average, and promotional expenditure was very low. Hence, the main emphasis was on innovativeness, rather than marketing effort. Consistent with this lack of emphasis on marketing, levels of both horizontal and vertical integration were low. This group had surprinsingly high levels of performance. Market share was, for example, the highest of any group, and, while, as might be expected, they had negative cashflow, they had high levels of ROI. These businesses were predominantly capital goods businesses, with an above average number of late entrant businesses, suggesting that they were predominantly “market followers.”
The Integrated Marketer
The third cluster, the integrated marketers, accounted for about 24% of the sample. They exhibited some of the characteristics of the broad-liner group, i.e., broad market scope and above average quality. However, they also exhibited relatively high customer concentration and a high degree of vertical integration, suggesting a somewhat more concentrated and integrated approach. This group performed relatively well on both financial and marketing measures, though not as well as the broad-liners, suggesting somewhat of a “me too” strategy. Consistent with their broad market scope/product quality strategy, the integrated marketers had above average market share, as well as above average ROI and cash flow. As in the case of the “Broad-liners,” these businesses came from all types of industries, and also had an above average number of pioneers.
The Low Quality
The low quality group (20% of the sample) seemed to be the least clearly directed of any of the groups. Product market scope was narrow, product quality low, as well as shared marketing expenditure, thus strongly suggesting a “dogs” category. In addition, they not only had below average market share, but also performed exceptionally poorly on the ROI and ROS measures as well as having close to zero cash flow. These businesses appeared to be scattered across different industries and have few distinctive characteristics.
The “nichers,” another small group (6% of the sample), adopted a highly focused or ‘market niche’ strategy. They targeted a small number of highly concentrated customers with a relatively narrow product line. Product quality was also high, suggesting targeting to a premium high quality segment. Vertical integration was very low as also shared marketing effort, suggesting a customized strategy. In line with their focus, the nichers had a significantly smaller market share than the other groups, but financial performance was above average no doubt due to high product quality [Phillips, Chang and Buzzell 1983]. This group consisted primarily of components businesses with few raw materials businesses, where opportunities for customization were probably low.
The sixth group was the largest of all, and contained 30% of the sample. Like the nicher, this group tended to have a relatively narrow market scope, but product quality and percent new products were below average, A key facet of this business was a high level of shared marketing expenditure, suggesting a search for potential synergies. This group had below average performance on both financial and marketing measures, which may to some extent reflect low quality, absence of new products, etc. Once again these businesses came from all types of industries.
The Six European Market Clusters
As noted previously, the six European market clusters were similar in key characteristics, but exhibited some differences with regard to specific features, performance, and business characteristics. These are next examined in more detail.
The European broad-liner cluster was markedly similar to its counterpart in the U.S. market. The only significant difference was a high customer concentration rather than fragmentation, coupled with low shared expenditure. This suggested emphasis on offering a broad product range to a few large customers rather than to a wide range of customers. Again, financial performance was the highest of any group, and in this case market share was also extremely high. These businesses were also predominantly components businesses, and contained an extremely high proportion of pioneers as well as somewhat above average number of businesses of U.S. origin.
The innovator group was similar to that the U.S. market in its high proportion of new products, but was characterized by high promotional expenditure as compared with the low level in the U.S. market. Customer fragmentation also tended to be high. Market share was high, but ratings on other financial measures were moderate, though somewhat surprisingly, cash flow was less adversely affected than in the U.S. market. In addition, while in the U.S. market the innovator group consisted predominantly of capital goods businesses,, in the European market, most were raw material businesses and over two thirds were pioneers. Only two of these businesses were of U.S. origin, suggesting that U.S. businesses may be more likely to introduce new products in domestic market first.
The Integrated Marketer
Again, while this group shared the same high degree of integration as the U.S. market group, their market scope tended to be narrow, and customer fragmentation was also relatively high. Consistent with this, market share was low, and in addition, ROI and cash flow were the lowest of any of the European clusters. This group contained a substantial number of components businesses and also fewer pioneers than any other group.
The Low Quality
The low-quality group was similar in many characteristics to its counterpart in the U.S. market. The principal difference lay in the low degree of vertical integration. Somewhat surpringly, while market share was low, ROI and cashflow were the second highest of any group, suggesting that these business were being “milked.”
The nicher profile was substantially similar in both the U.S. and European markets. However, while in the U.S., this groups exhibited above average levels of finandial performance on ROI and ROS, in the European markets financial performance was somewhat below average especially with regard to ROS, though market share was somewhat above averae. Again, this group consisted predominantly of components and capital goods businesses, and had below average number of piorneers. The businesses were predominantly of U.S. origin, who appeared to have found an untapped niche in the European market.
The synergists also exhibited markedly similar characteristics in both U.S. and European markets. The only difference was a low degree of integration in the U.S. market versus high integration in the European market. Performance was again slightly below average.
Thus, four of the clusters — the broad-liners, the innovators, the nichers and the synergists, exhibited markedly similar characteristics in both the U.S. and European markets. These were also the clusters with the most distinctive and clear-cut strategies. They did, however, differ in some cases, with regard to financial performance as well as the proportion of pioneers, and companies of U.S. origin. The two remaining groups — the integrated marketers and the low qualitiy group, differed somewhat in the U.S. and European markets, especially in the case of the integrated marketers. In the U.S. market, this group paralleled the broad-liners’ strategy in many regards, and had relatively high levels of financial profitability, but in European markets, they appeared in many respects to be “dogs.” Conversely, the low quality group, exhibited extremely low profitability in U.S. markets, and above-average financial performance in European markets.
Market Environment Characteristics of the Six Strategy Types
The final aspect to be examined was the business environment characterizing the various strategy types. As noted earlier, previous research suggests that the effectiveness of different strategies will depend on the nature of the business and, in particular, the rate of market growth. In high growth markets, and in the expansion phase of the product life cycle, gains in market share are likely to be less costly and easier to achieve, and hence result in high levels of ROI [Day 1981; Day and Montgovermy 1983]. As an industry matures and growh levels out, a shake-out period characterized by market instability is like to occur, depressing levels of profitability and rendering gains in market share costly. Similarly, a high degree of buyer or seller concentration will create barriers to entry, and is likely to be associated with high market share and levels of financial performance.
Consistent with previous research findings, the contingency analysis of market growth in Table 5 indicated that financial performance was invariably higher under conditions of high growth, though market share was not necessarily higher. The difference in financial performance was especially marked in the case of European market business, where the overall or average level of growth was substantially lower than for U.S. domestic business.
In the case of the U.S. market business, approximately half the sample, i.e., the broad-liners, the innovators and the integrated marketers, had somewhat higher levels of ROI in high growth markets, though the first two groups had lower levels of cash flow, reflecting the costs of building a business in growth markets. The other half, i.e., the low quality, the nicher, and the synergist, had similar or lower levels of financial performance in high growth markets. In the case of the European market businesses, however, levels of ROI were substantially higher growth businesses of all strategy types. The difference was least marked for the low quality group, where businesses appeared to be milked. It was most dramatic in the case of the nicher, though these results need to be interpreted with extreme caution due to the small sample size. In general, cash flow did not appear to be adversely affected in high growth businesses in Europe as in the U.S. market. The only exception here were synergists. This may, however, be a reflection of the lower average growth rate and smaller size of the European market business.
Thus, market growth appeared to be an important factor conditioning levels of financial performance especially in the European market. Other environmental factors did not, however, appear to play an important role. In addition, few significant differences were observed in the environmental context characterizing different strategy types, although innovators were more likely to be younger product business in markets, with strong technological pressures. This may, however, in part be due to the nature of the sample, which consists predominantly of mature businesses with moderate to high levels of market shares in a somewhat limited range of environmental conditions.
The findings thus provide a number of insights with regard to the nature of competitive strategy in markets outside in U.S. in the first place, the basic components of competitive strategy, and the same generic competitive strategy types appear to occur among businesses in European as in U.S. markets. Some differences were, however, observed with regard to certain aspects of strategy, especially with regard to the integrated marketer groups. Secondly, some differences were observed in the performance and business characteristics of the strategy types. These were especially marked with regard to the integrated marketer and the low quality group, and to a less extent, the innovator and nicher group. Finally, levels of financial performance appeared to be higher in high growth markets, especially in European markets. However, other environmental characteristics did not appear to play an important role in conditioning competitive strategy types.
It should, however, be emphasized that these findings should be viewed as tentative in view of the nature of the sample, which consists of industrial businesses from the PIMS database. These cannot be considered representative of all types of industries, businesses of a given national origin, nor of a wide range of environmental characteristics. In the U.S., they are predominantly relatively successful medium to large businesses from Fortune 500 companies in growth or mature industries. In the European market, the sample is small, consisting of 67 businesses of U.S. origin, and 120 of European origin, of which a high proportion have corporate headquarters in the U.K. Hence, great caution needs to be exercised in interpreting the results as representative of European industrial businesses.
The findings relating to the three key research questions are next discussed in more detail.
In the first place, the results suggest that the basic components of a competitive strategy are the same, and that the same generic competitive strategies can be identified among industrial businesses in both the U.S. and Europe. However, while the main features of the six strategy types were highly similar in both market locations, some differences were observed with regard to specific characteristics, especially for the integrated marketer. In European markets the integrated marketers were characterized by a narrow product market scope, coupled with high customer fragmentation, in contrast to the broad market scope and above average quality of their U.S. counterparts. Similarly, while the broad-liners in the U.S. market exhibited low customer concentration, in European markets, the focused on a limited number of large customers. Innovators in European markets also had high levels of promotional expenditure, in contrast to low promotional expenditure of innovators in the U.S. This may, however, reflect the younger age of innovator business in European markets.
In addition, while similar strategy types identified in U.S. and European markets, differences were observed in the performance and business characteristics of a given strategy type between the two market locations. These were particularly marked in the case of the integrated marketers and the low quality group. In the European market, the integrated marketers had the lowest levels of financial performance of any of the six groups and also the lowest market share, compared with their somewhat above average performance in the U.S. Conversely, while the low quality group had the worst performance of any group in the U.S., they that high levels of ROI and cash flow in European markets. Market share was, however, extremely low, and the age of the businesses was well above average, suggesting that these businesses were being milked.
The innovator and nicher groups also had somewhat below average levels of financial performance in European markets, compared with the above average performance for their counterparts in the U.S. In the case of the innovators, cash flow was, however, moderately high in Europe compared with negative cash flow in the U.S., suggesting that despite high levels of promotional expenditure, the costs of developing and marketing new products were not as high. This group also consisted almost exclusively of businesses of European origin, suggesting that U.S. businesses were more likely to market established products in European markets rather than developing new products. The nicher group also had above average market share, which might therefore reflect a lack of bargaining power in the face of customer concentration. These business were also, with a single exception, of U.S. origin. However, the small number, i.e., seven, suggests that these results should be interpreted with extreme caution.
In both U.S. and European markets, levels of financial performance were generally higher in high growth markets. While this effect was observed for over half the sample in the U.S. market, it was considerably more marked in the European market and occurred in relation to all strategy types. Since overall rates of growth were substantially lower in European markets than in the U.S., one might perhaps conjecture that this finding reflects the higher fragmentation and smaller size of European markets, so that payoffs in growth markets are greater.
The study thus extends findings with regard to generic competitive strategies to markets outside the U.S., and more specifically, to European market businesses. In general, it suggests that the same underlying dimensions characterize competitive strategies and that the same competitive strategy types may be identified irrespective of market location. Specific characteristics of certain types may, however, vary, as also their business characteristics and performance, especially where strategy types are less clear cut.
In the first place, the extent to which certain clearly defined competitive strategy types such as the broad-liner or the innovator are to be found in all markets, while other, less clearly defined types such as the integrated marketer or the low quality group appear to vary both in terms of strategy and performance, might be further probed. In addition, the extent which certain strategy types are more likely to be pursued by firms of a given origin, or in domestic as opposed to overseas markets might be investigated. Secondly, the extent to which the business environment impacts the effectiveness of specific competitive strategies, needs to be further examined. While the present study provides some evidence to suggest that market growth is a key factor conditioning performance, this finding and the role of other environmental factors needs to be more broadly studied under a wider and more diverse range of conditions. This would appear to be especially important since environmental conditions may vary significantly in different foreign markets.
More extensive research probing these issues is therefore needed. This should focus on the use of larger samples, covering a wider range of businesses, including companies of more diverse national origins relative to different types of country markets, ranging from highly industrialized nations to developing countries. This might, therefore, shed some further light on the factors underlying effective competitive strategies and their effectiveness under different business environment conditions.
Flynn, Barbara B., and E. James Flynn. “Achieving Simultaneous Cost and Differentiation Competitive Advantages through Continuous Improvement: World Class Manufacturing as a Competitive Strategy.” Journal of Managerial Issues 8.3 (1996): 360+. 3 December 2005 <http://www.questia.com/PM.qst?a=o&d=5000425664>.
Achieving simultaneous cost and differentiation competitive advantages through continuous improvement: world class manufacturing as a competitive strategy.
by E. James Flynn , Barbara B. Flynn
Since the early 1980s, the issue of the competitiveness of U.S. industry has been widely discussed because of an increased awareness of global competition and the appreciation that management approaches transcend national boundaries. This has resulted in what Hayes and Wheelwright (1984) described as the world class manufacturing (WCM) approach. WCM is based on creating and sustaining a manufacturing-based competitive advantage by using the best management practices, regardless of their national origin. It focuses on continuous improvement of all aspects of the firm, not just manufacturing, by emphasizing the integration of practices related to human resources management, product and process management, and organization characteristics, in order to develop manufacturing capability as a competitive weapon. By achieving continuous improvement throughout the firm, world class manufacturers can provide products that achieve economies of scope (cost reduction through the ability to share activities), as well as revised economies of scale (cost reduction through the efficiencies associated with high volume production) which result in products that can attain and sustain several competitive advantages simultaneously. This ability to achieve simultaneous competitive advantages enables WCM to be viewed in the context of strategic management, which is the goal of this article.
The most dominant strategic management paradigm in recent years is known as the competitive strategies model (Fredrickson, 1991; Hambrick, 1990). Exemplified by Porter’s (1980, 1985, 1990) work, this approach addresses the issue of how firms compete within their product markets. Porter identified two competitive advantages that provide a firm with a defensible position: lower cost and differentiation. The lower cost advantage is defined as the ability to more efficiently design, manufacture, and distribute a comparable product than the competition. Products with unique and superior value–in terms of quality, features, and after-sales service–are examples of the differentiation competitive advantage. Pursuing one of these advantages will make a firm’s product or service unique, and is strongly recommended so the firm is not “stuck in the middle” (Porter, 1991: 40), where, by pursuing both competitive advantages, neither is achieved.
Thus, there is an apparent contradiction between WCM and the competitive strategies paradigm. The competitive strategies approach identifies two competitive advantages, either of which can be successful, but only individually. Attempting to pursue simultaneous competitive advantages will result in “strategic mediocrity,” except for firms in unusual industry niches (Porter, 1991: 40). This appears to contradict WCM’s intentional goal of simultaneously achieving excellence on several product attributes, or potential competitive advantages, to create a position that is especially difficult to challenge.
This article attempts to reconcile these apparently disparate perspectives by synthesizing concepts from the literature of strategic management and operations management. It begins with brief overviews of the WCM and competitive advantages approaches. Although many of the individual practices included in WCM have been previously examined in the literature of diverse fields, including organization theory, human re. sources management, operations management, as well as other areas, the WCM approach brings these diverse practices and approaches together under a common umbrella. The article then examines the theoretical and empirical work that has challenged Porter’s assertion that it is unlikely a firm’s products can be both lower cost and differentiated, including drawing upon the WCM literature for support. It concludes by extracting a set of propositions to guide re. search related to attaining and sustaining competitive advantages.
World Class Manufacturing
It has been noted that corporate and business level strategy have often overlooked the manufacturing function (Kotha and Orne, 1989). Indeed, Skinner (1969) claimed the focus of corporate strategy on a firm’s business mix and short-term profitability had eroded the manufacturing infrastructure and its potential link with long-term profitability. Meanwhile, business level strategy has focused primarily on product positioning (Mintzberg, 1988) and has generated only limited discussion on how to actually produce a product or service that fits the prescribed Position (i.e., Porter’s value chain (1985) and Kotha and Orne (1989)).
Hayes and Wheelwright (1984) proposed that manufacturing’s strategic role and integration with corporate and business strategy falls along a continuum that can be portrayed in four stages. In the tint stage, the manufacturing function is viewed as a potential detriment to the firm, or as neutral at best. Tight controls over all manufacturing functions are deemed essential. Stage two firms still view manufacturing as a detriment or as neutral, however, they have an external focus, looking to industry standards and the advice of consultants as guidelines in managing the manufacturing function. Stage three firms have developed their manufacturing functions and incorporate the capabilities of manufacturing into their strategic plans. Finally, the manufacturing function is the very strength of the firm in stage 4 firms and forms their basis for competition. Hayes and Wheelwright (1984) first used the term “world class manufacturing” to describe stage four firms, identifiable by their ability to develop and use their manufacturing capability as the key to attaining and sustaining a global competitive advantage. Since then, the concept has been elaborated by others, particularly Schonberger (1986, 1991), as attaining sustainable global competitive advantages through the continuous improvement of manufacturing capability.
The WCM approach is based upon the recognition that advanced manufacturing firms can overcome the trade-off between cost and quality, speed, and flexibility (DeMeyer et al., 1989; Ferdows and DeMeyer, 1990) through the continuous improvement of products and services. The ability to develop and exploit multiple capabilities is achieved through an integrated system of management practices that focus on: 1) getting operations and related processes under control; 2) designing processes to consistently produce the product correctly; 3) continuously improving product and manufacturing process management; and 4) ultimately, providing the basis for creating and sustaining a competitive advantage, WCM shifts the focus of the manufacturing function from simply reacting to the firm’s strategic plan to being a vital participant in business level strategy formulation (Anderson et al., 1989). Thus, in a WCM firm, manufacturing is not simply helpful to business strategy, it becomes the catalyst of success (Vickery et al., 1993).
The integrative and, consequently, most powerful core component of WCM is its emphasis on continuous improvement in all areas that have an influence on manufacturing and, consequently, on competitive attributes. In addition to specific manufacturing processes and product improvements, continuous improvements are also made to the infrastructure which supports manufacturing operations. Because a product’s features (including cost, quality, and delivery speed) are ultimately integrated in WCM, improvements in them become concurrent (Ferdows and DeMeyer, 1990), and thereby allow the firm to achieve economies of scope. A WCM firm can continuously improve simultaneous competitive attributes, creating a moving target on several dimensions that is very difficult for competitors to attack, especially if competitors focus on a simple dimension. D’Aveni (1994) described these types of firms as hypercompetitive firms. Thus, the competitive advantage of a World Class Manufacturer is built on outstanding performance on several competitive dimensions, as well as a continuous improvement among them, which gives it the ability to repeatedly gain temporary advantages which yield a sustainable competitive advantage (D’Aveni, 1994).
A general model of WCM is presented in Figure 1. The left-hand side of the figure identifies the types of practices typically used by world class manufacturers, although few firms have been seen incorporating all of them. The figure also highlights the integration of WCM practices throughout the firm (Flynn et al, 1989).
The goal of WCM, achieving a global competitive position, is shown at the far right in Figure 1. It is attained through superior manufacturing system performance, as indicated by the five manufacturing performance measures, each of which directly reflects a competitive attribute. This goal can be achieved through the continuous improvement of manufacturing capability. Once this has been established, continuous improvement in these characteristics makes it difficult for competitors to catch up with or copy them, permitting superiority to be sustained by destroying a firm’s own previous standards and advantage.
As identified in Figure 1, the performance characteristics of a World Class Manufacturer (simultaneous high quality, low costs, on time deliver), volume flexibility and product line flexibility) are its sources of competitive advantage. The ability to continuously improve manufacturing capabilities, through product cost, quality, dependability and flexibility, means that world class manufacturers can achieve simultaneous competitive advantages. For example, as manufacturing capability continuously improves, the need for rework of defective items is lessened, thereby lowering cost and improving quality, while simultaneously reducing delivery lead times. Thus, continuous improvement of manufacturing capability by a World Class Manufacturer is directly related to improving its competitive position, in terms of its product line flexibility, volume flexibility, quality, timeliness of delivery, and cost. In WCM, these competitive features are riot trade-offs, but are sequentially Connected like a sandhill, where the hill can only grow taller as its base expands (Ferdows and DeMeyer, 1990). Thus, the dimensions of manufacturing performance measures are inexorably linked among one another (are not trade-offs).
At the left of Figure 1 are various types of practices used by world class manufacturers, grouped into organizational characteristics, product and process management practices, and human resources management practices. The product and process management practices and approaches of world class manufacturers are associated with Total Quality Management (Schonberger, 1986), Just-in-Time (Hall, 1983), continuous improvement of process technology (Wheelwright and Hayes, 1985), preventive maintenance (Garvin, 1984), running machines at less than design capacity (Hayes, 1981), and concurrent engineering (Hartley, 1992).
Because these practices cut across functions and, representing potential coordination and linkage problems, there is a need for group problem solving and coordination of decision making between diverse functional areas (Ettlie and Reza, 1992: Kim et al., 1992; Parthasarthy and Sethi, 1992). The use of groups and coordinating mechanisms is enhanced by certain types of organizational characteristics and human resource management practices. Organizational characteristics typical of world class manufacturers include: decentralization of decision making(Collins et al., 1988); formalization of procedures in order to foster employee flexibility (Pugh et al., 1969); integrating mechanisms to ensure that decentralized decision making is not counterproductive (Galbraith, 1973; Lawrence and Lorsch, 1969; Hrebiniak and Joyce, 1984); and output control in the form of immediate feedback (Ouchi, 1980; Ashford and Cummings, 1984). These practices solve problems that hinder continuous improvement, as well as create the capability to allow variety in product design and volume, which are prerequisites to competing on flexibility. The effect of these characteristics enables the manufacturing system to respond quickly and accurately to problems, which creates economies of scope by sharing activities and transferring competencies among firm units (Porter, 1985; Prayeer and Kazanjian, 1995).
The human resource management practices typical of world class manufacturers include egalitarian approaches that minimize the distance between levels in the organizational hierarchy (Ziskin, 1986) and facilitate both decentralized decision making and integration across functional areas, resulting in improved economies of scope. In addition, egalitarian practices seek to create a high degree of cohesiveness (Ouchi, 1980), encouraging the development of group values and norms and providing a strong sense of community (Gordon, 1985). Other common practices include extensive training in both specific job skills and in skills that enhance decentralized and integrated decision making, such as small group problem solving, communication, and statistical process control (Garvin, 1984). Compensation approaches which reward group problem solving and multiskill expertise, including group compensation plans (Suzawa, 1985) and pay-for-skill approaches (Lawier and Ledford, 1985), are frequently used by world class manufacturers.
The organizational characteristics and human resource practices provide linkages and coordination across the firm, thereby forming the infrastructure among diverse pans of the firm that support improvements in manufacturing processes and products, is well as economies of scope (Powell, 1995: Miller and Shamsie, 1996). Likewise, manufacturing processes and product improvements also influence organizational characteristics and human resources management practices. As Porter noted, “careful management of linkages can be a decisive source of competitive advantage” (1990: 42). A world class manufacturer creates its advantage by effectively managing its linkages.
Competitive Strategies Model
Strategic management’s most dominant paradigm is Porter’s (1980, 1985, 1990) competitive strategies model (Fredrickson, 1990; Hambrick, 1990; Hill, 1988), which addresses how a firm competes within its product markets to gain and sustain a Competitive advantage. A competitive advantage is achieved when a firm’s product is viewed by its customers as having a higher value than the product of its competitors (Porter, 1985).
Porter (1980, 1985, 1990) identified two types of competitive advantage which help a firm create a defensible position and thus outperform its competition: A lower cost competitive advantage occurs when a firm designs, produces and markets its product more efficiently than its competitors (Porter, 1990). In contrast, a differentiation competitive advantage exists when a firm can make its product unique from its competitors. In either case, the firm produces a product that has a value to the customer. Porter defines lower cost as providing comparable value more efficiently, and differentiation as providing a product whose attributes create more value than its competitors create in their products.
A firm that pursues a lower cost competitive advantage strives to improve its profitability by having lower costs, relative to its industry (Porter, 1980, 1985, 1990). When product value is at or near the competitors’, lower cost translates into superior returns. Thus, lower cost products derive their advantage from the fact that customers purchase them because they get a comparably valued product for less cost. These superior returns then can be reinvested in new manufacturing equipment and facilities that promote maintenance of the cost leadership position (Phillips et al., 1985). Thus, firms which pursue a lower cost competitive advantage focus their efforts on asset use, employee productivity, discretionary expenses (Hambrick, 1983; Segev, 1989), efficiency, experience curve policies, overhead control, and other cost reductions (Galbraith and Schendel, 1983). They also often rely on economies of scale. Of course, a firm cannot neglect quality, service, and other important areas if it expects to sustain its competitive advantage; however, these are not the primary components of a lower cost competitive advantage.
A differentiation competitive advantage prescribes that a firm achieve and maintain a means of making its product unique from its competitors’ products (Galbraith and Schendel, 1983; Kotha and Orne, 1989). The advantage of differentiation is based on the additional value the product possesses, for which the customer will pay a premium. While additional value may be created through a variety of means, such as quality, service, brand image, or distribution (Dess and Davits, 1984), superior quality is the means of differentiation which is most often used (Galbraith and Schendel, 1983). Thus, successful differentiation permits a firm to command premium prices (Porter, 1990) for this additional value. A differentiated product engenders customer loyalty, reducing customer sensitivity to price and protecting the business from other competitive forces which could reduce price-cost margins (Phillips et al., 1983). While a firm that pursues a differentiation competitive advantage should not ignore costs, they are not the key ingredient in its strategy.
Porter advocates that ever)’ firm must make a choice about which competitive advantage it will pursue:
It is difficult, though not impossible, to be
both lower cost and differentiated relative
to competitors. Achieving both is difficult,
became providing unique performance,
quality or service ia inherently costly
Clearly, this is incompatible with the tenet of WCM that it costs less to make the product correctly the first time (Schonberger, 1986). World class manufacturers link lower cost and increased value by producing products that feature differentiation (high quality, on-time delivery, product flexibility and volume flexibility) at lower Cost for that value. The popular press has reported anecdotal evidence Of this occurring, with some Japanese manufacturing firms (e.g., Toyota, Kawasaki, Sony) becoming almost mythical in their reputation for producing extremely high quality products at a very low cost (Phillips et al., 1983: White, 1986; Schonberger, 1986). This evidence raises the question of whether Porter was incorrect in his assertion, whether this evidence represents the exception, rather than the norm, or whether WCM may have created new dynamics which supersede those discussed by Porter.
The Relationship Between Competitive Strategies and WCM
In spite of the apparent incompatibility between the competitive strategies model and the WCM model, the competitive strategies model offers a great deal of potential for interpreting WCM. Conversely, WCM generates unique insights into the nature and evolution of competitive advantages.
The competitive strategies model identifies the ways in which firms successfully compete, as well as providing general guidance in determining how those strategies can be implemented. Like the competitive advantages approach, WCM represents a set of choices about managing and configuring the firm; however, it does so in more detail and with a continuous focus on increasing a product’s value on several dimensions while lowering cost. In doing so, it provides a means for simultaneously achieving lower cost and differentiation competitive advantages, which as noted earlier, Porter (1980, 1985, 1991) claims only can happen under unusual circumstances. Similar to the WCM approach, Porter emphasizes that a firm should be managed as an entire system, rather than as a collection of separate parts, in creating value in a product. Coordination between a firm’s activities (the value chain) is vital because it allows the substitution of a less costly operation in one area for a more expensive operation in another (Porter, 1990). WCM expands on this by incorporating both coordination and development of less costly operations processes and procedures.
However, there is some question whether the competitive strategies model adequately explains the strategic importance of world class manufacturing. This is based on the issue of whether differentiation is both inherently more expensive and, ultimately, in direct competition with lower cost. In 1980, Porter described lower cost and differentiation as incompatible and mutually exclusive, or as endpoints on a unidimensional continuum (Hambrick, 1983). Since then he has stated,
Each … involves a fundamentally different
route to competitive advantage. Achieving
a competitive advantage requires a firm to
make a choice (1985:11).
The worst strategic error is to be stuck in the
middle, or to try simultaneously to pursue all
the strategies. This is a recipe for strategic
mediocrity and below average performance,
because pursuing all strategies simultaneously
means that a finn cannot achieve
any of there’?because of their inherent contradictions
However, Porter acknowledged that a firm may be successful in pursuing both a lower cost and a differentiation competitive advantage simultaneously:
Reducing cots does not always involve a sacrifice
in differentiation. Many firms have
discovered ways to reduce cost, not only
without hurting their differentiation, but
while actually raising it, by ming practices
that are both more efficient and effective or
by employing a different technology (1985:
Indeed, Porter (1985) stated that in what were the rare occasions when firms were successful at simultaneously pursuing both competitive advantages they reaped even greater benefits than firms which pursue only one competitive advantage:
If a firm can achieve cost leadership and
differentiation simultaneously, the rewards
are great became the benefits are additive–differentiation
leach to premium
prices when cost leadership implies lower
costs (1985: 18).
While Porter describes performance similar to that achieved by world class manufacturers, he severely limits the set of situations in which it may be achieved. The simultaneous pursuit of both competitive advantages will be successful in one of only three situations: 1) in a market where all competitors fail to consistently pursue one competitive advantage or the other (all are “stuck in the middle”; thus, the firm that is best at pursuing both will be the most successful); 2) where cost is strongly affected by market share or the interrelationships between industries; or S) where a firm pioneers a major product or process innovation.
At first glance, it appears that the third situation could describe WCM. While world class manufacturers are innovative, the goal in WCM is not the rare and infrequent major innovation, but rather the continuous, incremental improvements that constantly advance a firm’s competitive advantages (Hartley, 1992). Thus, continuously improving product designs, manufacturing processes, and associated supportive infrastructure rather than major innovations produces a regular series of incremental improvements. For example, evidence from Japanese manufacturers in recent decades has shown that product enhancement ia better managed as a series of small improvements rather than large major enhancements, such as new “model years” for automobiles (Maskill, 1991). The cutting edge in any particular technology represents the accumulation of incremental improvements (Weiss and Birnbaum, 1989). Thus, a goal of WCM ia to continuously work on developing product features or neW products, while improving existing products and processes (Gomory, 1989) to increase their value to customers.
Striving for major breakthroughs is actively discouraged by world class manufacturers, because it leaves most firms in a situation of constantly trying to “catch up” (Stalk and Hour, 1990). Firms that seek only breakthroughs in product and process development are often surprised by changes in the market and their competitors’ approaches. This leaves them with two distasteful choices: 1) to proceed as planned, introducing a product design breakthrough conceived to meet a market need that no longer exists, or 2) to stop the development effort, redirecting and restarting it, which causes further delays and risks exposure to additional market and competitive change.
The incremental product improvement strategy of world class manufacturers is effective because their production processes are under control, and production personnel can be rapidly trained to effectively manage pilot production, as well as possessing the flexibility to slot improvements into production schedules with a minimum of disruption. On the other hand, breakthroughs are traditionally preferred by companies that do not have effective control of production processes and cannot effectively manage many small changes (Maskill, 1991). These firms compete solely on the basis of innovation, which means that cost, quality, and delivery are not managed effectively. This is a problematic strategy, because once an innovation has been copied, the innovating firm no longer has a competitive advantage.
Porter states that, as competitors begin to imitate a successful firm, it will ultimately be forced to make a choice between lower cost and differentiation:
Firms can improve technology, and methods
in ways that simultaneously reduce cost and
improve differentiation. In the long run,
however, competitors will imitate and force
a choice of which type of advantage to emphasize
This conclusion fails to recognize that continuous improvement can make successful imitation extremely unlikely because it creates a moving target; the imitating firm is attempting to duplicate a performance level the target firm will soon surpass. Continuous improvement is based upon the consistent and additive advantages of many changes that complicate a firms’ processes and systems, thereby making it difficult for other firms to imitate them (Barney, 1991).
Researchers in operations management (Ferdows and DeMeyer, 1990; Hall, 1983; Schonberger, 1986) have documented how pursuing high quality can lead to lower costs in the long mn, than will the pursuit of lesser quality for the sake of obtaining a lower cost competitive advantage. A classic book on quality management, entitled Quality is Free (Crosby, 1979), professes that, although increased inspection and quality training can be costly initially, the benefit comes from the lowered cost of not having to build, maintain, and operate the “hidden plant” (the additional space, machines, material, and people required to correct defects), which averages 30% of manufacturing costs (Grant, 1992).
Ferdows and DeMeyer (1990) note that a firm’s performance capabilities are cumulative and sequential and must be managed as such for them to be achieved. Specifically, quality provides the foundation for dependability, which leads to production flexibility, and only then can cost be fully addressed. As these capabilities evolve, World Class Manufacturers destroy their own competitive advantages and continuously generate new advantages, which D’Aveni (1994) described as hypercompetition. On the other hand, the competitive strategies model views the cost of implementing quality management as inherently continuous and, therefore, detrimental to a lower cost position. Thus, the competitive strategies model suggests that firms have to manage competitive attributes as contradictory, while WCM is based on the belief that they are complementary.
WCM extends the logic of continuous improvement to all areas of the business unit. For example, WCM’s use of Just-in-Time (JIT), which focuses on improving material flows through the production system by exposing problems in the manufacturing process and solving them, ultimately has benefits beyond the production system. When material flows are improved, inventories are reduced. Both outcomes reduce lead time and costs. In order to improve material flows, efforts must be undertaken to coordinate, decentralize, and integrate decision making throughout the company, which requires improved information flows (Galbraith, 1973). These improved information flows facilitate joint product and process engineering (traditionally discrete activities), emphasizing “getting the bugs out” before production rather than rushing a questionable product to the market or delaying product introduction until the problems are corrected (Hartley, 1992). This leads to improved product line flexibility and faster innovation. The synthesis of WCM practices results in successfully sharing activities, creating economies of scope that complement new smaller volume economies of scale (Jones and Buffer, 1988; Sriram and Gupta, 1991), rather than requiting manufacturing based on large volumes. The combination of economies of scope and scale results in products which are less costly, higher quality, more rapidly developed and delivered, and more customized. Such a product is one that few customers can resist and one which other firms will have great difficulty competing with.
The strategic importance of continuous improvement and the comprehensive nature of WCM are indicated in a set of recent studies. Vickery et al. (1993) showed that production competence is related to business performance and that it may have increased importance if competition shifts to quality, customization, service and/or speed. Ward et al. (1994) reported that manufacturing proactiveness is related to higher performance. Product development competence, which is a heavily cross-functional competence, was shown to be the key variable in six measures of business performance (Droge et al., 1994). The behavioral characteristics of total quality management, firm culture empowerment, and managerial commitment have been reported to produce economic benefits to the firm (Powell, 1995). Recently, Miller and Shamsie (1996) reported that in more uncertain industries, skills which promote the ability to adapt, which they refer to as knowledge-based assets, are more useful than property-based assets.
The competitive strategies model is based on larger volume, standardized products, which require economies of scale as a major driver of lower cost advantages. This is because traditional manufacturing technology, processes, and management achieve low cost in mass produced standardized products. The technology and processes further encourage mass production because changeover time (a linkage) is extensive. In contrast, WCM, with its focus on integration and coordination, reduces changeover time tremendously, as well as emphasizing manufacturing technologies and processes that lower average total cost over smaller volumes than a mass production system. As a result, WCM achieves both economies of scope and economies of scale and their resulting benefits.
Theoretical Support for Simultaneous Competitive Advantages
Several strategic management researchers have also questioned the competitive strategy model’s assertion that differentiation (particularly on high quality) and low cost should not be pursued simultaneously. Hambrick (1983) stated that each genetic strategy, is composed of three dimensions. These are efficiency (the degree to which inputs per unit of output are low); differentiation (the degree to which the product or its enhancements are perceived as unique); and scale/scope (the relative size and range of activities of the business within its industry). Hambrick also argued that, although efficiency and differentiation may be generally incompatible, they do not represent opposite ends of a single continuum. Because each genetic strategy is a combination of efficiency, differentiation, and scale/ scope, it is possible to excel at several strategies, especially as they focus on the scale/scope dimensions. Further support for this notion was provided by Jones and Buffer (1988), who noted that both competitive advantages are subject to the same underlying cost trade-offs rather than representing a trade-off. Therefore, they are not at opposite ends of the strategy continuum. Thus, according to both Hambrick (1983) and Jones and Buffer (1988), the differences between the competitive advantages are in the degree to which they are pursued, not a discrete choice of one over the other.
Continuing the argument that strategy is multidimensional, Murray (1088) noted there are certain preconditions necessary for a firm to pursue each competitive advantage. The preconditions for cost leadership stem principally from the industry’s structural characteristics, while the preconditions for differentiation stem primarily from customer tastes. Clearly, the two sets of preconditions are not mutually exclusive. WCM, with its reduced changeover and lead times, facilitates customization of products thereby enabling firms to take advantage of these conditions.
Hill (1988) observed two weaknesses in the competitive strategies model. First, many industries do not have a unique low cost position. This is particularly true of mature industries, where most firms have already achieved minimum-cost structures. In these industries, firms which also differentiate are rewarded by superior economic performance because their products will have more value. Thus, establishing a sustained competitive advantage in these industries may require a firm to simultaneously pursue both low cost and differentiation competitive advantages. Second, Hill demonstrated that differentiation can be a means to achieve an overall low cost, position. Although the immediate effect of differentiation may be to increase unit costs, there is frequently a long-run reduction of cost as demand for a more valuable product increases, due to learning effects and economies of scale and scope. The ability of differentiation to help achieve a low cost position depends on two additional factors: 1) the extent to which differentiation significantly increases demand, shifting the demand curve to the tight; and 2) the extent to Which significant reductions in unit costs arise from the increasing volume, which generally occurs for any type of manufacturing. Thus, when a firm follows a differentiation strategy, it may often also achieve a lower cost position.
While Hill’s explanation has profound implications because it includes discussion of a manufacturing-based competitive advantage, it is incomplete because it focuses solely on an economics-based interpretation of the relationship between cost and differentiation. WCM is more complete because it is based on the thesis that not only does the demand curve move to the fight with improved product features (quality, speed, flexibility, customization), but that it also costs less to continuously expose and eliminate problems, which subsequently reduces costs, rather than work around them. By controlling manufacturing processes, output is virtually defect free, on time, and flexible, and thus eliminates the need for inspection, rework, expediting, “fire fighting” (Schonberger, 1986), or the “hidden plant” (Grant, 1992). Thus, WCM is not based solely on the achievement of economies of scale, nor does it require that capital investment in state-of-the-art machinery is necessary to achieve low cost. It is based on controlling the manufacturing system in its broadest definition, thereby controlling more drivers of cost and quality, creating a product of greater value.
Mintzberg (1988) claimed that there are actually seven generic approaches to differentiating a product, each making a different strategy possible. The seven differentiators are: cost, image, support, design, quality, functional and undifferentiated (generic). Firms will alter whichever of the seven differentiators they can to achieve a competitive position. For example, Mintzberg specifically stated the competitive advantage of lower cost does not occur until the cost is translated into price. Thus, if the lower cost is used in a strategy, the firm is a price differentiator, because it is the product’s price, not the cost to produce it, on which it competes in the marketplace. More importantly, Mintzberg (1988) also stated the seven forms of differentiation are on equal footing, competing against each other, not that cost is a distinct competitive advantage against which all other types of competitive advantage must compete, as stated by Porter (1980).
Reinforcing Mintzberg’s (1988) thesis of several dimensions of differentiation are the multi-attribute models of consumer behavior (Ahtola, 1975; Hughes, 1974; Ginter, 1974). Consumer purchasing decisions are complex activities involving concurrent evaluation of multiple attributes with the goal of maximizing their match with consumer preferences. Ahtola (1975) proposed there are several concepts contained in any one dimension. When consumers make buying decisions based on multiple attributes, a simple attribute advantage may not be sufficient. Even when other attributes are equal, superiority on a single attribute may not be sufficient because that attribute may not be critical to the buyer’s decision, or other products may have a pattern of attribute strengths which more closely matches the multi-attribute criteria of the customer, resulting in a competitive advantage position.
More recently, D’Aveni (1994) presented a harsh criticism of Porter’s model for being static, rather than dynamic, and being “a simple accounting-based view of where profits come from” (1994: 3). He notes that a dynamic strategy model would incorporate how competitors would react and maneuver the four bases of competition: 1) cost and quality, 2) timing and knowhow, 3) strongholds, and 4) deep pockets. This has resulted in hypercompetition, where the goal of strategy is to achieve a temporary advantage and continuously disrupt the market, in order to destroy the advantage of competitors. This is very consistent with WCM’s emphasis on continuous improvement of manufacturing capability to simultaneously improve the five dimensions of manufacturing performance and competitive advantage.
Thus, there are several authors, representing a variety of academic fields (consumer behavior, operations management and strategic management), who conclude that the ability to link multiple competitive advantages is not as constrained as Porter (1985) claims. They claim it is possible, and some claim it is even common, to simultaneously pursue multiple attributes or competitive advantages. Their conclusions are based on different theses: strategy is multidimensional; shifting demand curves achieve new economies of Kale; the removal of the “hidden plant” reduces costs and improves quality; and consumer behavior as a multiattribute-based decision. Collectively, they reveal that not only does WCM improve manufacturing capability and performance, but it can also change the competitive dynamics by simultaneously lowering costs, and improving speed, quality and customization, all of which may be important to customers. When a continuous improvement focus is used, it creates a moving target on all these dimensions, resulting in a continuously improving competitive advantage which is even more difficult to duplicate.
Empirical Support: Observations of Simultaneous Competitive Advantages
The empirical research supporting the achievement of simultaneous competitive advantages is intriguing because in each case the intent of the study was not to refute Porter’s assertation that it is unusual to achieve them. Phillips et al. (1984) found that quality was positively associated with increased market share and negatively associated with relative direct costa, indicating that high quality was less costly. These findings supported the earlier work of Fine (1083), who found that costs declined more rapidly for firms that produced higher quality products. Almost one-third of the 69 business units studied by White (1986) successfully combined both competitive advantages and had an average return on investment that was higher than the return of business units which were the most successful at creating a single competitive advantage.
In addition, Ferdows and DeMeyer (1990) observed the “sandcone” model, in which cost reduction is achieved only after other manufacturing competencies are developed. This suggests that true control of manufacturing and its related processes is the ultimate source of a lower cost advantage. The sandcone model has the additional benefit of showing the development of advantages in other sources of differentiation, including quality, speed, and product flexibility.
Motorola’s “Six Sigma Program” refutes the traditional assumption that there is a critical point after which both costs and quality increase. Its success with this program illustrates the significance of the “hidden plant,” and how gaining control of manufacturing processes yields more competitive benefits than a program designed to control costs or increase differentiation (Grant, 1992).
In a study of Mintzberg’s (1988) typology discussed above, Kotha and Vadlamani (1995) found strong support for the typology. They concluded that WCM technologies and practices may have increased the complexity of competition, which calls for more fine-grained strategies, as is indicated in Mintzberg’s typology.
There is diverse theoretical, empirical, and anecdotal support in both the operations management and strategic management literatures that it is possible to simultaneously achieve lower cost and differentiation competitive advantages. However, these literatures have not acknowledged the contributions of each other. For example, the strategic management critics of Porter who have described simultaneous competitive advantages have not incorporated the contributions from the WCM approach. Also, the proponents of WCM have focused on operations issues and seldom described their advantages in a directly competitive context. Combined, these literature streams integrate knowledge of firm skills and practices with how the product competes, making a compelling argument for combining them in theory, teaching, and practice.
World Class Manufacturing as a Research Paradigm: Implications for Competitive Advantage
As noted earlier, WCM is built upon the premise that continuous improvement of product and process management, including organizational characteristics and human resource management practices, may result in products with several competitive advantages. These characteristics are at the upper end of Porter’s (1990) hierarchy of the sources of competitive advantage. Porter notes that success at this end of the hierarchy is difficult for other firms to compete with. Thus, the following research proposition can be stated.
Proposition 1: Firms that are world class
manufacturers will have higher-order
sources of competitive advantage than their
Higher-order advantages are more durable and less vulnerable to competitor duplication. Achieving these advantages requires more advanced skills, including highly trained personnel, internal technical capability, and linkages among different parts of the firm. World class manufacturers effectively develop and implement an integrated system of management, based on organizational characteristics, human resource practices and advanced skills for interfunctional cooperation, teamwork, a flexible work force and decentralization. The final result is extremely high value products which are outstanding on several dimensions. These characteristics are very difficult to duplicate and in themselves become a source of competitive advantage (Barney, 1991). This leads to the conclusion:
Proposition 2: Firms with a more thorough
and better integrated system of firm characteristics,
manufacturing process, and
product management, and human resource
management are more likely to achieve simultaneous
The key component of world class manufacturing is its focus on continuous improvement of its manufacturing capability, and product characteristics. Even Porter states that the most important reason that a competitive advantage is sustained is continuous improvement and upgrading.
Virtually any advantage can be replicated
sooner or later if a leader rests on its laurels.
In order to sustain advantage, a firm mint
become a moving target, creating new advantages
as fast as competitors can replicate
old ones (1991: 51).
Proposition 3: The stronger a firm’s commitment
to continuous improvement of its
processes and products, the higher the order
of its competitive advantages.
Further, Porter (1991) noted that constant manufacturing process and product upgrading and improvement increase the sustainability of a competitive advantage. Thus, two corollaries of Proposition 3 can be stated,
Corollary 1: If a firm embraces continuous
improvement, it will sustain its competitive
Corollary 2: Competitive advantages based
on continuous improvement will be difficult
When a firm is successful in developing continuous improvement capabilities, it has the ability to destroy existing competitive advantages, including its own. This makes it possible for a firm to rapidly escalate the competition in its own industry. In other words, the use of continuous improvement will be emphasized by hypercompetitive firms (D’Aveni, 1994). This leads to the fourth proposition:
Proposition 4: The greater a firm’s ability to
continuously improve, the greater the likelihood
it is a hypercompetitive firm.
This article has attempted to integrate Porter’s competitive strategy model and world class manufacturing by focusing on the linkages between them. While Porter claims it is very difficult and unlikely for a firm to achieve simultaneous lower cost and differentiation competitive advantages, world class manufacturing prescribes a general model in which it is likely that simultaneous competitive advantages can be achieved. WCM, which draws on the set Of best manufacturing practices from throughout the world, contends that by gaming control over the entire production system and related systemic issues (e.g., maintenance, training, decentralization) a product can achieve a high competitive profile on cost, quality, deliverability and customization, the latter three comprising differentiation in Porter’s model. Porter’s model claims that it is almost universally impossible to simultaneously achieve both competitive advantages. Ironically, much of the criticism of Porter’s model is in the strategic management literature, both theoretical and empirical.
WCM focuses on the linkages, or coordination between activities, which results in economies of scope, as well as technological processes which reduce the time needed to make change occur. This pattern is consistent with the “sandcone” model in which true cost reduction only occurs after the accumulation of other competencies. The ability to share activities and consequent cost reduction is referred to as economies of scope. Porter’s model relies heavily on the assumption that economies of scale, based on large volumes, are the basis of minimizing costs. Thus, Porter believes there is an inherent tradeoff betWeen any attempt to add product features (various forms of features and quality) once a lower cost competitive advantage has been created, while WCM does not accept this as inevitable.
Despite these differences, the models share many features. These include managing the value chain as the means to competitive advantage, continuously improving the value chain, and ensuring that a product has more value that its competition. These commonalities enable the models to be used together to create competitive advantages based upon higher order, more difficult to imitate competitive advantages. Porter described a general model of competition, while WCM prescribes many of the specific characteristics necessary to simultaneously achieve competitive advantages. The benefit to a firm which successfully incorporates WCM is that it is much more likely to excel on several competitive dimensions. The product will be outstanding on several dimensions of what Porter classifies as differentiation, as well as being at least competitive on cost. Firms with these characteristics are not only able to effectively compete against the best firms in the world, but they are also able to continuously increase the standards of competition in the dimensions of competition.