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Session4ReferenceReadingCompetitiveAdvantage.pdf
C H A P T E R 6
Competitive Position and Sources of Advantage
■ Value, instead of cost, must be used in analyzing competitive position. 1
COMPETITIVE ADVANTAGE
A competitive advantage results in some level of superior customer value, as summarized by Michel Porter in his highly recognized book, Competitive Strategy.
Competitive advantage grows fundamentally from the value a firm is able to create. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset higher prices. 3
Shown in the price-performance value map is the competitive position of 10 competing midsize SUVs. The positioning of the SUVs is based on Consumer Reports’ rat- ings of 2010 models, along with each model’s average selling price. 2
Value maps provide insights into competi- tive position and customer value. Brand 3 clearly offers the best customer value. It has slightly above-average performance and the price is $5,600 below the fair price line (the price a buyer would expect to pay for that level of performance). Brand 4 offers a good value for buyers who are looking for performance significantly above average. The brands above the fair price line have a negative value. Appen- dix 6.1 identifies each brand, along with its overall performance, average selling price, fair price, and customer value.
$28,000
$30,000
$32,000
$34,000
$36,000
$38,000
$40,000
Competitive Position and Customer Value Sport Utility Vehicles
VALUE MAP
$26,000 20 30 40
Performance 50 60 70
Average
Pr ic
e
Negative Value
Positive Value
Fai r Pr
ice Lin
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10
3
7
4
2 6
5
18
9
192 Part II Market Analysis
A competitive advantage results in some level of superior customer value based on a customer’s preference for performance benefits, the cost of the purchase, and the ease of the purchase. Businesses with a cost advantage are able to create superior customer value even with products that have average performance benefits if the businesses offer the products at below-average cost. Businesses that have a meaningful differentiation advan- tage are likewise able to create superior customer value with above-average performance benefits, even at above-average prices.
Figure 6-1 illustrates how either low cost of purchase or high performance benefits can create customer value and how customer value can be mapped. Businesses that have either of these two sources of competitive advantage find it easier to attract and retain customers. It is important to keep in mind, however, that the two sources of customer value attract two different kinds of customers.
Price-sensitive customers are attracted by a lower purchase price, and performance- conscious customers are attracted by superior performance and are willing to pay a pre- mium price for it. In either case, the superior customer value results in superior profits. As Figure 6-2 illustrates, businesses with above-average customer value produce higher levels of pre-tax return on investment. Businesses with an average customer value, where the cost of purchase equals performance benefits, produce average pre-tax profits. The businesses in this second group need to spend more to acquire customers, and they have more difficulty retaining customers because their value propositions are merely average. The net result is average profits.
Businesses with a negative customer value, where the cost of purchase exceeds per- formance benefits, produce a negative value and have difficulties attracting customers and even greater difficulties keeping them. These businesses have been shown to produce lower profits and tend to lose market share.
Performance Benefits
Performance Benefits
Customer Value
Cost of Purchase
Cost of Purchase
Below Average
Above Average
Cost Advantage
Differentiation Advantage
Average
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Customer Value Map
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Customer Value
Differentiation Advantage Cost Advantage
FIGURE 6-1 COMPETITIVE ADVANTAGE, CUSTOMER VALUE, AND PROFITABILITY
Chapter 6 Competitive Position and Sources of Advantage 193
Either a cost advantage or a differentiation advantage improves a business’s com- petitiveness. A third source of competitive advantage takes the form of a marketing advantage . Businesses that can create a superior customer value with high levels of mar- ket share and brand awareness, along with broad product lines and highly effective distri- bution systems, have a marketing advantage. Businesses that have a marketing advantage as the result of high levels of brand awareness and brand preference have a positive cus- tomer value, as shown in Figure 6-2 .
In many instances, a business with a marketing advantage will have a market share that is considerably higher than its closest competitor. Its strong market presence creates high brand awareness and brand recognition, enabling it to attract new customers more easily. Although such a business does not offer lower cost or greater benefits, it does cre- ate customer value with a high brand reputation, a broad product line offering a variety of choices, and excellent product distribution that lowers customers’ transaction costs. As Figure 6-2 shows, businesses with a marketing advantage typically have prices at or slightly above average prices. The combination of high share (high volume) and slightly higher prices (higher margins) contributes to above-average profits.
To achieve above-average profits, a business has to develop some source of competi- tive advantage that provides target customers with positive customer value. Figure 6-3 presents three aspects of performance for three well-known companies, each of which is pursuing a different source of competitive advantage.
■ Dell—Cost Advantage: Dell’s low-cost direct-marketing strategy is well known and has allowed the company to emerge from being unknown to being among the share leaders in the personal computer market. Compared with the other two companies
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Customer Value Map 30%
20%
10%
0% Negative Average PositiveBelow
Average Above
Average Average
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FIGURE 6-2 COMPETITIVE ADVANTAGE, CUSTOMER VALUE, AND PROFITABILITY
194 Part II Market Analysis
shown in Figure 6-3 , Dell’s percent gross margin in 2010 was much lower, but its sales-to-assets ratio was the highest. Efficient asset management is a key part of a low- cost producer strategy. Dell produces $1.57 in sales for every dollar in assets.
■ Apple—Differentiation Advantage: Apple’s product innovation and brand loyalty put it in a special class of companies that have realized success with a differentiation strategy. As Figure 6-3 shows, Apple has achieved superior financial performance and outstanding marketing performance, producing a marketing ROI of 545 percent. The company’s return on sales and return on assets are far higher than its competitors, primarily because its products are premium priced as they offer highly specialized performance benefits as part of their product differentiation advantage.
■ Nike—Marketing Advantage: Nike is a powerful marketing company. It builds brands with innovative advertising and dominates channels with an aggressive sales force. Nike’s products are produced abroad, lowering Nike’s investment in assets, and they command premium prices, so the company realizes very attractive margins. With its emphasis on marketing, however, the cost of marketing and sales are considerably higher as a percentage of sales, as Figure 6-3 shows. In 2010 the company produced $1.32 in sales for every dollar in assets.
Sustainable Advantage
Dell, Apple, and Nike are examples of companies that were just beginning to emerge in the 1970s and 1980s. Although the three companies have seen stellar sales growth and performance during the past 20 years, there is no guarantee that they will have the same success over the next 20 years. Sustaining a source of competitive advantage is a chal- lenge not to be taken lightly. Many great companies have come and gone as their sources
FIGURE 6-3 COMPANY SOURCES OF ADVANTAGE AND COMPANY PERFORMANCE
Company Performance (2010) Dell Apple Nike
Source of Advantage: Low Cost Differentiation Marketing
Financial Performance
Percent Gross Margin 19.1% 42.9% 55.9%
Return on Sales (pre-tax) 4.2% 29.8% 20.3%
Return on Assets (pre-tax) 6.5% 24.5% 12.5%
Asset Management
Sales-to-Assets Ratio 1.57 0.82 1.32
Accounts Receivable (days) 40 58 24
Inventory (days) 7 6 28
Marketing Performance
Marketing & Sales Expenses (% sales) 9.2% 6.7% 23.8%
Marketing Return on Sales 9.9% 36.3% 32.1%
Marketing Return on Investment 107% 545% 135%
Chapter 6 Competitive Position and Sources of Advantage 195
of competitive advantage were nullified by competitors. In many instances, those com- petitors did not even exist prior to the mid-1970s.
The successes of Dell, Apple, and Nike are impressive. But even for these busi- nesses, maintaining a competitive advantage is difficult because the competitive environ- ment is always changing. To stay ahead, these companies must continuously update their customer and competitor knowledge and monitor their level of competitive advantage. Consider General Motors, NBC, or Sears: the strong competitive position held by each of these market leaders for so many years has changed dramatically. For General Motors, it was foreign competition that eroded its competitive position—first with lower prices and then with higher levels of product quality. For NBC, as well as for CBS and ABC, it was first ESPN, CNN, and Fox, and then a multitude of cable networks and the Internet. For Sears and other long-established large retailers of consumer goods, it was Wal-Mart, Target, Best Buy, and Costco.
In each case, the market leader once held an almost impenetrable competitive posi- tion. And in each case, when new competitive forces emerged, the competitive position of the market leader seriously eroded. It is important to recognize that in each example, the market leader had not lowered quality, raised prices, or curtailed marketing efforts. On the contrary, each made intense efforts to improve products, reduce prices, and expand mar- keting efforts to retain customers. But in each case, the competitive forces brought to bear on its market first challenged, and then eroded, the market leader’s competitive position.
The challenge of sustainable competitive advantage led former Intel CEO Andrew Grove to write a book titled Only the Paranoid Survive . 4 The core message of Dr. Grove’s book is that a company in pursuit of a stronger competitive advantage never rests. Attain- ing a competitive advantage is a continuous process of innovation and a never-ending effort to understand customer needs, both the needs being met and the needs remaining unfulfilled. To date, Dell, Apple, and Nike have done a great job as they continue to expand their product lines while leveraging their core sources of competitive advantage. However, the daunting challenge is that they can never stop. If they do, they will be on the road to losing their sources of competitive advantage.
SOURCES OF COMPETITIVE ADVANTAGE
As a business begins to more fully grasp its position relative to key competitors, it gains more insight into potential sources of competitive advantage. For a source of relative advantage to be a competitive advantage requires that (1) the area of relative advantage be meaningful to target customers, and (2) the relative advantage be sustainable (not easily copied by competitors). Wal-Mart, for example, has developed a cost advantage that has enabled it to attract and satisfy target customers by offering lower prices. Hewlett-Packard has built a differentiation advantage with product innovation and quality, and Nordstrom has built a differentiation advantage with service quality. All three companies attract and satisfy customers with differentially superior products or services. Nike and Procter & Gamble, on the other hand, have developed their marketing advantages by building their brand reputations and using creative retailing that attracts and satisfies target customers. In each case, the business developed a source of competitive advantage that is meaningful to target customers. This source of competitive advantage becomes an area of daily focus for managers in order to sustain their business’s level of competitive advantage.
196 Part II Market Analysis
With Dell, Apple, and Nike, we saw three primary sources of competitive advantage. The three sources are shown in Figure 6-4 and may be summarized in this way:
■ Cost Advantage: A significantly lower cost position from which to create lower prices while still achieving desirable profit margins.
■ Differentiation Advantage: A meaningful differentiation that creates desired per- formance benefits at a level superior to those of competitors.
■ Marketing Advantage: A market position and marketing effort that dominates the competition in brand recognition, product line, and channels of distribution.
COST ADVANTAGE
A business can achieve three different types of cost advantage, as listed in Figure 6-4 . It can achieve a lower variable cost per unit sold, a lower level of marketing and sales expenses, or a lower level of operating and overhead expense. Each type of cost advan- tage can be achieved in several ways. As demonstrated in Figure 6-5 , a cost advantage relative to competition contributes to higher levels of profitability.
Variable Cost Advantage
Businesses with a lower unit cost are able to achieve the same (or better) margins at lower prices than competing businesses. Unit or variable costs include manufacturing costs and costs associated with distribution, such as discounts, sales commissions, trans- portation, and other transaction costs.
But how does a business achieve a variable cost advantage? Volume is a key factor. Businesses with a substantial market share advantage (volume) can generally achieve a lower unit cost. 5 As volume increases, the cost per unit generally decreases. For example, as demonstrated in Figure 6-6 , the cost of providing cellular phone service to each cus- tomer decreases by 20 percent every time the volume of customers in a geographic mar- ket doubles. For example, when a cellular business doubles its customer base from 400,000 to 800,000, the unit cost decreases by 20 percent. The cellular service company that attains the largest customer penetration (volume) achieves the lowest unit cost.
Variable Costs Marketing Expenses Operating Expenses
Product Differentiation Service Quality Brand Reputation
Market Leader Product Line Advantage Channel Advantage
Competitive Advantage
Cost Advantage
Differentiation Advantage
Marketing Advantage
FIGURE 6-4 SOURCES OF COMPETITIVE ADVANTAGE
Chapter 6 Competitive Position and Sources of Advantage 197
A larger unit volume allows for production and purchasing economies that lower the per-unit manufacturing cost of a product, thereby creating a scale effect. By making large volume purchases, Wal-Mart has been able to negotiate a lower cost of goods. The same scale effect occurs for a manufacturer who doubles production capacity. As Honda has increased its production capacity, the company has seen a reduction in unit cost due to a scale effect for a certain component product, as illustrated in Figure 6-7 .
Likewise, when a business adds products to its product line that have similar manu- facturing processes and that are made of the same purchased materials as its other prod- ucts, the business can lower the average unit cost of all products. This is a scope effect . For Honda, the cost of ignition switches is lower than for some other manufacturers because the same ignition switch components are used in cars, motorcycles, lawn mow- ers, all-terrain vehicles, snowblowers, snowmobiles, jet skis, and generators. Honda’s extension of its product line has provided a cost advantage across products due to the increased volume, and hence the reduced cost, of the common component parts.
Finally, as a business builds more of the same product, there is a greater opportunity for learning effects . These nonscale, nonscope effects contribute to lower costs through process improvements that are the result of learning. Each unit produced provides additional learning
Businesses with a cost advantage relative to competitors have been shown to be more profitable.
In contrast, businesses with above-average cost relative to competitors are, in general, less profitable.
Profit Impact
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Cost Advantage Index
(The lower the index, the greater the advantage.)
30%
20%
10%
0% 70
Note: When competitors differ significantly in size (sales), a weighted average based on sales should be used for the top three competitors.
8090100110120130
Cost Advantage Index
Cost Advantage Index
Business (% Cost of Goods Sold)
Average (% Cost of Goods Sold) for Top Three Competitors × 100=
50%
(60% + 65% + 70%)/3 × 100 × 100=
77=
= 50%
65%
FIGURE 6-5 COST ADVANTAGE AND PROFITABILITY
198 Part II Market Analysis
and the opportunity to build the next unit more efficiently. Naturally, the business with the most production experience has had the best opportunity to learn from experience. This learning normally leads to improvements in processes that lower the cost per unit.
Marketing Cost Advantage
Quite often, businesses fail to look beyond variable costs for sources of a cost advantage. Many of these businesses could benefit from marketing cost efficiencies derived from product line extensions, which is another way to gain a cost advantage. For example, it takes a certain number of salespeople to adequately cover a target market. As the sales force is given more products to sell to the same customers, a marketing cost scope effect is created. As illustrated on the left side of Figure 6-8 , Procter & Gamble’s sales force expense per pound of detergent sold should decrease as it adds more brands of detergent
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Note: Appendix 6.2 explains how to estimate an experience curve coefficient, and Marketing Performance Tool 6.1 is an application of this concept for improved understanding.
Total Subscribers (000)
80% Experience Curve: Each time the total number of subscribers doubles, a cellular service business’s cost per customer decreases by 20%.
$150
$120
$100
$25
200 300 400 500 600 800 1,000
$50
$75
Unit Cost Estimate Base Unit Cost Estimated Volume
Base Volume ×
B
=
Unit Cost Estimate $70 800,000
400,000 ×
.32
= $70 .80×= $56=
FIGURE 6-6 UNIT COST AND EXPERIENCE CURVE—CELLULAR SERVICE
Chapter 6 Competitive Position and Sources of Advantage 199
to its product line. A competitor with far fewer brands would need to have the same sales call frequency to adequately serve retailers and, therefore, would experience a higher cost per pound sold because it has fewer brands to sell.
Another area of marketing cost advantage is derived from the advertising cost effi- ciency of a brand extension strategy, as the right side of Figure 6-8 illustrates for the extensive product line offered by Campbell’s Soup. Each time an individual soup is
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Scope Effect
Motor- cycles
Lawn- mowers
Snow- blowers
Pumps
FIGURE 6-7 IGNITION SWITCH COST ADVANTAGE DUE TO SCALE AND SCOPE EFFECTS
Sa le
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Sales Force Expense
Cheer Dash . . . . . . . . . Gain
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Tomato Soup
Campbell’s Soup Line
Advertising Expense
Split Pea
Clam Chowder
. . . . . . . . . Onion Soup
FIGURE 6-8 PRODUCT SCOPE AND MARKETING COST ADVANTAGE
200 Part II Market Analysis
advertised, the ad reinforces top-of-the-mind awareness of Campbell’s Soup brand and other soups in the product line. In this way, the scope effect created by additional soups lowers the advertising dollars spent per ounce of soup sold.
Operating Cost Advantage
Although an operating cost advantage is generally outside the control or influence of the marketing function, lower operating expenses relative to competitors contribute to a cost advantage. Wal-Mart achieves an operating expense to sales ratio of less than 20 percent of sales, whereas many of its competitors’ operating expenses are well over 20 percent. This difference gives Wal-Mart another source of cost advantage from which to create greater customer value with lower prices and greater shareholder value with lower oper- ating expenses.
Similarly, McDonald’s has been able to cut construction costs of new restaurants by 50 percent since 1990 by using standardized building designs. Because the building is an asset that is depreciated over time, this source of operating expense is drastically lower than it would be if each building had a unique design. A standardized building design, along with rapid store expansion, has contributed to higher earnings and shareholder value for McDonald’s.
DIFFERENTIATION ADVANTAGE
Every business must manage its costs, but not every business can have a cost advantage. To achieve above-average profits, a business needs some source of competitive advan- tage. A differentiation advantage with respect to product, service, or brand reputation is a potential source of competitive advantage, as we have seen. But like every source of competitive advantage, a differentiation advantage has to be meaningful to target cus- tomers as well as sustainable (not easily duplicated by competitors).
Product Advantage
A business can build a differentiation advantage around any of a product’s many aspects. A product’s durability, reliability, performance, features, appearance, and conformance to a specific application each have potential to be a differentiation advantage. 6 ESCO Corpo- ration, for example, is a manufacturer of earth-moving equipment parts that are used in very demanding mining and construction applications. The company has developed a dif- ferentiation advantage in the wear life of its products due to proprietary steel chemistry and product design. Its products last longer and are less likely to break than are the prod- ucts of its competitors. Both of these product benefits save the customer money even when the products are sold at a higher price. Overall, businesses with a relative advantage in product quality produce higher levels of profitability, as illustrated in Figure 6-9 .
Service Advantage
A business can achieve a differentiation service advantage in the same way it can achieve a differentiation product advantage. 7 The same baseline conditions are required. First, the
Chapter 6 Competitive Position and Sources of Advantage 201
service advantage has to be meaningful and important to target customers, and second, it has to be sustainable. FedEx tracks its performance on 10 service quality indicators (each weighted by the “customer pain” that a failure creates). This service quality index is care- fully monitored each day to help FedEx maintain a service quality advantage. As its service quality index improves, customer satisfaction improves and the overall cost per package decreases. By tracking its service performance each day, FedEx is able to create greater overall customer satisfaction with fewer errors, lower costs, and greater profits for shareholders. As Figure 6-10 shows, businesses with a service advantage produce higher levels of profitability.
Reputation Advantage
Another source of differentiation competitive advantage is brand reputation. Although competing watchmakers may match the quality of a Rolex watch, they cannot easily match Rolex’s brand reputation advantage. Brands such as Chanel, Nikon, and Perrier also have built reputations that provide a source of competitive advantage in their ability to attract target customers. For these companies, the stature of their brand names adds a dimension of appeal that is an important customer benefit for many less price-sensitive, more image-conscious consumers.
A brand reputation advantage can be measured in the same way as a product or service advantage. Businesses with an advantage in brand reputation can both attract
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Product Advantage Index
Product Advantage Index = 100 + 20 = 120
30%
20%
10%
0% 70 80 90 100 110 120 130
Profit Impact
Businesses with a product advantage that outperforms competitors in delivering superior product benefits have been shown to be more profitable.
In contrast, as in this example, an inferior competitive position with respect to product benefits sought by target customers has been correlated with poorer financial performance.
Intel, Microsoft, and Apple have each built a product advantage in the markets they serve.
Product Benefits (Voice of the Customer)
7.5
5.1
6.8
7.4
7.7
5.2
6.7
4.9
6.1
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–10
13
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Relative Importance
50
30
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100
7.7
5.6
7.6
Our Business
Product Advantage
Competitors
A B C
Reliable Performance
Product Life
Ease of Use
FIGURE 6-9 PRODUCT DIFFERENTIATION ADVANTAGE AND PROFITABILITY
202 Part II Market Analysis
customers and obtain a price premium. As Figure 6-11 shows, the reputation of a con- sumer product or service can have an impact on price premiums. The strong brand repu- tation of the Apple iPod, for example, translates into a price premium. Even in business-to-business markets, an advantage in brand or company reputation helps to support price and margins.
MARKETING ADVANTAGE
A business that dominates markets with a relative advantage in sales coverage, distri- bution, or marketing communications can control (and often block) market access. A marketing advantage can be a business’s best source of competitive advantage. Whether through sales, distribution, or marketing communications, Nike, Procter & Gamble, Campbell’s Soup, and many other companies have developed solid competitive advan- tages as a result of their marketing expertise.
Market Share Advantage
Market leaders often do not pose a strong differentiation or cost advantage. Their competi- tive advantage is derived from market dominance. As Figure 6-12 shows, the more dominant the share leader is with regard to market share compared with its top three competitors, the greater are the share leader’s profits. In this example, Google is the share leader among
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Service Advantage Index
30%
20%
10%
0% 70 80 90 100 110 120 130
Profit Impact Businesses with a service advantage that outperforms competitors in delivering superior service quality have been shown to be more profitable.
In contrast, an inferior competitive position with respect to the service quality sought by customers has been correlated with poorer financial performance.
Nordstrom is an example of a business that has strived to build a service advantage.
Service Quality (Voice of the Customer)
6.3
6.8
6.3
4.3
6.6
5.2
6.7
5.5
6.6
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Relative Importance
60
20
20
100
7.2
6.5
7.2
Our Business
Service Advantage
Competitors
A B C
Parts Availability
Response to Problems
Competent Service
Service Advantage Index = 100 + 27 = 127
FIGURE 6-10 SERVICE DIFFERENTIATION ADVANTAGE AND PROFITABILITY
Chapter 6 Competitive Position and Sources of Advantage 203
search engines and has a relative market share of 199. Yahoo, number two in market share, has a relative market share of 19, and number three AOL has a relative market share of 2. For this industry, relative market share partially explains large differences in company profitabil- ity. Market leaders have well-known, trusted brands; many variations in their product lines; and highly effective distribution systems.
Like Google, Nike is also a market share leader with a considerable marketing advan- tage. The main thing that makes Nike a tough competitor is the level of market awareness it has developed with creative ad copy, pervasive promotion of the Nike swoosh, careful selection of product spokespersons, and heavy advertising. This level of marketing advan- tage makes it difficult for competitors to succeed, even those who might have a better prod- uct or lower prices with comparable quality.
This type of competitive advantage, like all others, is relevant only when the com- munications created are meaningful and important to target customers. It takes more than simply spending advertising dollars to obtain and sustain a marketing communications
0% 100 110 120 130
Brand Advantage Index
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iPod
>150
5%
10%
15%
20%
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Profit Impact Businesses with a brand advantage command a price premium, which often means higher margins. This, in turn, contributes to higher levels of profitability.
Brand Benefits (Voice of the Customer)
7.5
6.7
5.4
6.6
6.7
3.5
Relative Importance
50
50
100
7.7
7.5
Our Business
17
17
34
Brand Advantage
Competitors
A B C
Most Respected Brand
Known for Quality
Brand Advantage Index = 100 + 34 = 134
FIGURE 6-11 BRAND ADVANTAGE AND PROFITABILITY
204 Part II Market Analysis
advantage. The challenge goes right to the core of market-based management: who are our customers, what do they want, and how do we communicate our product in a way that best serves their needs?
Product Line Advantage
The more products a business has to sell, the more ways it has to attract and satisfy cus- tomers. A broad line of products creates more selling opportunities for the sales force and channel partners. A business with a narrow line of products has to be more focused in order to be cost effective in its marketing efforts. Because a broad product line gives a business more prospective customers and the potential to sell more to each customer, this type of marketing efficiency translates into more sales and higher levels of profit- ability. Figure 6-13 shows that businesses with broad product lines are more profitable during the emerging and growing stages of a product life cycle than are businesses with narrow product lines. It is particularly important, then, to expand a business’s product line during these stages of the product life cycle.
Quite often, a company wants to expand from one market segment into an adjacent segment in order to grow sales and profits. Product line expansion requires considerable
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40%
30%
20%
0
10%
<20 40 60 80 100 120 <140
Relative Market Share
RMS Google
Company's Market Share
Total Share of Three Largest Competitors × 100=
Yahoo + Bing + Ask × 100 × 100= = = 199
65.5%
15.9% + 14.1% + 2.9%
Businesses with a higher relative market share have been shown to produce a higher pre-tax ROI. Below are the 2010 relative market shares for the top five Internet search engine providers.
Profit Impact
Search Engine
Provider
Market Share 2010
65.5%
15.9%
14.1%
2.9%
1.5%
0.1%
199
19
17
Relative Market Share
Bing
Yahoo
Ask
Others
AOL
3
2
FIGURE 6-12 MARKET SHARE ADVANTAGE AND PROFITABILITY
Chapter 6 Competitive Position and Sources of Advantage 205
0
10%
20%
30%
40%
Emerging
R et
u rn
o n
A ss
et s
Growing Mature
Stage of Product Life Cycle
Narrow Product Line
Average Product Line
Broad Product Line
11%
16%
27%
13%
18%
29%
23%
18%
23%
FIGURE 6-13 PRODUCT LINE ADVANTAGE AND PROFITABILITY
product differentiation and careful positioning because the same company then needs to ask a different price for a different combination of product, service, and brand benefits. Toyota sequentially expanded its product line from a low product-price segment in the 1960s to its current full line of vehicles, each with a different product-price position and a unique brand-name identity.
In the beer market, Anheuser-Busch’s product line strategy utilizes separate brand names for each of the several positioning strategies it has pursued. Each brand has a dis- tinct product-price position that is attractive to different types of customers or different use situations. In recent years, Anheuser-Busch has expanded its product line to the microbrew segment with the introduction of Michelob Bavarian Style Wheat, added Kirin and other foreign brands to create an import brand position, and developed Bud- weiser Select for the low-calorie, low-carbohydrate segment.
Channel Advantage
Businesses that need distribution in order to gain market access have a limited number of distributors, whether they are retailers in consumer markets or dealers in business- to-business markets. There are only a few top-notch distributors. Therefore, a business that has exclusive access to these distributors can control channels in a given market and, to some degree, can control market access. A channel advantage is a source of competi- tive advantage that is independent of a cost or differentiation advantage.
Figure 6-14 shows the relationship between distributor share and market share. As a business is able to dominate the channels to market, it is able to achieve a larger relative market share, and a larger relative share in turn corresponds with greater profitability. 8
206 Part II Market Analysis
KNOWLEDGE AS A SOURCE OF ADVANTAGE
More than 2,500 years ago (510 B.C.), the Chinese general Sun Tzu wrote a military manual called The Art of War . 9 General Sun Tzu concluded that the out-and-out destruc- tion of an enemy resulted in greater losses than gains . He believed that deception, restraint, and minimalism were the best ways to defeat an enemy. Though it seems para- doxical, the major premise of The Art of War is that the best policy is to neutralize and subjugate a competitor into following one’s own group, not to fight the competitor. Today, The Art of War is among the world’s most widely read books, and its principles of competition are studied by many major corporations. 10
In his manual, General Sun Tzu presents competitive strategy as the process of developing a knowledge advantage and then attacking obliquely, almost unnoticeably, in a way that eventually causes your competitor to follow you. He believed that a less con- frontational approach could achieve better results without significant losses than direct warfare. Focused on a knowledge advantage, he built competitive strategies based on superior knowledge of both the terrain (customers) and the enemy (competitors).
In any competitive environment, knowledge is the principal source of competitive advantage. In business, attracting customers is the mission a business seeks to accom- plish, and the competitors are the forces it is fighting to achieve its mission. Without adequate knowledge of both customers and competitors, a business is severely handi- capped in developing strategies to gain customers and grow market share. A company needs a knowledge advantage in order to develop a successful oblique strategy. Partial knowledge may seem like an advantage, but it often results in reactive strategies , as pre- sented in Figure 6-15 . A business with excellent customer knowledge but limited com- petitor knowledge will likely overreact to customer demands. Similarly, having excellent competitor knowledge without adequate customer knowledge will likely result in an overreaction to competitors’ moves.
As Figure 6-15 shows, businesses that lack both customer knowledge and competitor knowledge are working with an inside-the-box strategy as they make competitive moves
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FIGURE 6-14 CHANNEL ADVANTAGE AND PROFITABILITY
