BA4 SM Chapter Bases of Competitive Advantage The Strategy Clock - Johnson, Scholes and Whittington, 2008 PDF

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C H APT E R 6

6.3

BU SI N ESS- L EVEL ST R A T EG Y

BASES OF COMPETITIVE ADVANTAGE: THE ‘STRATEGY CLOCK’

Competitive strategy is concerned with the basis on which a business unit might achieve competitive advantage in its market a .p e

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KEY CONCEPT

Strategy clock

This section reviews different ways of thinking about competitive strategy, the bases on which a business unit might achieve competitive advantage in its market. For public service organisations, the equivalent concern is the bases on which the organisation chooses to achieve superior quality of services in competition with others for funding; that is, how it provides ‘best value’. Michael Porter2 proposed three different ‘generic’ strategies by which an organisation could achieve competitive advantage: ‘overall cost leadership’, ‘differentiation’ and ‘focus’. There is much debate as to exactly what each of these categories means. In particular many confuse Porter’s ‘cost leadership’ with ‘low price’. To remove such confusions this book employs ‘market-facing’ generic strategies similar to those used by Cliff Bowman and Richard D’Aveni.3 These are based on the principle that competitive advantage is achieved by providing customers with what they want, or need, better or more effectively than competitors. Building on this proposition, the strategy clock (Exhibit 6.2) enshrines Porter’s categories of differentiation and focus alongside price – as discussed in the sections below. In a competitive situation, customers make choices on the basis of their perception of value for money, the combination of price and perceived product/ service benefits. The ‘strategy clock’ represents different positions in a market where customers (or potential customers) have different ‘requirements’ in terms of value for money. These positions also represent a set of generic strategies for achieving competitive advantage. Illustration 6.1 shows examples of different competitive strategies followed by firms in terms of these different positions on the strategy clock. The discussion of each of these strategies that follows also acknowledges the importance of an organisation’s costs – particularly relative to competitors. But it will be seen that cost is a strategic consideration for all strategies on the clock – not just those where the lead edge is low price. Since these strategies are ‘market facing’ it is important to understand the critical success factors for each position on the clock. Customers at positions 1 and 2 are primarily concerned with price, but only if the product/service benefits meet their threshold requirements as discussed in Chapter 2 (section 2.4.3). This usually means that customers emphasise functionality over service or aspects such as design or packaging. In contrast, customers at position 5 require a customised product or service for which they are prepared to pay a price premium. The volume of demand in a market is unlikely to be evenly spread across the positions on the clock. In commodity-like markets demand is substantially weighted towards positions 1 and 2. Many public services are of this type too. Other markets have significant demand in positions 4 and 5. Historically professional services were of this type. However, markets change over time. Commodity-like markets develop value-added niches which grow as disposable incomes rise. For example, this has occurred in the drinks market with premium and speciality beers. And customised markets may become more commodity-like particularly where IT can demystify and routinise the professional content of the product – as in financial services. So the strategy clock can help managers understand the changing requirements of their markets and the choices they can make about positioning and competitive advantage. Each position on the clock will now be discussed.

BA SES O F C O MP ET I T I VE A D VA N T A G E: T H E ‘ST R A T EG Y C L O C K ’

Exhibit 6.2

The strategy clock: competitive strategy options

Note: The strategy clock is adapted from the work of Cliff Bowman (see D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995). However, Bowman uses the dimension ‘Perceived Use Value’.

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Illustration 6.1

Competitive strategies on the strategy clock The competitive strategies of UK grocery retailers have shifted in the last three decades.

The supermarket retail revolution in the UK began in the late 1960s and 1970s as, initially, Sainsbury’s began to open up supermarkets. Since the dominant form of retailing at that time was the corner grocery shop, Sainsbury’s supermarkets were, in effect, a hybrid strategy: very clearly differentiated in terms of the physical layout and size of the stores as well as the quality of the merchandise, but also lower priced than many of the corner shop competitors. As more and more retailers opened up supermarkets a pattern emerged. Sainsbury’s was the dominant differentiated supermarket retailer. Tesco grew as a ‘pile it high, sell it cheap’ no frills operator. Competing in between as lower priced, but also lower quality than Sainsbury’s, were a number of other supermarket retailers. The mid-1990s saw a major change. Under the leadership of Ian Maclaurin, Tesco made a dramatic shift in strategy. It significantly increased the size and number of its stores, dropped the ‘pile it high, sell cheap’ stance and began offering a much wider range of merchandise. Still not perceived as equal to Sainsbury’s on quality, it none the less grew its market share at the expense of the other retailers and began to challenge Sainsbury’s dominance. However the big breakthrough came for Tesco when it also shifted to higher-quality merchandise but still at perceived lower prices than Sainsbury’s. In effect it was now adopting a hybrid strategy. In so doing it gained massive market share. By early 2007 this stood at over 30 per cent of the retail grocery market in the UK. In turn Sainsbury’s had seen its share eroded to just 16 per cent, as it sought to find a way to resurrect its differentiated image of quality in the face of this competition. In the meantime, other competitive strategy positions had consolidated. The low-price strategy was being followed by Asda ( Wal-Mart) which also had a 16 per cent share of the market and Morrison’s (with 11 per cent). In the no-frills segment was Netto, Lidl and Aldi, all retail formats that arrived in the 1990s from European neighbours and with a combined share of around 6 per cent.

The strategy of differentiation no longer really existed in a pure form. The closest was Waitrose (almost 4 per cent) emphasising a higher-quality image, but targeting a more select, upper-middleclass, market in selected locations. The focused differentiated stance remained the domain of the specialists: delicatessens and, of course in a London context, Harrods Food Hall.

Questions 1 Who is ‘stuck in the middle’ here? Why? 2 Is a differentiated strategy or a low-price strategy defensible if there is a successful hybrid strategy, similar to that being followed by Tesco? 3 What might prevent other competitors following the Tesco strategy and competing successfully with them? ( That is, does Tesco have strategic capabilities that provide sustainable competitive advantage?) 4 For another market of your choice, map out the strategic positions of the competitors in that market in terms of the strategy clock. ( Tesco is the case example in Chapter 10.)

BA SES O F C O MP ET I T I VE A D VA N T A G E: T H E ‘ST R A T EG Y C L O C K ’

6.3.1 Price-based strategies (routes 1 and 2) A ‘no frills’ strategy combines a low price, low perceived product /service benefits and a focus on a price-sensitive market segment

Route 1 is the ‘no frills’ strategy, which combines a low price with low perceived product /service benefits and a focus on a price-sensitive market segment. These segments might exist because of the following: ● The existence of commodity markets. These are markets where customers

do not value or discern differences in the offering of different suppliers, so price becomes the key competitive issue. Basic foodstuffs – particularly in developing economies – are an example. ● There may be price-sensitive customers, who cannot afford, or choose not,

to buy better-quality goods. This market segment may be unattractive to major providers but offers an opportunity to others (Aldi, Lidl and Netto in Illustration 6.1, for example). In the public services funders with tight budgets may decide to support only basic-level provision (for example, in subsidised spectacles or dentistry). ● Buyers have high power and/or low switching costs so there is little choice – for

example, in situations of tendering for government contracts. ● The strategy offers an opportunity to avoid major competitors. Where major

providers compete on other bases, a low-price segment may be an opportunity for smaller players or a new entrant to carve out a niche or to use route 1 as a bridgehead to build volume before moving on to other strategies. A low-price strategy seeks to achieve a lower price than competitors whilst trying to maintain similar perceived product or service benefits to those offered by competitors

Route 2, the low-price strategy, seeks to achieve a lower price than competitors whilst maintaining similar perceived product or service benefits to those offered by competitors. Increasingly this has been the competitive strategy chosen by Asda (owned by Wal-Mart) and Morrisons in the UK supermarket sector (see Illustration 6.1). In the public sector, since the ‘price’ of a service to the provider of funds (usually government) is the unit costs of the organisation receiving the budget, the equivalent is year-on-year efficiency gains achieved without loss of perceived benefits. Competitive advantage through a low-price strategy might be achieved by focusing on a market segment that is unattractive to competitors and so avoiding competitive pressures eroding price. However, a more common and more challenging situation is where there is competition on the basis of price, for example in the public sector and in commodity-like markets. There are two pitfalls when competing on price: ● Margin reductions for all. Although tactical advantage might be gained by

reducing price this is likely to be followed by competitors, squeezing profit margins for everyone. ● An inability to reinvest. Low margins reduce the resources available to develop

products or services and result in a loss of perceived benefit of the product. So, in the long run, both a ‘no frills’ strategy and a low-price strategy cannot be pursued without a low-cost base. However, low cost in itself is not a basis for advantage. Managers often pursue low cost that does not give them competitive advantage. The challenge is how costs can be reduced in ways which others cannot match such that a low-price strategy might give sustainable advantage. This is difficult but possible ways are discussed in section 6.4.1. Illustration 6.2 also shows how easyJet has sought to reduce costs to pursue its ‘no frills’ strategy.

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Illustration 6.2

easyJet’s ‘no frills’ strategy Multiple bases for keeping costs down can provide a basis for a successful ‘no frills’ strategy.

Launched in 1995, easyJet was seen as the brash young upstart of the European airline industry and

It might also have added that other factors contributed to low costs:

widely tipped to fail. But by the mid-2000s this Luton-based airline had done more than survive.

● A focus on the Airbus A319 aircraft, and the

From a starting point of six hired aircraft working one route, by 2006 it had 122 aircraft flying 262 routes to 74 airports and carrying over 33 million passengers per annum and impressive financial results: £129m profit on £1,619m revenue (≈ A187m on ≈ A2,348m). The principles of its strategy and its business model were laid down in annual reports year by year. For example, in 2006: ● The internet is used to reduce distribution costs . . .

now over 95% of all seats are sold online, making Easy Jet one of Europe’s biggest internet retailers; ● Maximizing the utilization of substantial assets. We fly

retirement of ‘old generation’ Boeing 737 aircraft, meant ‘a young fleet of modern aircraft secured at very competitive rates’ benefiting maintenance costs. And, since an increasing proportion of these were owned by easyJet, financing costs were being reduced. ● A persistent focus on reducing ground handling

costs. ● In the face of rising fuel costs, hedging on future

buying of fuel. In addition to all the factors above the 2006 annual report stated that easyJet’s customer proposition is defined by

our aircraft intensively, with swift turnaround times

via an email rather than paper. This helps to

low cost with care and convenience. . . . We fly to main European destinations from convenient local airports and provide friendly onboard service. People are a key point

significantly reduce the cost of issuing, distributing, processing and reconciling millions of transactions

of difference at Easy Jet and are integral to our success. This allows us to attract the widest range of customers

each time we land. This gives us a very low unit cost; ● Ticket-less travel. Passengers receive booking details

each year; ● No ‘free lunch’. We eliminate unnecessary services, which are complex to manage such as free catering,

to use our services – both business and leisure. Source: easyJet annual report 2006.

pre-assigned seats, interline connections and cargo services. This allows us to keep our total costs of production low; ● Efficient use of airports. Easy Jet flies to main

destination airports throughout Europe, but gains efficiencies compared to traditional carriers with rapid turnaround times, and progressive landing charge agreements with airports. [It might have added here that since it does not operate a hub system, passengers have to check in and offload their luggage at each stage. This means that aircraft are not held up whilst luggage is transferred between flights.]

Questions 1 Read sections 6.3.1 and 6.4.1 and identify the bases of easyJet’s ‘no frills’ strategy. 2 How easy would it be for larger airlines such as BA to imitate the strategy? 3 On what bases could other low-price airlines compete with easyJet?

BA SES O F C O MP ET I T I VE A D VA N T A G E: T H E ‘ST R A T EG Y C L O C K ’

6.3.2 (Broad) Differentiation strategies (route 4) A differentiation strategy The next option is a broad differentiation strategy providing products or services seeks to provide products that offer benefits different from those of competitors and that are widely valued or services that offer by buyers.4 The aim is to achieve competitive advantage by offering better products benefits that are different from those of competitors or services at the same price or enhancing margins by pricing slightly higher. and that are widely valued In public services, the equivalent is the achievement of a ‘centre of excellence’ by buyers status, attracting higher funding from government (for example, universities try

to show that they are better at research or teaching than other universities). The success of a differentiation approach is likely to be dependent on two key factors: ● Identifying and understanding the strategic customer. The concept of the strategic

customer is helpful because it focuses consideration on who the strategy is targeting. However, this is not always straightforward, as discussed in section 2.4.3. For example, for a newspaper business, is the customer the reader of the newspaper, the advertiser, or both? They are likely to have different needs and be looking for different benefits. For a branded food manufacturer is it the end consumer or the retailer? It may be important that public sector organisations offer perceived benefits, but to whom? Is it the service user or the provider of funds? However, what is valued by the strategic customer can also be dangerously taken for granted by managers, a reminder of the importance of identifying critical success factors (section 2.4.2). ● Identifying key competitors. Who is the organisation competing against? For

example, in the brewing industry there are now just a few major global competitors, but there are also many local or regional brewers. Players in each strategic group (see section 2.4.1) need to decide who they regard as competitors and, given that, which bases of differentiation might be considered. Heineken appears to have decided that it is the other global competitors – Carlsberg and Anheuser-Busch, for example. SABMiller built its global reach on the basis of acquiring and developing national brands and competing on the basis of local tastes and traditions, but has more recently also acquired Miller to compete globally. The competitor analysis explained in section 2.4.4 (and Exhibit 2.8) can help in both of these regards: ● The difficulty of imitation. The success of a strategy of differentiation must

depend on how easily it can be imitated by competitors. This highlights the importance of non-imitable strategic capabilities discussed in section 3.4.3. ● The extent of vulnerability to price-based competition. In some markets cus-

tomers are more price sensitive than others. So it may be that bases of differentiation are just not sufficient in the face of lower prices. Managers often complain, for example, that customers do not seem to value the superior levels of service they offer. Or, to take the example of UK grocery retailing (see Illustration 6.1), Sainsbury’s could once claim to be the broad differentiator on the basis of quality but customers now perceive that Tesco is comparable and seen to offer lower prices.

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6.3.3 The hybrid strategy (route 3) A hybrid strategy seeks simultaneously to achieve differentiation and a price lower than that of competitors

A hybrid strategy seeks simultaneously to achieve differentiation and low price relative to competitors. The success of this strategy depends on the ability to deliver enhanced benefits to customers together with low prices whilst achieving sufficient margins for reinvestment to maintain and develop bases of differentiation. It is, in effect, the strategy Tesco is seeking to follow. It might be argued that, if differentiation can be achieved, there should be no need to have a lower price, since it should be possible to obtain prices at least equal to the competition, if not higher. Indeed, there is a good deal of debate as to whether a hybrid strategy can be a successful competitive strategy rather than a suboptimal compromise between low price and differentiation.5 If it is the latter, very likely it will be ineffective. However, the hybrid strategy could be advantageous when: ● Much greater volumes can be achieved than competitors so that margins may

still be better because of a low-cost base, much as Tesco is achieving given its market share in the UK. ● Cost reductions are available outside its differentiated activities. For example,

IKEA concentrates on building differentiation on the basis of its marketing, product range, logistics and store operations, but low customer expectations on service levels allow cost reduction because customers are prepared to transport and build its products...