DMEL chapter 5

TYPES OF COMPETITIVE ADVANTAGE AND SUSTAINABILITY

Michael Porter presented three generic strategies that a firm can use to overcome the five forces and achieve competitive advantage.2 Each of Porter's generic strategies has the potential to allow a firm to outperform rivals in their industry. The first, overall cost leadership, is based on creating a low-cost position. Here, a firm must manage the relationships throughout the value chain and lower costs throughout the entire chain. Second, differentiation requires a firm to create products and/or services that are unique and valued. Here, the primary emphasis is on "nonprice" attributes for which customers will gladly pay a premium.3 Third, a focus strategy directs attention (or "focus") toward narrow product lines, buyer segments, or targeted geographic markets, and they must attain advantages through either differentiation or cost leadership.4 Whereas the overall cost leadership and differentiation strategies strive to attain advantages industrywide, focusers have a narrow target market in mind. Exhibit 5.1 illustrates these three strategies on two dimensions: competitive advantage and markets served. Both casual observation and research support the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not.5 There has been a rich history of strategic management research addressing this topic. One study analyzed 1,789 strategic business units and found that businesses combining multiple forms of competitive advantage (differentiation and overall cost leadership) outperformed businesses that used only a single form. The lowest performers were those that did not identify with any type of advantage. They were classified as "stuck in the middle." Results of this study are presented in Exhibit 5.2.6 For an example of the dangers of being stuck in the middle, consider department stores. Chains, such as J.C. Penney and Sears, used to be the main retailers consumers would shop at for clothes and housewares. However, they find themselves in a situation today where affluent customers are going upmarket to retailers like Saks Fifth Avenue for exclusive designer clothes while budget-conscious consumers are drifting to discount chains such as TJ Maxx and Ross Stores Overall Cost Leadership - The first generic strategy is overall cost leadership. Overall cost leadership requires a tight set of interrelated tactics that include: • Aggressive construction of efficient-scale facilities. • Vigorous pursuit of cost reductions from experience. • Tight cost and overhead control. • Avoidance of marginal customer accounts. • Cost minimization in all activities in the firm's value chain, such as R&D, service, sales force, and advertising - Exhibit 5.3 draws on the value-chain concept (see Chapter 3) to provide examples of how a firm can attain an overall cost leadership strategy in its primary and support activities. One factor often central to an overall cost leadership strategy is the experience curve, which refers to how business "learns" to lower costs as it gains experience with production processes. With experience, unit costs of production decline as output increases in most industries. The experience curve, developed by the Boston Consulting Group in 1968, is a way of looking at efficiency gains that come with experience. For a range of products, as cumulative experience doubles, costs and labor hours needed to produce a unit of product decline by 10 to 30 percent. There are a number of reasons why we find this effect. Among the most common factors are workers getting better at what they do, product designs being simplified as the product matures, and production processes being automated and streamlined. However, experience curve gains will be the foundation for a cost advantage only if the firm knows the source of the cost reduction and can keep these gains proprietary. To generate above-average performance, a firm following an overall cost leadership position must attain competitive parity on the basis of differentiation relative to competitors.7 In other words, a firm achieving parity is similar to its competitors, or "on par," with respect to differentiated products.8 Competitive parity on the basis of differentiation permits a cost leader to translate cost advantages directly into higher profits than competitors. Thus, the cost leader earns above-average returns.9 The failure to attain parity on the basis of differentiation can be illustrated with an example from the automobile industry—the Tata Nano. Tata, an Indian conglomerate, developed the Nano to be the cheapest car in the world. At a price of about $2,000, the Nano was expected to draw in middle-class customers in India and developing markets as well as budget conscious customers in Europe and North America. However, it hasn't caught on in either market. The Nano doesn't have some of the basic features expected with cars, such as power steering and a passenger side mirror. It also faces concerns about safety. In crash tests, the Nano received zero stars for adult protection and didn't meet basic UN safety requirements. Also, there were numerous reports of Nanos catching fire. Due to all of these factors, the Nano has simply been seen by customers as offering a lousy value proposition.10 The lesson is simple. Price is just one component of value. No matter how good the price, the most cost-sensitive consumer won't buy a bad product. Gordon Bethune, the former CEO of Continental Airlines, summed up the need to provide good products or services when employing a low-cost strategy this way: "You can make a pizza so cheap, nobody will buy it."11 Next, we discuss two examples of firms that have built a cost leadership position. Aldi, a discount supermarket retailer, has grown from its German base to the rest of Europe, Australia, and the United States by replicating a simple business format. Aldi limits the number of products (SKUs in the grocery business) in each category to ensure product turn, to ease stocking shelves, and to increase its power over suppliers. It also sells mostly private-label products to minimize cost. It has small, efficient, and simply designed stores. It offers limited services and expects customers to bring their own bags and bag their own groceries. As a result, Aldi can offer its products at prices 40 percent lower than competing supermarkets.12 Zulily, an online retailer, has built its business model around lower-cost operations in order to carve out a unique position relative to Amazon and other online retailers. Zulily keeps very little inventory and typically orders products from vendors only when customers purchase the product. It also has developed a bare-bones distribution system. Together, these actions result in deliveries that take an average of 11.5 days to get to customers and can sometimes stretch out to several weeks. Due to its reduced operational costs, Zulily is able to offer attractive prices to customers who are willing to wait.13 A business that strives for a low-cost advantage must attain an absolute cost advantage relative to its rivals.14 This is typically accomplished by offering a no-frills product or service to a broad target market using standardization to derive the greatest benefits from economies of scale and experience. However, such a strategy may fail if a firm is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for services or design changes. Strategy Spotlight 5.1 discusses how Primark, an Irish clothing retailer, has built a low-cost strategy while also being seen as effectively addressing concerns about environmental sustainability. - Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces An overall low-cost position enables a firm to achieve above-average returns despite strong competition. It protects a firm against rivalry from competitors, because lower costs allow a firm to earn returns even if its competitors eroded their profits through intense rivalry. A low-cost position also protects firms against powerful buyers. Buyers can exert power to drive down prices only to the level of the next most efficient producer. Also, a low-cost position provides more flexibility to cope with demands from powerful suppliers for input cost increases. The factors that lead to a low-cost position also provide a substantial entry barriers position with respect to substitute products introduced by new and existing competitors.15 A few examples will illustrate these points. Zulily's close attention to costs helps to protect the company from buyer power and intense rivalry from competitors. Thus, Zulily is able to drive down costs and reduce the bargaining power of its customers. By cutting costs lower than other discount clothing retailers, Primark both lessens the degree of rivalry it faces and increases entry barriers for new entrants. Aldi's extreme focus on minimizing costs across its operations makes it less vulnerable to substitutes, such as discount retailers like Walmart and dollar stores. Potential Pitfalls of Overall Cost Leadership Strategies Potential pitfalls of an overall cost leadership strategy include: • Too much focus on one or a few value-chain activities. Would you consider a person to be astute if he canceled his newspaper subscription and quit eating out to save money but then "maxed out" several credit cards, requiring him to pay hundreds of dollars a month in interest charges? Of course not. Similarly, firms need to pay attention to all activities in the value chain.16 Too often managers make big cuts in operating expenses but don't question year-to-year spending on capital projects. Or managers may decide to cut selling and marketing expenses but ignore manufacturing expenses. Managers should explore all value-chain activities, including relationships among them, as candidates for cost reductions. • Increase in the cost of the inputs on which the advantage is based. Firms can be vulnerable to price increases in the factors of production. For example, consider manufacturing firms based in China that rely on low labor costs. Due to demographic factors, the supply of workers 16 to 24 years old has peaked and will drop by a third in the next 12 years, thanks to stringent family-planning policies that have sharply reduced China's population growth.17 This is leading to upward pressure on labor costs in Chinese factories, undercutting the cost advantage of firms producing there. • A strategy that can be imitated too easily. One of the common pitfalls of a cost leadership strategy is that a firm's strategy may consist of value-creating activities that are easy to imitate.18 Such has been the case with online brokers in recent years.19 As of early 2019, there were over 200 online brokers listed on allstocks.com, hardly symbolic of an industry where imitation is extremely difficult. And according to Henry McVey, financial services analyst at Morgan Stanley, "We think you need five to ten" online brokers. • A lack of parity on differentiation. As noted earlier, firms striving to attain cost leadership advantages must obtain a level of parity on differentiation.20 Firms providing online degree programs may offer low prices. However, they may not be successful unless they can offer instruction that is perceived as comparable to traditional providers. For them, parity can be achieved on differentiation dimensions such as reputation and quality and through signaling mechanisms such as accreditation agencies. • Reduced flexibility. Building up a low-cost advantage often requires significant investments in plant and equipment, distribution systems, and large, economically scaled operations. As a result, firms often find that these investments limit their flexibility, leading to great difficulty responding to changes in the environment. For example, Coors Brewing developed a highly efficient, large-scale brewery in Golden, Colorado. Coors was one of the most efficient brewers in the world, but its plant was designed to mass-produce one or two types of beer. When the craft brewing craze started to grow, the plant was not well equipped to produce smaller batches of craft beer, and Coors found it difficult to meet this opportunity. Ultimately, Coors had to buy its way into this movement by acquiring small craft breweries.2 • Obsolescence of the basis of cost advantage. Ultimately, the foundation of a firm's cost advantage may become obsolete. In such circumstances, other firms develop new ways of cutting costs, leaving the old cost leaders at a significant disadvantage. The older cost leaders are often locked into their way of competing and are unable to respond to the newer, lower-cost means of competing. This is the position that discount investment advisors now find themselves. Charles Schwab and TD Ameritrade challenged traditional brokers with lower cost business models. Now, they find themselves having to respond to a new class of robo-advisor firms, such as Betterment, that offer even lower cost investment advice using automated data analytic-based computer systems Differentiation - As the name implies, a differentiation strategy consists of creating differences in the firm's product or service offering by creating something that is perceived industrywide as unique and valued by customers.22 Differentiation can take many forms: • Prestige or brand image (Hotel Monaco, BMW automobiles).23 • Quality (Apple, Ruth's Chris steak houses, Michelin tires). • Technology (Martin guitars, North Face camping equipment). • Innovation (Medtronic medical equipment, Tesla Motors). • Features (Cannondale mountain bikes, Ducati motorcycles). • Customer service (Nordstrom department stores, USAA financial services). • Dealer network (Lexus automobiles, Caterpillar earthmoving equipment). - Exhibit 5.4 draws on the concept of the value chain as an example of how firms may differentiate themselves in primary and support activities. Firms may differentiate themselves along several different dimensions at once.24 For example, the Cheesecake Factory, an upscale casual restaurant, differentiates itself by offering highquality food, the widest and deepest menu in its class of restaurants, and premium locations.25 Firms achieve and sustain differentiation advantages and attain above-average performance when their price premiums exceed the extra costs incurred in being unique.26 For example, the Cheesecake Factory must increase consumer prices to offset the higher cost of premium real estate and producing such a wide menu. Thus, a differentiator will always seek out ways of distinguishing itself from similar competitors to justify price premiums greater than the costs incurred by differentiating.27 Clearly, a differentiator cannot ignore costs. After all, its premium prices would be eroded by a markedly inferior cost position. Therefore, it must attain a level of cost parity relative to competitors. Differentiators can do this by reducing costs in all areas that do not affect differentiation. Porsche, for example, invests heavily in engine design—an area in which its customers demand excellence—but it is less concerned and spends fewer resources in the design of the instrument panel or the arrangement of switches on the radio.28 Although a differentiation firm needs to be mindful of costs, it must also regularly and consistently reinforce the foundations of its differentiation advantage. In doing so, the firm builds a stronger reputation for differentiation, and this reputation can be an enduring source of advantage in its market.29 Many companies successfully follow a differentiation strategy. For example, Zappos may sell shoes, but it sees the core element of its differentiation advantage as service. Zappos CEO Tony Hsieh puts it this way:30 "We hope that 10 years from now people won't even realize that we started out selling shoes online, and that when you say "Zappos," they'll think, "Oh, that's the place with the absolute best customer service." And that doesn't even have to be limited to being an online experience. We've had customers email us and ask us if we would please start an airline, or run the IRS" - This emphasis on service has led to great success. Growing from an idea to a billiondollar company in only a dozen years, Zappos is seeing the benefits of providing exemplary service. Strategy Spotlight 5.2 discusses how video game developers design games to differentiate the experience and lock players in to playing more frequently and for longer periods of time - Differentiation: Improving Competitive Position vis-à-vis the Five Forces Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs.31 By increasing a firm's margins, differentiation also avoids the need for a low-cost position. Higher entry barriers result because of customer loyalty and the firm's ability to provide uniqueness in its products or services.32 Differentiation also provides higher margins that enable a firm to deal with supplier power. And it reduces buyer power, because buyers lack comparable alternatives and are therefore less price-sensitive.33 Supplier power is also decreased because there is a certain amount of prestige associated with being the supplier to a producer of highly differentiated products and services. Last, differentiation enhances customer loyalty, thus reducing the threat from substitutes.34 Our examples illustrate these points. Porsche has enjoyed enhanced power over buyers because its strong reputation makes buyers more willing to pay a premium price. This lessens rivalry, since buyers become less price-sensitive. The prestige associated with its brand name also lowers supplier power since margins are high. Suppliers would probably desire to be associated with prestige brands, thus lessening their incentives to drive up prices. Finally, the loyalty and "peace of mind" associated with a service provider such as Zappos makes such firms less vulnerable to rivalry or substitute products and services - Potential Pitfalls of Differentiation Strategies Potential pitfalls of a differentiation strategy include: • Uniqueness that is not valuable. A differentiation strategy must provide unique bundles of products and/or services that customers value highly. It's not enough just to be "different." An example is Gibson's Dobro bass guitar. Gibson came up with a unique idea: Design and build an acoustic bass guitar with sufficient sound volume so that amplification wasn't necessary. The problem with other acoustic bass guitars was that they did not project enough volume because of the low-frequency bass notes. By adding a resonator plate on the body of the traditional acoustic bass, Gibson increased the sound volume. Gibson believed this product would serve a particular niche market—bluegrass and folk artists who played in small group "jams" with other acoustic musicians. Unfortunately, Gibson soon discovered that its targeted market was content with the existing options: an upright bass amplified with a microphone or an acoustic electric guitar. Thus, Gibson developed a unique product, but it was not perceived as valuable by its potential customers.3 • Too much differentiation. Firms may strive for quality or service that is higher than customers desire.36 Thus, they become vulnerable to competitors that provide an appropriate level of quality at a lower price. For example, consider the expensive Mercedes-Benz S-Class, which ranged in price between $93,650 and $138,000 for the 2011 models.37 Consumer Reports described it as "sumptuous," "quiet and luxurious," and a "delight to drive." The magazine also considered it to be the least reliable sedan available in the United States. According to David Champion, who runs the testing program, the problems are electronic. "The engineers have gone a little wild," he says. "They've put in every bell and whistle that they think of, and sometimes they don't have the attention to detail to make these systems work."38 Some features include a computer-driven suspension that reduces body roll as the vehicle whips around a corner; cruise control that automatically slows the car down if it gets too close to another car; and seats that are adjustable 14 ways and are ventilated by a system that uses eight fans. • Too high a price premium. This pitfall is quite similar to too much differentiation. Customers may desire the product, but they are repelled by the price premium. For example, Apple, a firm that has successfully differentiated itself and built strong customer loyalty, has appeared to hit a limit in pricing with the iPhone XS. This model of iPhone can cost as much as $1,500, but at that price, Apple found demand very weak. This led Apple to reduce the price of the phone in some markets to drum up sales.39 • Differentiation that is easily imitated. As we noted in Chapter 3, resources that are easily imitated cannot lead to sustainable advantages. Similarly, firms may strive for, and even attain, a differentiation strategy that is successful for a time. However, the advantages are eroded through imitation. Consider Cereality's innovative differentiation strategy of stores that offer a wide variety of cereals and toppings for around $4.40 As one would expect, once the idea proved successful, competitors entered the market because much of the initial risk had already been taken. These new competitors included stores with the following names: the Cereal Cabinet, The Cereal Bowl, and Bowls: A Cereal Joint. Says David Roth, one of Cereality's founders: "With any good business idea, you're faced with people who see you've cracked the code and who try to cash in on it."41 • Dilution of brand identification through product-line extensions. Firms may erode their quality brand image by adding products or services with lower prices and less quality. Although this can increase short-term revenues, it may be detrimental in the long run. Consider Gucci.42 In the 1980s Gucci wanted to capitalize on its prestigious brand name by launching an aggressive strategy of revenue growth. It added a set of lowerpriced canvas goods to its product line. It also pushed goods heavily into department stores and duty-free channels and allowed its name to appear on a host of licensed items such as watches, eyeglasses, and perfumes. In the short term, this strategy worked. Sales soared. However, the strategy carried a high price. Gucci's indiscriminate approach to expanding its products and channels tarnished its sterling brand. Sales of its high-end goods (with higher profit margins) fell, causing profits to decline • Perceptions of differentiation that vary between buyers and sellers. The issue here is that "beauty is in the eye of the beholder." Companies must realize that although they may perceive their products and services as differentiated, their customers may view them as commodities. Indeed, in today's marketplace, many products and services have been reduced to commodities.43 Thus, a firm could overprice its offerings and lose margins altogether if it has to lower prices to reflect market realities - Exhibit 5.5 summarizes the pitfalls of overall cost leadership and differentiation strategies. In addressing the pitfalls associated with hese two generic strategies, there is one common, underlying theme: Managers must be aware of the dangers associated with concentrating so much on one strategy that they fail to attain parity on the other Focus - A focus strategy is based on the choice of a narrow competitive scope within an industry. A firm following this strategy selects a segment or group of segments and tailors its strategy to serve them. The essence of focus is the exploitation of a particular market niche. As you might expect, narrow focus itself (like merely "being different" as a differentiator) is simply not sufficient for above-average performance. The focus strategy, as indicated in Exhibit 5.1, has two variants. In a cost focus, a firm strives to create a cost advantage in its target segment. In a differentiation focus, a firm seeks to differentiate in its target market. Both variants of the focus strategy rely on providing better service than broad-based competitors that are trying to serve the focuser's target segment. Cost focus exploits differences in cost behavior in some segments, while differentiation focus exploits the special needs of buyers in other segments. Let's look at examples of two firms that have successfully implemented focus strategies. LinkedIn has staked out a position as the business social media site of choice. Rather than compete with Facebook head on, LinkedIn created a strategy that focuses on individuals who wish to share their business experience and make connections with individuals with whom they share or could potentially share business ties. In doing so, it has created an extremely strong business model. LinkedIn monetizes its user information in three ways: subscription fees from some users, advertising fees, and recruiter fees. The first two are fairly standard for social media sites, but the advertising fees are higher for LinkedIn since the ads can be more effectively targeted as a result of LinkedIn's focus. The third income source is fairly unique for LinkedIn. Headhunters and human resource departments pay significant user fees, up to $8,200 a year, to have access to LinkedIn's recruiting search engine, which can sift through LinkedIn profiles to identify individuals with desired skills and experiences. The power of this business model can be seen in the difference in user value for LinkedIn when compared to Facebook. For every hour that a user spends on the site, LinkedIn generates $1.30 in income. For Facebook, it is a paltry 6.2 cents.44 Marlin Steel Wire Products, a Baltimore-based manufacturing company, has also seen great benefit from developing a niche-differentiator strategy. Marlin, a manufacturer of commodity wire products, faced stiff and ever-increasing competition from rivals based in China and other emerging markets. These rivals had labor-based cost advantages that Marlin found hard to counter. Marlin responded by changing the game it played. Drew Greenblatt, Marlin's president, decided to go upmarket, automating his production and specializing in high-end products. For example, Marlin produces antimicrobial baskets for restaurant kitchens and exports its products globally. Marlin provides products to customers in 36 countries and, in 2012, was listed as the 162nd fastest-growing private manufacturing company in the United States.45 Strategy Spotlight 5.3 illustrates how Aston Martin pursued an extreme focus positioning by developing a hypercar for the super rich. Focus: Improving Competitive Position vis-à-vis the Five Forces Focus requires that a firm have either a low-cost position with its strategic target, high differentiation, or both. As we discussed with regard to cost and differentiation strategies, these positions provide defenses against each competitive force. Focus is also used to select niches that are least vulnerable to substitutes or where competitors are weakest. Let's look at our examples to illustrate some of these points. First, by providing a platform for a targeted customer group, businesspeople, to share key work information, LinkedIn insulated itself from rivalrous pressure from existing social networks, such as Facebook. It also felt little threat from new generalist social networks, such as Google +. Similarly, the new focus of Marlin Steel lessened the power of buyers since the company provides specialized products. Also, it is insulated from competitors, which manufacture the commodity products Marlin used to produce. Potential Pitfalls of Focus Strategies Potential pitfalls of focus strategies include: • Cost advantages may erode within the narrow segment. The advantages of a cost focus strategy may be fleeting if the cost advantages are eroded over time. For example, early pioneers in online education, such as the University of Phoenix, have faced increasing challenges as traditional universities have entered with their own online programs that allow them to match the cost benefits associated with online delivery systems. Similarly, other firms have seen their profit margins drop as competitors enter their product segment • Even product and service offerings that are highly focused are subject to competition from new entrants and from imitation. Some firms adopting a focus strategy may enjoy temporary advantages because they select a small niche with few rivals. However, their advantages may be short-lived. A notable example is the multitude of dotcom firms that specialize in very narrow segments such as pet supplies, ethnic foods, and vintage automobile accessories. The entry barriers tend to be low, there is little buyer loyalty, and competition becomes intense. And since the marketing strategies and technologies employed by most rivals are largely nonproprietary, imitation is easy. Over time, revenues fall, profits margins are squeezed, and only the strongest players survive the shakeout. • Focusers can become too focused to satisfy buyer needs. Some firms attempting to attain advantages through a focus strategy may have too narrow a product or service. Consider many retail firms. Hardware chains such as Ace and True Value are losing market share to rivals such as Lowe's and Home Depot that offer a full line of home and garden equipment and accessories. And given the enormous purchasing power of the national chains, it would be difficult for such specialty retailers to attain parity on costs. Combination Strategies: Integrating Overall Low Cost and Differentiation - Perhaps the primary benefit to firms that integrate low-cost and differentiation strategies is the difficulty for rivals to duplicate or imitate.46 This strategy enables a firm to provide two types of value to customers: differentiated attributes (e.g., high quality, brand identification, reputation) and lower prices (because of the firm's lower costs in value-creating activities). The goal is thus to provide unique value to customers in an efficient manner.47 Some firms are able to attain both types of advantages simultaneously.48 For example, superior quality can lead to lower costs because of less need for rework in manufacturing, fewer warranty claims, a reduced need for customer service personnel to resolve customer complaints, and so forth. Thus, the benefits of combining advantages can be additive, instead of merely involving trade-offs. Next, we consider four approaches to combining overall low cost and differentiation. Adopting Automated and Flexible Manufacturing Systems Given the advances in manufacturing technologies such as CAD/CAM (computer aided design and computer aided manufacturing) as well as information technologies, many firms have been able to manufacture unique products in relatively small quantities at lower costs—a concept known as mass customization.49 Using Data Analytics Corporations are increasingly collecting and analyzing data on their customers, including data on customer characteristics, purchasing patterns, employee productivity, and physical asset utilization. These efforts have the potential to allow firms to better customize their product and service offerings to customers while more efficiently and fully using the resources of the company. For example, Caterpillar collects and analyzes large volumes of data about how customers use their tractors. Since this data helps Caterpillar better assess the uses and limitations of their current tractors, the firm can use data analytics to employ more focused and timely product improvement efforts. This allows the firm to simultaneously reduce the cost of new product development efforts and better differentiate their products.50 Exploiting the Profit Pool Concept for Competitive Advantage A profit pool is defined as the total profits in an industry at all points along the industry's value chain.51 Although the concept is relatively straightforward, the structure of the profit pool can be complex.52 The potential pool of profits will be deeper in some segments of the value chain than in others, and the depths will vary within an individual segment. Segment profitability may vary widely by customer group, product category, geographic market, or distribution channel. Additionally, the pattern of profit concentration in an industry is very often different from the pattern of revenue generation. For example, with airlines squeezing aircraft manufacturers on the prices of planes the airlines are ordering, Boeing has made a big push into providing maintenance and repair services to airlines, business segments that are potentially more profitable than aircraft manufacturing.53 Unscaling to Create a Combination Strategy For decades, firms built large-scaled operations to run as efficiently as possible in order to dominate markets. Doing so allowed the firm to build cost advantages over rivals, but this large scale also led them to be slow to responding to market changes and limited in their ability to customize their products to specific customer needs. Unscaling turns this logic on its head. Rather than building scaled operations to meet general customer needs, unscaled firms look to build small scale operations that meet the needs of particular customers as efficiently or possible, at times even more efficiently than scaled competitors. Unscaling involves both the leveraging of technology, such as artificial intelligence, and the reliance on suppliers or customers to provide critical inputs to the process. For example, Waze, a GPS Navigation app, relies on inputs from users to provide information on traffic conditions and uses artificial intelligence to develop algorithms for each user, tailoring the route map for that user at that particular moment. Larger firms that have previously relied on scale are also employing elements of unscaling. Proctor & Gamble (P&G) faces a slew of unscaled competitors, such as the Dollar Shave Club's subscription model and The Honest Co's environmentally friendly diapers. P&G has responded with its Connect + Develop initiative. After relying on internal development of products for 175 years, P&G now invites outside inventors to submit development proposals to the company. If their proposals are approved, these inventors can effectively "rent" P&G's distribution and marketing to get their products to market. Doing so allows P&G to be more nimble in meeting the needs of different customers in an efficient way since the firm doesn't bear the entire cost of product development. In essence, P&G is slowly translating itself into becoming a consumer product platform rented by an everchanging set of small, focused product developers.54 Strategy Spotlight 5.4 discusses how one men's clothing retailer, Indochino, is leveraging the power of unscaled operations to outcompete traditional retailers. Integrated Overall Low-Cost and Differentiation Strategies: Improving Competitive Position vis-à-vis the Five Forces Firms that successfully integrate both differentiation and cost advantages create an enviable position. For example, Walmart's integration of information systems, logistics, and transportation helps it to drive down costs and provide outstanding product selection. This dominant competitive position serves to erect high entry barriers to potential competitors that have neither the financial nor physical resources to compete head-to-head. Walmart's size—with over $482 million in sales in 2016—provides the chain with enormous bargaining power over suppliers. Its low pricing and wide selection reduce the power of buyers (its customers), because there are relatively few competitors that can provide a comparable cost/value proposition. This reduces the possibility of intense head-tohead rivalry, such as protracted price wars. Finally, Walmart's overall value proposition makes potential substitute products (e.g., Internet competitors) a less viable threat. Pitfalls of Integrated Overall Cost Leadership and Differentiation Strategies The pitfalls of integrated overall cost leadership and differentiation include: • Failing to attain both strategies and possibly ending up with neither, leaving the firm "stuck in the middle." A key issue in strategic management is the creation of competitive advantages that enable a firm to enjoy above-average returns. Some firms may become stuck in the middle if they try to attain both cost and differentiation advantages. As mentioned earlier in this chapter, mainline supermarket chains find themselves stuck in the middle as their cost structure is higher than discount retailers offering groceries and their products and services are not seen by consumers as being as valuable as those of high-end grocery chains, such as Whole Foods. • Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain. Integrating activities across a firm's value chain with the value chain of suppliers and customers involves a significant investment in financial and human resources. Firms must consider the expenses linked to technology investment, managerial time and commitment, and the involvement and investment required by the firm's customers and suppliers. The firm must be confident that it can generate a sufficient scale of operations and revenues to justify all associated expenses. • Miscalculating sources of revenue and profit pools in the firm's industry. Firms may fail to accurately assess sources of revenue and profits in their value chain. This can occur for several reasons. For example, a manager may be biased due to his or her functional area background, work experiences, and educational background. If the manager's background is in engineering, he or she might perceive that proportionately greater revenue and margins were being created in manufacturing, product, and process design than a person whose background is in a "downstream" value-chain activity such as marketing and sales. Or politics could make managers "fudge" the numbers to favor their area of operations. This would make them responsible for a greater proportion of the firm's profits, thus improving their bargaining position. - A related problem is directing an overwhelming amount of managerial time, attention, and resources to value-creating activities that produce the greatest margins—to the detriment of other important, albeit less profitable, activities. For example, a car manufacturer may focus too much on downstream activities, such as warranty fulfillment and financing operations, to the detriment of differentiation and cost of the cars themselves.

INDUSTRY LIFE-CYCLE STAGES: STRATEGIC IMPLICATIONS

The industry life cycle refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry. In considering the industry life cycle, it is useful to think in terms of broad product lines such as personal computers, photocopiers, or long-distance telephone service. Yet the industry life-cycle concept can be explored from several levels, from the life cycle of an entire industry to the life cycle of a single variation or model of a specific product or service. Why are industry life cycles important?60 The emphasis on various generic strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle. Managers must become even more aware of their firm's strengths and weaknesses in many areas to attain competitive advantages. For example, firms depend on their research and development (R&D) activities in the introductory stage. R&D is the source of new products and features that everyone hopes will appeal to customers. Firms develop products and services to stimulate consumer demand. Later, during the maturity phase, the functions of the product have been defined, more competitors have entered the market, and competition is intense. Managers then place greater emphasis on production efficiencies and process (as opposed to the product) engineering in order to lower manufacturing costs. This helps to protect the firm's market position and to extend the product life cycle because the firm's lower costs can be passed on to consumers in the form of lower prices, and price-sensitive customers will find the product more appealing. Exhibit 5.6 illustrates the four stages of the industry life cycle and how factors such as generic strategies, market growth rate, intensity of competition, and overall objectives change over time. Managers must strive to emphasize the key functional areas during each of the four stages and to attain a level of parity in all functional areas and value-creating activities. For example, although controlling production costs may be a primary concern during the maturity stage, managers should not totally ignore other functions such as marketing and R&D. If they do, they can become so focused on lowering costs that they miss market trends or fail to incorporate important product or process designs. Thus, the firm may attain low-cost products that have limited market appeal. - It is important to point out a caveat. While the life-cycle idea is analogous to a living organism (i.e., birth, growth, maturity, and death), the comparison has limitations.61 Products and services go through many cycles of innovation and renewal. Typically, only fad products have a single life cycle. Maturity stages of an industry can be "transformed" or followed by a stage of rapid growth if consumer tastes change, technological innovations take place, or new developments occur. The cereal industry is a good example. When medical research indicated that oat consumption reduced a person's cholesterol, sales of Quaker Oats increased dramatically.62 Strategies in the Introduction Stage - In the introduction stage, products are unfamiliar to consumers.63 Market segments are not well defined, and product features are not clearly specified. The early development of an industry typically involves low sales growth, rapid technological change, operating losses, and the need for strong sources of cash to finance operations. Since there are few players and not much growth, competition tends to be limited. Success requires an emphasis on research and development and marketing activities to enhance awareness. The challenge becomes one of (1) developing the product and finding a way to get users to try it, and (2) generating enough exposure so the product emerges as the "standard" by which all other rivals' products are evaluated. There's an advantage to being the "first mover" in a market.64 It led to Coca-Cola's success in becoming the first soft-drink company to build a recognizable global brand and enabled Caterpillar to get a lock on overseas sales channels and service capabilities. However, there can also be a benefit to being a "late mover." Target carefully considered its decision to delay its Internet strategy. Compared to its competitors Walmart and Kmart, Target was definitely an industry laggard. But things certainly turned out well: "By waiting, Target gained a late-mover advantage. The store was able to use competitors' mistakes as its own learning curve. This saved money, and customers didn't seem to mind the wait: When Target finally opened its website, it quickly captured market share from both Kmart and Walmart Internet shoppers. Forrester Research Internet analyst Stephen Zrike commented, "There's no question, in our mind, that Target has a far better understanding of how consumers buy online." - Examples of products currently in the introductory stages of the industry life cycle include electric vehicles and space tourism. Strategies in the Growth Stage - The growth stage is characterized by strong increases in sales. Such potential attracts other rivals. In the growth stage, the primary key to success is to build consumer preferences for specific brands. This requires strong brand recognition, differentiated products, and the financial resources to support a variety of value-chain activities such as marketing and sales, and research and development. Whereas marketing and sales initiatives were mainly directed at spurring aggregate demand—that is, demand for all such products in the introduction stage—efforts in the growth stage are directed toward stimulating selective demand, in which a firm's product offerings are chosen instead of a rival's. Revenues increase at an accelerating rate because (1) new consumers are trying the product and (2) a growing proportion of satisfied consumers are making repeat purchases.66 In general, as a product moves through its life cycle, the proportion of repeat buyers to new purchasers increases. Conversely, new products and services often fail if there are relatively few repeat purchases. For example, Alberto-Culver introduced Mr. Culver's Sparklers, which were solid air fresheners that looked like stained glass. Although the product quickly went from the introductory to the growth stage, sales collapsed. Why? Unfortunately, there were few repeat purchasers because buyers treated them as inexpensive window decorations, left them there, and felt little need to purchase new ones. Examples of products currently in the growth stage include cloud computing data storage services and ultra-high-definition television (UHD TV). Strategies in the Maturity Stage - In the maturity stage aggregate industry demand softens. As markets become saturated, there are few new adopters. It's no longer possible to "grow around" the competition, so direct competition becomes predominant.67 With few attractive prospects, marginal competitors exit the market. At the same time, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price-sensitive. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services. The domestic beer industry demonstrates how firms become increasingly competitive as growth tails off. Beer firms have been attacked by both upstart craft brewers and other substitute drinks, such as distilled spirits. As a result, the major brewers initiated advertising campaigns that directly attacked their major rivals. For example, AB InBev launched a campaign that criticized MillerCoors for using corn syrup as an ingredient in its light beers. In addition to beer, many product classes and industries, including consumer products such as cell phones, automobiles, and athletic shoes, are in maturity. Firms do not need to be "held hostage" to the life-cycle curve. By positioning or repositioning their products in unexpected ways, firms can change how customers mentally categorize them. Thus, firms are able to rescue products floundering in the maturity phase of their life cycles and return them to the growth phase. Two positioning strategies that managers can use to affect consumers' mental shifts are reverse positioning, which strips away "sacred" product attributes while adding new ones, and breakaway positioning, which associates the product with a radically different category.68 Reverse Positioning This strategy assumes that although customers may desire more than the baseline product, they don't necessarily want an endless list of features. With reverse positioning, companies make the creative decision to step off the augmentation treadmill and shed product attributes that the rest of the industry considers sacred. Then, once a product is returned to its baseline state, the stripped-down product adds one or more carefully selected attributes that would usually be found only in a highly augmented product. Such an unconventional combination of attributes allows the product to assume a new competitive position within the category and move backward from maturity into a growth position on the life-cycle curve. Breakaway Positioning As noted previously, with reverse positioning, a product establishes a unique position in its category but retains a clear category membership. However, with breakaway positioning, a product escapes its category by deliberately associating with a different one. Thus, managers leverage the new category's conventions to change both how products are consumed and with whom they compete. Instead of merely seeing the breakaway product as simply an alternative to others in its category, consumers perceive it as altogether different. When a breakaway product is successful in leaving its category and joining a new one, it is able to redefine its competition. Similar to reverse positioning, this strategy permits the product to shift backward on the life-cycle curve, moving from the rather dismal maturity phase to a thriving growth opportunity Strategies in the Decline Stage - Although all decisions in the phases of an industry life cycle are important, they become particularly difficult in the decline stage. Firms must face up to the fundamental strategic choices of either exiting or staying and attempting to consolidate their position in the industry.69 The decline stage occurs when industry sales and profits begin to fall. Typically, changes in the business environment are at the root of an industry or product group entering this stage.70 Changes in consumer tastes or a technological innovation can push a product into decline. For example, the advent of online news services pushed the print newspaper and news magazine businesses into a rapid decline. Products in the decline stage often consume a large share of management time and financial resources relative to their potential worth. Sales and profits decline. Also, competitors may start drastically cutting their prices to raise cash and remain solvent. The situation is further aggravated by the liquidation of assets, including inventory, of some of the competitors that have failed. This further intensifies price competition. In the decline stage, a firm's strategic options become dependent on the actions of rivals. If many competitors leave the market, sales and profit opportunities increase. On the other hand, prospects are limited if all competitors remain.71 If some competitors merge, their increased market power may erode the opportunities for the remaining players. Managers must carefully monitor the actions and intentions of competitors before deciding on a course of action. Four basic strategies are available in the decline phase: maintaining, harvesting, exiting, and consolidating.72 • Maintaining refers to keeping a product going without significantly reducing marketing support, technological development, or other investments, in the hope that competitors will eventually exit the market. For example, even though most documents are sent digitally, there is still a significant market for fax machines since many legal and investment documents must still be signed and sent using a fax. This mode of transmission is still seen as more secure than other means of transmission. Thus, there may still be the potential for revenues and profits • Harvesting involves obtaining as much profit as possible and requires that costs be reduced quickly. Managers should consider the firm's value-creating activities and cut associated budgets. Value-chain activities to consider are primary (e.g., operations, sales and marketing) and support (e.g., procurement, technology development). The objective is to wring out as much profit as possible. • Exiting the market involves dropping the product from a firm's portfolio. Since a residual core of consumers exist, eliminating it should be carefully considered. If the firm's exit involves product markets that affect important relationships with other product markets in the corporation's overall portfolio, an exit could have repercussions for the whole corporation. For example, it may involve the loss of valuable brand names or human capital with a broad variety of expertise in many value-creating activities such as marketing, technology, and operations. • Consolidation involves one firm acquiring at a reasonable price the best of the surviving firms in an industry. This enables firms to enhance market power and acquire valuable assets. One example of a consolidation strategy took place in the defense industry in the early 1990s. As the cliché suggests, "peace broke out" at the end of the Cold War and overall U.S. defense spending levels plummeted.73 Many companies that make up the defense industry saw more than 50 percent of their market disappear. Only one-quarter of the 120,000 companies that once supplied the Department of Defense still serve in that capacity; the others have shut down their defense business or dissolved altogether. But one key player, Lockheed Martin, became a dominant rival by pursuing an aggressive strategy of consolidation. During the 1990s, it purchased 17 independent entities, including General Dynamics' tactical aircraft and space systems divisions, GE Aerospace, Goodyear Aerospace, and Honeywell Electro-Optics. These combinations enabled Lockheed Martin to emerge as the top provider to three governmental customers: the Department of Defense, the Department of Energy, and NASA. - Examples of products currently in the decline stage of the industry life cycle include cable TV (being replaced by streaming services), hard disk drives (being replaced by cloud storage), and taxis (being replaced by ride sharing services). The introduction of new technologies and associated products does not always mean that old technologies quickly fade away. Research shows that in a number of cases, old technologies actually enjoy a very profitable "last gasp."74 Examples include disposable batteries (versus rechargeable batteries), coronary artery bypass graft surgery (versus angioplasty), and vinyl records (versus CDs and digital downloads of music). In each case, the advent of new technology prompted predictions of the demise of the older technology, but each of these has proved to be a resilient survivor. Strategy Spotlight 5.5 discusses how the major disposable battery manufacturers have rejuvenated their profitability even as demand declines. What accounts for their continued profitability and survival? Retreating to more defensible ground is one strategy that firms specializing in technologies threatened with rapid obsolescence have followed. For example, while angioplasty may be appropriate for relatively healthier patients with blocked arteries, sicker, higher-risk patients seem to benefit more from coronary artery bypass graft surgery. This enabled the surgeons to concentrate on the more difficult cases and improve the technology itself. The advent of television unseated the radio as the major source of entertainment from American homes. However, the radio has survived and even thrived in venues where people are also engaged in other activities, such as driving. Using the new to improve the old is a second approach. Train service providers in Europe have incorporated elements of the business model of discount airlines to win business back from them. Improving the price-performance trade-off is a third approach. IBM continues to make money selling mainframes long after their obituary was written. It retooled the technology using low-cost microprocessors and cut their prices drastically. Further, it invested and updated the software, enabling it to offer clients such as banks better performance and lower costs. Turnaround Strategies - A turnaround strategy involves reversing performance decline and reinvigorating growth toward profitability.75 A need for turnaround may occur at any stage in the life cycle but is more likely to occur during maturity or decline. Most turnarounds require a firm to carefully analyze the external and internal environments.76 The external analysis leads to identification of market segments or customer groups that may still find the product attractive.77 Internal analysis results in actions aimed at reduced costs and higher efficiency. A firm needs to undertake a mix of both internally and externally oriented actions to effect a turnaround.78 In effect, the cliché "You can't shrink yourself to greatness" applies. A study of 260 mature businesses in need of a turnaround identified three strategies used by successful companies.79 • Asset and cost surgery. Very often, mature firms tend to have assets that do not produce any returns. These include real estate, buildings, and so on. Outright sales or sale and leaseback free up considerable cash and improve returns. Investment in new plants and equipment can be deferred. Firms in turnaround situations try to aggressively cut administrative expenses and inventories and speed up collection of receivables. Costs also can be reduced by outsourcing production of various inputs for which market prices may be cheaper than in-house production costs • Selective product and market pruning. Most mature or declining firms have many product lines that are losing money or are only marginally profitable. One strategy is to discontinue such product lines and focus all resources on a few core profitable areas. For example, in 2014, Procter & Gamble announced that it would sell off or close down up to 100 of its brands, allowing the firm to improve its efficiency and its innovativeness as it focused on its core brands. The remaining 70 to 80 "core" brands accounted for 90 percent of the firm's sales. • Piecemeal productivity improvements. There are many ways in which a firm can eliminate costs and improve productivity. Although individually these are small gains, they cumulate over a period of time to substantial gains. Improving business processes by reengineering them, benchmarking specific activities against industry leaders, encouraging employee input to identify excess costs, increasing capacity utilization, and improving employee productivity lead to a significant overall gain

CAN COMPETITIVE STRATEGIES BE SUSTAINED? INTEGRATING AND APPLYING STRATEGIC MANAGEMENT CONCEPTS

Thus far this chapter has addressed how firms can attain competitive advantages in the marketplace. We discussed the three generic strategies—overall cost leadership, differentiation, and focus—as well as combination strategies. Next we discussed the importance of linking value-chain activities (both those within the firm and those linkages between the firm's suppliers and customers) to attain such advantages. We also showed how successful competitive strategies enable firms to strengthen their position vis-à-vis the five forces of industry competition as well as how to avoid the pitfalls associated with the strategies. Competitive advantages are, however, often short-lived. As we discussed in the beginning of Chapter 1, the composition of the firms that constitute the Fortune 500 list has experienced significant turnover in its membership over the years—reflecting the temporary nature of competitive advantages. Consider BlackBerry's fall from grace. BlackBerry initially dominated the smartphone market. BlackBerry held 20 percent of the cell phone market in 2009, and its users were addicted to BlackBerry's products, leading some to refer to them as crackberrys. However, the firm's market share quickly eroded with the introduction of touch screen smartphones from Apple, Samsung, and others. BlackBerry was slow to move away from its physical keyboards and saw its market share fall to 0.1 percent by 2016.55 Clearly, "nothing is forever" when it comes to competitive advantages. Rapid changes in technology, globalization, and actions by rivals from within—as well as outside—the industry can quickly erode a firm's advantages. It is becoming increasingly important to recognize that the duration of competitive advantages is declining, especially in technology-intensive industries.56 Even in industries that are normally viewed as "low tech," the increasing use of technology has suddenly made competitive advantages less sustainable.57 Amazon's success in book retailing at the cost of Barnes & Noble, the former industry leader, as well as cable TV's difficulties in responding to streaming services providers like Netflix and Hulu, serve to illustrate how difficult it has become for industry leaders to sustain competitive advantages that they once thought would last forever. In this section, we will discuss some factors that help determine whether a strategy is sustainable over a long period of time. We will draw on some strategic management concepts from the first five chapters. To illustrate our points, we will look at a company, Atlas Door, which created an innovative strategy in its industry and enjoyed superior performance for several years. Our discussion of Atlas Door draws on a Harvard Business Review article by George Stalk, Jr.58 It was published some time ago (1988), which provides us the benefit of hindsight to make our points about the sustainability of competitive advantage. After all, the strategic management concepts we have been addressing in the text are quite timeless in their relevance to practice. A brief summary follows Atlas Door: A Case Example - Atlas Door, a U.S.-based company, has enjoyed remarkable success. It has grown at an average annual rate of 15 percent in an industry with an overall annual growth rate of less than 5 percent. Recently, its pretax earnings were 20 percent of sales—about five times the industry average. Atlas is debt-free, and by its 10th year, the company had achieved the number-one competitive position in its industry. Atlas produces industrial doors—a product with almost infinite variety, involving limitless choices of width and height and material. Given the importance of product variety, inventory is almost useless in meeting customer orders. Instead, most doors can be manufactured only after the order has been placed. How Did Atlas Door Create Its Competitive Advantages in the Marketplace? First, Atlas built just-in-time factories. Although simple in concept, they require extra tooling and machinery to reduce changeover times. Further, the manufacturing process must be organized by product and scheduled to start and complete with all of the parts available at the same time. Second, Atlas reduced the time to receive and process an order. Traditionally, when customers, distributors, or salespeople called a door manufacturer with a request for price and delivery, they would have to wait more than one week for a response. In contrast, Atlas first streamlined and then automated its entire order-entry, engineering, pricing, and scheduling process. Atlas can price and schedule 95 percent of its incoming orders while the callers are still on the telephone. It can quickly engineer new special orders because it has preserved on computer the design and production data of all previous special orders—which drastically reduces the amount of reengineering necessary. Third, Atlas tightly controlled logistics so that it always shipped only fully complete orders to construction sites. Orders require many components, and gathering all of them at the factory and making sure that they are with the correct order can be a time-consuming task. Of course, it is even more time-consuming to get the correct parts to the job site after the order has been shipped! Atlas developed a system to track the parts in production and the purchased parts for each order. This helped to ensure the arrival of all necessary parts at the shipping dock in time—a just-in-time logistics operation. The Result? When Atlas began operations, distributors had little interest in its product. The established distributors already carried the door line of a much larger competitor and saw little to no reason to switch suppliers except, perhaps, for a major price concession. But as a start-up, Atlas was too small to compete on price alone. Instead, it positioned itself as the door supplier of last resort—the company people came to if the established supplier could not deliver or missed a key date. Of course, with an average industry order-fulfillment time of almost four months, some calls inevitably came to Atlas. And when it did get the call, Atlas commanded a higher price because of its faster delivery. Atlas not only got a higher price, but its effective integration of value-creating activities saved time and lowered costs. Thus, it enjoyed the best of both worlds. In 10 short years, the company replaced the leading door suppliers in 80 percent of the distributors in the United States. With its strategic advantage, the company could be selective— becoming the supplier for only the strongest distributors. Are Atlas Door's Competitive Advantages Sustainable? - We will now take both the "pro" and "con" positions as to whether or not Atlas Door's competitive advantages will be sustainable for a very long time. It is important, of course, to assume that Atlas Door's strategy is unique in the industry, and the central issue becomes whether or not rivals will be able to easily imitate its strategy or create a viable substitute strategy. "Pro" Position: The Strategy Is Highly Sustainable Drawing on Chapter 2, it is quite evident that Atlas Door has attained a very favorable position vis-à-vis the five forces of industry competition. For example, it is able to exert power over its customers (distributors) because of its ability to deliver a quality product in a short period of time. Also, its dominance in the industry creates high entry barriers for new entrants. It is also quite evident that Atlas Door has been able to successfully integrate many value-chain activities within the firm—a fact that is integral to its just-in-time strategy. As noted in Chapter 3, such integration of activities provides a strong basis for sustainability, because rivals would have difficulty in imitating this strategy due to causal ambiguity and path dependency (i.e., it is difficult to build up in a short period of time the resources that Atlas Door has accumulated and developed as well as disentangle the causes of what the valuable resources are or how they can be re-created). Further, as noted in Chapter 4, Atlas Door benefits from the social capital that it has developed with a wide range of key stakeholders (Chapter 1). These would include customers, employees, and managers (a reasonable assumption, given how smoothly the internal operations flow and the company's long-term relationships with distributors). It would be very difficult for a rival to replace Atlas Door as the supplier of last resort—given the reputation that it has earned over time for "coming through in the clutch" on timesensitive orders. Finally, we can conclude that Atlas Door has created competitive advantages in both overall low cost and differentiation (Chapter 5). Its strong linkages among value-chain activities—a requirement for its just-in-time operations—not only lower costs but enable the company to respond quickly to customer orders. As noted in Exhibit 5.4, many of the value-chain activities associated with a differentiation strategy reflect the element of speed or quick response. "Con" Position: The Strategy Can Be Easily Imitated or Substituted An argument could be made that much of Atlas Door's strategy relies on technologies that are rather well known and nonproprietary. Over time, a well-financed rival could imitate its strategy (via trial and error), achieve a tight integration among its value-creating activities, and implement a justin-time manufacturing process. Because human capital is highly mobile (Chapter 4), a rival could hire away Atlas Door's talent, and these individuals could aid the rival in transferring Atlas Door's best practices. A new rival could also enter the industry with a large resource base, which might enable it to price its doors well under Atlas Door to build market share (but this would likely involve pricing below cost and would be a risky and nonsustainable strategy). Finally, a rival could potentially "leapfrog" the technologies and processes that Atlas Door has employed and achieve competitive superiority. With the benefit of hindsight, it could use the Internet to further speed up the linkages among its value-creating activities and the order-entry processes with its customers and suppliers. (But even this could prove to be a temporary advantage, since rivals could relatively easily do the same thing.) What Is the Verdict? Both positions have merit. Over time, it would be rather easy to see how a new rival could achieve parity with Atlas Door—or even create a superior competitive position with new technologies or innovative processes. However, two factors make it extremely difficult for a rival to challenge Atlas Door in the short term: (1) The success that Atlas Door has enjoyed with its just-in-time scheduling and production systems—which involve the successful integration of many value-creating activities—helps the firm not only lower costs but also respond quickly to customer needs, and (2) the strong, positive reputational effects that it has earned with its customers increases their loyalty and would take significant time for rivals to match. Finally, it is important to also understand that it is Atlas Door's ability to appropriate most of the profits generated by its competitive advantages that make it a highly successful company. As we discussed in Chapter 3, profits generated by resources can be appropriated by a number of stakeholders such as suppliers, customers, employees, or rivals. The structure of the industrial door industry makes such value appropriation difficult: The suppliers provide generic parts, no one buyer is big enough to dictate prices, the tacit nature of the knowledge makes imitation difficult, and individual employees may be easily replaceable. Still, even with the advantages that Atlas Door enjoys, it needs to avoid becoming complacent or it will suffer the same fate as the dominant firm it replaced. Strategies for Platform Markets - Before moving on to our discussion of industry life-cycle stages and competitive strategy, we introduce and discuss an emerging trend: two-sided or platform markets. In these markets, firms act as intermediaries between two sets of platform users: buyers and sellers. Firms that thrive in these markets often do not produce a product themselves. Instead, successful platform firms create a business that attracts a large range of suppliers and a wide population of customers, becoming the go-to clearinghouse that both suppliers and customers turn to in order to facilitate a transaction. In doing so, they typically successfully combine elements of both cost and differentiation advantages. These types of markets have been in existence for a long period of time. For example, VISA became the largest credit card company by signing up both the most merchants and the most customers in their card network. Retailers and restaurants now perceive the need to accept VISA credit and debit cards because millions of customers carry them. On the other side, when considering which credit card(s) to carry, most customers feel the need to carry a VISA card since it is accepted by so many merchants. As the VISA example illustrates, the sheer number of buyers and sellers using a given platform provides the platform firm with a differentiated market position while simultaneously allowing it to become a cost leader due to the economies of scale it accrues as it becomes the largest platform. While these types of markets have existed for decades, they have become increasingly common in the 21st century. Whether it is Amazon in retailing, Facebook in social networks, Airbnb in short-term housing rentals, Uber in driver services, Spotify in streaming services, or Etsy in craft products, platform businesses have taken on increasing prominence in the economy. But how do firms position themselves to succeed in these two-sided markets? It involves a combination of actions to build a strong position and facilitate optimal interactions between suppliers and users. In doing so, these firms strive to simultaneously limit costs to users and also provide differentiated service. The issues platform businesses need to master to succeed include the following. • Draw in users. The key to success in platform models is to generate the best (and often biggest) base of suppliers and customers. Thus, firms must develop effective pricing and incentives for users to attract and retain them. This typically involves subsidizing early and price-sensitive users. For example, Adobe was able to emerge as the dominant pdf software partly because it allowed users to read and print documents for free. As it established itself as "the" pdf reader software, producers of documents and those who wished to edit documents became increasingly willing to purchase software from Adobe. Thus, Adobe provided the product at no cost to some users while differentiating itself in the eyes of other users. Successful platform providers also find ways to attract and retain "marquee" users. YouTube has done this by allowing users to set up their own channel and compensate them for the volume of traffic they bring in. • Create easy and informative customer interfaces. Platform business providers need to make it easy for users to plug into the platform. For example, Quicken Loans strives to differentiate itself with its Rocket Mortgage product, arguing it is the easiest and quickest system for applying for a home mortgage—typically taking less than 10 minutes to complete the application. By developing an easy to use app that requires no lending officer interaction, Quicken Loans was also able to build a more cost-efficient lending system than traditional loan brokers. Uber similarly worked to differentiate itself with a simple app for users to connect with a driver and by providing updated information on the expected arrival time of the driver. On the supplier side, Apple strives to ease the process for software developers by providing the operating system and underlying library codes needed to develop new software. • Facilitate the best connections between suppliers and customers. Platform businesses can learn a great deal about their suppliers and customers by observing their search and usage patterns. Successful platform firms leverage this data to figure out how to best fill their matchmaking role in bringing together suppliers and users. Google is notable in its ability to tailor advertising to the search patterns of its users in order to increase the success rates for its advertising. Similarly, Airbnb has worked to create systems that increase the likelihood that hosts will agree to offers from potential renters. The firm realizes that renters get frustrated if their rental offers are declined. Additionally, hosts will be dissatisfied if offers come from undesirable renters. Using data analytics, Airbnb analyzed when specific hosts accepted and declined offers and their satisfaction ratings of renters to develop profiles of preferred renter characteristics. Using the resulting algorithm for matching renter characteristics and host preferences, the company saw a 4 percent increase in its rate of converting offers into accepted rental matches. • Sequencing the growth of the business. To maximize the chance of success, platform firms must consciously plan out the sequence of their businesses. This involves thinking in terms of both geographic and product market expansion. In planning out its geographic market expansion, Uber analyzed the supply and demand of the taxi markets in cities across the country and first entered cities with the greatest shortage of taxis. Since it started in markets with unmet demand, Uber was able to expand quickly in these markets to be as cost efficient as possible. It also heavily advertised its business in settings where taxis were likely to be in short supply, such as sporting events and concerts. Once Uber established itself in these markets and developed a brand image, it expanded into other markets. Platform firms also need to consider both the need and opportunity of expanding their product scope. For example, Facebook has looked to continually extend its differentiation by expanding the range of services it offers, and as a result, has been able to put the squeeze on narrow platform providers, such as Twitter. Similarly, Spotify expanded from music to video streaming services in a quest to be a more complete service provider - If successful, a platform provider becomes the dominant player linking suppliers and customers. This success offers the firm great flexibility in pricing its services as the firm gains a near monopoly in its market