Journal of Business Strategy

STRATEGIES TO OUTPACE THE COMPETITION

Xavier Gilbert Paul Strebel
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Xavier Gilbert Paul Strebel, (1987),"STRATEGIES TO OUTPACE THE COMPETITION", Journal of Business Strategy, Vol. 8
Iss 1 pp. 28 - 36
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 STRATEGIES TO OUTPACE THE
COMPETITION
Xavier Gilbert and Paul Strebel
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Should one compete on the basis of product features or price? Both, say the authors.
A successful strategy should be flexible enough to exploit market changes by making
timely shifts back and forth.

Procter and Gamble's (P&G's) approach to premium, thereby shifting the strategic competi-
something as prosaic as the diaper industry illus- tion back to the value of the product. P&G was
trates the importance of a dynamic strategy, as unable to react immediately, and its market share
opposed to a static strategy. Prior to 1966, the dropped from 60 percent to 50 percent. By 1985,
diaper market was dominated by traditional cloth however, P&G shifted the competitive axis yet
products with competition revolving largely again and launched a well-tested, improved prod-
around price. In 1966, P&G changed the strategic uct, Huggies, at a lower cost.
rules of the game by introducing disposable Pam- This example illustrates how the opportunities
pers, which resulted in competition based on for strategic leverage of perceived product value
product features rather than price. When other and delivered cost can vary significantly over the
companies entered the market and offered dis- course of an industry's evolution. Under these
posable diapers, Pampers became common or conditions, competitive advantage can only be
standardized. Rather than trying to improve the sustained by means of an outpacing strategy,
product further, P&G switched strategic em- which is defined as the explicitly developed
phasis from the perceived value of unique prod- capacity, depending on the competitive situation,
uct characteristics back to its price. By emphasiz- to switch strategic emphasis between perceived
ing an efficient production process and by lower- product value and process cost reduction, in
ing prices, P&G was able to capture 60 percent of order to outdistance the competition.
the market. Throughout the 1970s, P&G pre- The perceived value of a product or service
vented Johnson & Johnson and Kimberly Clark represents the anticipated stream of benefits that
Corporation from mounting a successful chal- customers associate with its use. Process cost
lenge. reflects the costs to design, produce, market, and
In 1983, however, Kimberly launched a su- deliver the product or service. The most obvious
perior product using a new production process reason for focusing on perceived product value
and sold the disposable diaper at a 25 percent and actual process cost as the two fundamental
dimensions of competitive strategy is that the dif-
ference between the two captures the potential
Xavier Gilbert and Paul Strebel are Professors of Business Ad-
ministration at IMEDE Management Development Institute in profit margin advantage of the company relative
Lausanne, Switzerland. to the profit margin of the competition.
28
 THE JOURNAL OF BUSINESS STRATEGY 29

In addition, these two dimensions of competi-

tion are—at least intuitively—identified by most Database
companies when they relate to the choice be-
tween a differentiation strategy and a low-cost The concept of outpacing strategies grew out of
strategy [1, 2, 3]. However, these companies do sixty-five IMEDE consulting projects between
not easily recognize that success results not from 1979 and 1984, which applied the principles of
the single-minded pursuit of either strategy but industry analysis developed by McKinsey and
from the ability to add one to. the other at certain Company, Michael Porter, and others to fifteen
stages in the evolution of the market for their different industries, ranging from pharmaceuti-
product or service. cals and hotels to leisure products and the dis-
Based on an 1MEDE consulting project study tribution of consumer goods. Each project was
of sixty-five companies in a wide range of indus- comprised of three phases: industry analysis,
tries (see accompanying box), the authors have company analysis, and issue problem solving.
found that useful generalizations can be made The results of each phase were presented to a
about the most viable shifts in strategic emphasis top management committee of the company
as an industry passes from one stage in its evolu- concerned for input and feedback. In the pro-
tion to another. cess, a unique IMEDE approach to industry
Even though the detailed evolution of indus- analysis has been developed, which places par-
tries varies widely across technologies and mar- ticular emphasis on the dynamics of strategy in
kets, there are two common evolutionary transi- the context of industry evolution [5]. (The data
tions that are of particular strategic significance: shown in Exhibits 2 and 3 were collected by
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James Polcrano.)
(1) standardization of the product or service,
which marks the transition from a high perceived
value strategy to a low delivered cost strategy and
(2) rejuvenation, which marks the transition in
the opposite direction, from an emphasis on low any attempt at developing a low-cost strategy is
delivered cost back to high perceived value. likely to be quickly overtaken by the next step in
When an industry makes an evolutionary tran- the product's evolution. Competition is effec-
sition, the formula for success inevitably changes; tively restricted to the enhancement of the prod-
therefore, understanding the transitions is critical uct's value. In some industries like fashion goods,
to the ability to sustain a competitive advantage where value is more a function of image than of
in the long run. technology, strategy may revolve around con-
tinual product differentiation indefinitely. In the
overwhelming majority of industries, however,
evolution takes a different turn.
Strategic Dynamics of Standardization Progressively, the rate of innovation slows,
some of the product or service characteristics
Standardization occurs when product charac- become commonly accepted, and a standard
teristics that were once considered unique be- emerges. This process of standard development
come commonly accepted and expected. Prior to results not only from the acceptance of certain
standardization, strategy revolves around prod- characteristics by the market; it can also be
uct innovation and improvement. This occurs, marked by intense lobbying activity aimed at
when the industry first emerges or later on, during using government regulation or international
a period of new customer and end use develop- agreements to create a standard. Clear-cut exam-
ment. Frequent improvements to the product or ples of standard-setting are provided by Ford's
service are typical. It is often a time of intense Model T in the auto industry and IBM's PC in the
competition, with a plethora of competing models microcomputer industry.
vying for technological supremacy in the early Another example is provided by the search for
stages of the industry life cycle or for differential a viable auto parts distribution concept in France.
market niches later on. A classic example is pro- Currently, auto parts are distributed in large
vided by the 200 small firms in the automobile supermarkets, through auto centers attached to
industry of the 1900s. This industry was a har- supermarkets, specialized repair chains, and
binger of the hundreds of firms in the personal general-purpose service stations. Although these
computer industry of the early 1980s. channels appeal to a somewhat different clientele,
In the presence of a rapidly changing product, their market shares are highly unstable. One
 30 THE JOURNAL OF BUSINESS STRATEGY

supermarket has captured share with specialized standard were made undesirable, and those at the
auto centers, which show signs of becoming the standard had to compete on price against the IBM
dominant channel and, in the process, establish- offering. The pricing strategy was supported by a
ing an industry standard. systematic effort to decrease costs, both through
Standardization signals the start of a major considerable automation on the subcontractor
transition in an industry for two reasons: (1) it level and through economies of scale. The same
becomes viable for industry members to shift thing happened in the automobile industry fifty
some of their attention toward process improve- years ago, after Ford established its Model T and
ment, thus reducing costs, to provide pricing built market share rapidly with its low delivered
flexibility; (2) it becomes safe for new entrants to cost.
offer either the product/service itself or a look-
alike, depending on the availability and effective-
ness of patent protection. Some companies, par-
ticularly Japanese ones, seem to be especially Strategic Dynamics of Rejuvenation
competent at exploiting these two opportunities The second major type of strategic shift (rejuve-
under the higher-price umbrella provided by the nation) involves the transition back from the
early entrants. low-cost strategies associated with growth and
development to the high perceived value strate-
gies associated with innovation and differentia-
tion. This shift is more difficult to anticipate. A
To sustain its competitive advantage, a declining market growth rate may provide an in-
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company that has developed a standard dicator, however, especially after a period of
must immediately invest in process rapid growth.
improvement. A switch back to value creation involves differ-
entiating and tailoring the product to meet the
needs of different end user segments. It is a pe-
riod of incremental rather than fundamental
As a result, to sustain its competitive advan- changes in the product. In the early 1980s, elec-
tage, a company that has developed a standard tronic component distributors in Europe went
must immediately create a "productivity re- through this phase. Declining growth and increas-
serve" by investing in process improvement. The ing competition made it very difficult to sustain
company must initiate a shift toward cost reduc- existing levels of profitability. The successful
tion. Failing to do so will have negative conse- companies switched emphasis from volume-
quences as the industry completes the transition based product lines to nich-oriented, higher-tech
to the next stage in its evolution. components aimed at specific end users.
Autologic, an early European entrant in the Differentiation gave General Motors its big
office automation field, developed a word pro- chance in the automobile market of the 1930s and
cessor, which, though not yet a standard, was 1940s. The creation of the separate Chevrolet,
highly regarded technically. But having failed to Oldsmobile, Buick, and other divisions serving
invest in process improvement, Autologic was different customer preferences allowed GM to
unable to provide the necessary support for its exploit the growing demand for automobile vari-
product as a potential standard and has had to ety. Ford, sticking single-mindedly to its low-cost
withdraw from the market. strategy, missed the shift from market develop-
The phase that follows standardization is gen- ment to product differentiation. Its market share
erally characterized by price competition. A eroded significantly before it too made the switch
shakeout occurs among competitors, and those in strategic emphasis.
who cannot meet the standard or who cannot On the other hand, in mature industries, slow
follow the successive price decreases are elimi- growth may continue for long periods. If the
nated. The ability to make substantial invest- low-cost standard cannot be distinguished from
ments in marketing and manufacturing process one supplier to another, the product is like a
improvement is essential. commodity, for which strategic competition re-
In the personal computer industry, for exam- volves indefinitely around cost reduction. Yet,
ple, once the market accepted IBM's PC as a de the notion of a mature slow-growth market with
facto standard, the company decreased prices. stable strategies is deceptive. Once a market
All the products with perceived value below the stabilizes, opportunities for another round of cost
 THE JOURNAL OF BUSINESS STRATEGY 31

reduction or for rejuvenation are sought by com- delivered-cost axis. Companies that have been
petitors and new entrants. Established firms may able to maintain a high perceived value while
become complacent and especially vulnerable to reducing costs effectively outpace competitors
either sudden product or process obsolescence. that stick to a unidimensional strategy.
In the late 1960s, Japanese automobile man- The transition from innovation to standardiza-
ufacturers attacked the apparently mature West- tion can be quite radical for organizations. Cre-
ern markets with a dramatic reduction in process ative and innovative organizations, which initially
cost. Since Japanese cars were small and un- set the pace (e.g., Apple Computer), often find it
sophisticated, Western manufacturers did not see very difficult to reorient their operations inter-
them as a threat and maintained prices. They nally to keep up with the later entrants once a
failed to see that the real threat was in the man- product becomes standardized. The problem is
ufacturing process. The Western firms provided a often a form of cognitive dissonance. The original
price umbrella. Japanese manufacturers were entrepreneurs have difficulty accepting the shift
able to slip in under the umbrella with lower in the competitive axis. For example, in the case
prices. The Japanese then generated enough cash of Apple, the degree of internal change required
flow for a further switch in strategic emphasis: for adaptation was so great that both of the origi-
They reinvested in product improvement. Pres- nal founders of the company had to resign.
ently, Japanese cars are still cheap, reliable, and To avoid the organizational dislocation, Ciba-
considered fault-free. Many consumers believe Geigy Corp. has adopted a segmented approach
they are more desirable than most standard to the development of a productivity reserve. For
Western models. many years, Ciba-Geigy has been one of the lead-
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ing innovators in the pharmaceutical industry.

However, the rate of new drug discovery has
slowed, and the cost of bringing a new product to
Outpacing Strategies the market has increased. Even though this trend
has yet to undermine Ciba's high-value strategy,
For actively provoking these shifts in industry Ciba has initiated a classic outpacing move: It has
evolution, rather than passively reacting to them, begun to develop a low-cost reserve strategy in
a company needs an outpacing strategy with cor- the form of a wholly owned subsidiary focusing
responding shifts in the company's external mar- on generic drugs, which operates separately out-
ket focus and the internal organizational focus. side the mainstream organization.
During the early emergence phase, successful Companies that do not develop a productivity
companies follow a strategy of high perceived reserve are unable to lower prices later on to
product value. This is represented in Exhibit 1 by block the entry of new process-minded com-
the arrow close to the vertical axis. Such com- petitors. A leading European electronic-chip
panies are usually technology-driven and place a manufacturer wanted to switch strategic em-
high emphasis on product innovation. phasis from the product to the process costs by
The establishment of a standard product, by developing a high-volume production process.
contrast, requires a sensitivity to the market that It was prevented from doing so by its parent,
is not typical of technology-driven firms. Bridging a major telecommunications company, which
the gap between evolving technology and market needed much smaller volumes of special-purpose
sensitivity requires an outpacing strategy based chips. As a result, the chip manufacturer was
on a predeveloped capacity to find the common defenseless against the Japanese penetration of
denominator in the expanding demand for the the European market with low-cost products.
product. It was the market's common de- The strategy of low-cost, process-minded com-
nominator in desirable product attributes that petitors is represented by the arrow close to the
Henry Ford had the insight to build into his horizontal axis in Exhibit 1. After establishing
Model T. And IBM had the good fortune to cap- themselves, the outpacing strategy for the leaders
ture this common denominator in its PC. on the cost dimension involves the addition of a
Once the product is standardized, outpacing product value emphasis to their initial process
the competition becomes a function of improving focus. (This is illustrated in Exhibit 1 by the arrow
productivity on the process side by reducing turning the corner from the bottom to the right-
costs and building up a productivity reserve. The hand vertical axis.) Success comes to those capa-
corresponding outpacing shift in strategic focus is ble of eventually inducing a fundamental change
depicted in Exhibit 1 by the arrow that turns the in the buyers' perception of the product on the
corner from the perceived value axis to the low- one hand, and on the other hand, by the internal
 32 THE JOURNAL OF BUSINESS STRATEGY
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systems of the company so that product features ered cost by developing the logistics necessary
can be enhanced. for franchising. Presently, the product's per-
The objective of the strategy game in a rapidly ceived value is supported by a considerable ad-
evolving environment is to be the first one to vertising presence, and the quality of the product
reach the top right quadrant in Exhibit 1 by out- is never sacrificed. Yet McDonald's manages to
pacing the competition, using either standardiza- be one of the lowest-costing operations in the
tion (with the addition of a lower-cost process to industry, benefited by the franchise-driven econ-
a high-value product) or rejuvenation (with the omies of scale in marketing. Thus, although
addition of higher product value to a low-cost McDonald's will not hesitate to charge a premium
process). Successful Western companies have for its product when competitive conditions per-
typically followed the standardization path, mit, it can serve as a credible price threat even to
whereas the Japanese have excelled on the re- its low-cost competitors.
juvenation path. As another example, consider Corning Glass,
In France, McDonald's brought a unique for- which entered the fiber-optic market with
mula to the fast-food market: It intensified per- higher-quality fibers than its competitors. After
ceived value by increasing the quality of the food outpacing them in terms of perceived value, it
and service as well as the cleanliness of its estab- reinvested in the cost reduction process. Corning
lishments. Once a local standard had been set, Glass increased volumes and reduced prices to
McDonald's moved quickly to reduce the deliv- drive imitations from the market. Potential low-
 THE JOURNAL OF BUSINESS STRATEGY 33
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cost competitors could not enter the market with- Of course, there are striking exceptions to
out matching Coming's quality. these Western and Eastern stereotypes: Bic, the
Classic examples of rejuvenational types of French pen company, started with a single, low-
outpacing strategies are provided by the Japanese cost product and subsequently increased per-
automobile and chip industries mentioned earlier. ceived value by offering more colors, style, and
In the watch industry, the Japanese opened up convenience in a broader product line. Con-
the low- and medium-priced segments. The versely, Kawasaki/Honda entered the motorcy-
profits have been devoted increasingly to offering cle industry with small, quality bikes before in-
more value and features, thereby progressively vesting in the cost-reduction process. Later, they
permitting the development of an image in the repeated the strategy in the large-bike segment.
luxury watch segment. Similarly, in the zipper In addition, Western companies have shown
industry, YKK used aggressive pricing in one themselves increasingly capable of using strategic
country after another to capture a leading market switching to catch up with and at least temporar-
share. Thereafter, it added value to its product ily outpace their Japanese competition. The
line with greater variety, while increasing prices. Swiss watch conglomerate SMH, for example,
 34 THE JOURNAL OF BUSINESS STRATEGY

has spawned the Swatch division (which, after data are taken from the automobile and banking
catching up on the process cost dimension, has industries.
shifted competition to product design). By mak- In the first example, based on the automobile
ing the watch a fashion item, the Swatch team has industry, process cost is defined in terms of the
initiated an outpacing move, adding value in a pretax dollar cost per automobile sold. The per-
way that makes Japanese process skills less rele- ceived product value is approximated by the
vant. average dollar price per automobile sold (total
Whatever the approach, an outpacing strategy sales divided by the number of automobiles sold).
is not a mandate for complacency. Once a com- The figures for ten representative corporations
petitor reaches the top right quadrant in Exhibit for the years 1980 and 1983 are shown in Exhibit
1, others will imitate the move and gradually 2. The slashed diagonal line is the zero profit per
erode the competitive advantage. At this point, unit line. A measurement of success is provided
the game starts all over again. To sustain a com- by the vertical distance above and below this line,
petitive advantage, the leader must be able to which measures profit and loss per unit, respec-
outpace the competition with a new move on tively.
either the perceived value or delivered cost di- Between 1980 and 1983, most automobile man-
mension. The ability to do this continually is the ufacturers could be classified into one of four
hallmark of a successful outpacing strategy. groups, based on the average value and cost
characteristics of their overall product range. At
the low-cost end of the market were the major
Japanese producers plus the high-volume Euro-
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peans like Fiat. Next up the product value scale

Value/Cost Trade-off were the low-cost, niche-oriented companies like
Implicit in the concept of outpacing strategies is Volkswagen and AMC. Further up the scale were
the trade-off that has to be made. Each time the broad-range U.S. majors as well as some
strategic emphasis is shifted, there is a trade-off mid-market Europeans. At the high-value end of
between perceived value and delivered cost. Only the market were the high-priced Europeans—
the very best companies can implement a pure Volvo and BMW.
outpacing strategy, holding superior performance Over the three-year period, the dollar rose in
constant on one of the two strategic dimensions value, but this was offset by higher inflation in
while improving it on the other. (This is rep- some of the European countries. The high-
resented by the right angular arrows in Exhibit 1.) volume Europeans struggled to reduce dollar
costs to compete with the Japanese but were
forced to reduce prices almost proportionally. In
the process, Fiat managed to turn a loss into a
small profit per unit. Citroen was unable to elimi-
Bic, the French pen company, started with nate its loss however, despite a 40 percent drop in
a single, low-cost product and dollar costs per unit. Compared to the high-
volume Europeans, the U.S. majors "moved up
subsequently increased perceived value market." That is, Chrysler, Ford, and AMC pro-
by offering more colors, style, and duced striking turnaround performances that
convenience in a broader product line. resulted in higher-average-value cars at lower
cost.
The only company showing signs of a classic
outpacing move was Volvo. The Swedes turned a
Most companies find themselves constrained to unit loss in 1980 into the highest profit per unit in
trade off high value for low cost and vice versa. 1983 by holding average value constant at the
Indeed, at any point in time, the key competitors high end of the range and by dramatically reduc-
in an industry can be positioned according to the ing costs. The other high-value European man-
trade-off they have made between value and cost. ufacturer, BMW, moved down market somewhat
Their strategic moves can then be tracked over in dollar terms while maintaining unit profits.
time to see whether they show any signs of an GM, on the other hand, pursued a more focused
outpacing strategy (i.e., the ability to increase high-value strategy than it had previously, and it
profitability by adding superior performance on improved unit profits sharply. At the other end,
one dimension, without simply sacrificing it on the Japanese certainly had the lowest average
the other). To illustrate how this can be done, costs but apparently had difficulty creating addi-
 THE JOURNAL OF BUSINESS STRATEGY 35

tional product value and, hence, difficulty main- was difficult to outpace the competition, due to
taining unit profits. intensifying competition caused by uncertain
Exhibit 2 is consistent with the outpacing con- financial conditions, rapidly changing computer
cept. The years 1980-1983 represent a period of technology, increasing deregulation, and stiff
change in the automotive industry. During this international competition. With shifting market
time, the microchip created new opportunities for boundaries and collapsing market niches, dy-
both product enhancement and greater efficiency namic strategies offered the best competitive de-
via robotization. The best performing, high-value fense, whereas static strategies were doomed to
competitor, Volvo, switched strategies and re- failure.
duced costs. Meanwhile, the Americans, who had
previously tried to hold costs and investments
down, improved their cars dramatically by
switching to investment in greater perceived
value. In general, the worst performers were Managerial Implications
Europeans that stuck to their existing low-cost
strategies. The development of an outpacing strategy re-
The second example, shown in Exhibit 3, is quires three ingredients:
based on the Swiss banking industry. Perceived
value is defined in terms of total revenue (interest • A thorough understanding of the industry, with
plus fee and other income) divided by total loans anticipation of shifts in the pattern of the indus-
outstanding. This measure represents the value try's evolution;
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added as a percentage of loans outstanding. De- • Sharp initial strategic focus on building a com-
livered cost is defined as total expenses (interest petitive advantage for either perceived (prod-
expenses plus operating expenses plus loan loss- uct) value or delivered (process) cost;
es), which reflect the delivered cost as a percent • Reinvestment of the cash flow from the compet-
of loans. itive advantage to the resources needed to
Exhibit 3 illustrates the nature of the trade-off switch strategic emphasis, so that the moves of
between perceived value and cost in banking. the competition are preempted.
Moving up the zero profit line from right to left,
one first finds the low-cost, simple product and Several caveats must be noted when transferr-
service regional banks, represented by the ing these observations into practice. The first one
Banque Cantonale Vaudoise; then the three big is that an outpacing strategy is not a middle-of-
universal banks, Union Bank of Switzerland, the-road strategy with a little bit of everything.
Swiss Bank Corporation, and Credit Suisse, with An outpacing strategy is dominated by an obses-
intermediate value added and cost per Swiss sion with a product or process. The obsession of
franc loaned; and finally in the top left-hand the Japanese car manufacturers for quality is pur-
corner, one finds the private banks, represented sued without compromising the efficiency of the
by Julius Baer and Banque Gothard, propor- process.
tionally with the most service offered and cost The second important point is the timing of the
incurred. shift. This is difficult to analyze because the shift
Of the banks shown, those that stuck single- entails an element of risk taking and probably an
mindedly to their existing strategies, Julius Baer element of luck. Although IBM is not the kind of
at the top of the perceived value scale and company to be surprised by its own successes, it
Banque Cantonale Vaudoise at the bottom, did possibly did not expect the market to be so ready
worst in terms of profitability between 1980 and for a standard personal computer. It is clear,
1984: Both were apparently unable to fully con- however, that a productivity reserve has to be
trol costs as a percentage of loans. By contrast, built as soon as the product is standardized and
those that shifted their value-cost mix toward the that rejuvenation has to be prepared as soon as
lower end of the market, by reducing the amount the product becomes mature. However, the de-
of costly labor-intensive service, were apparently termination of when the product is standard, or
better able to maintain their profitability between when it is mature, is very much a matter of judg-
1980 and 1984. ment.
Shifts in business without improved profits are The third important point is that an outpacing
not evidence of outpacing strategies; rather, they strategy may not be easy to implement because
demonstrate the strength of the value-cost trade- the organizational requirements for creating
off. In the banking industry of the early 1980s, it product value are frequently opposite to those
 36 THE JOURNAL OF BUSINESS STRATEGY
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needed for reducing costs [4]. Yet, the winning menting an outpacing strategy is worth the effort
companies manage to combine both in their out- because strategic switching is the key to success
pacing strategies. They have found that imple- in rapidly evolving industries.

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4. P. Strebel, "Organizing for Innovation Over an Industry Life Cycle," Strategic Management Journal, March 1987.
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