Additional Readings

Contents

Reading 3.1: “Positioning within Industries”, extract from “The Competitive Advantage
of Nations” by Michael Porter, Free Press, New York, 1990

Reading 3.2: “Competitive Strategies in the Organic Juices Industry” Organic Monitor,
Oct 2002

Reading 3.3: “Strategic Groups” from Chapter 6 “Competitive Strategies” in “Strategic

Management and Policy” Charles Boyd, MGT487 Notes, 2002

Reading 3.4: “Trade-Offs? What Trade-Offs? Competence and Competitiveness in

Manufacturing Strategy”. Corbett and L. van Wassenhove, California
Management Review, Summer 1993.

Reading3.5: “Update: COMPETING INTERESTS An Interview with Michael E.

Porter” Richard Pastore, in CIO, 1 October 1995
Additional Reading 3.1

Reading 3.1: “Positioning within Industries”, extract from “The Competitive Advantage
of Nations”

Michael Porter, Free Press, New York, 1990

UNSW, Copied under Part VB of the Copyright Act 1968, as amended, on

December 1993.
POSITIONING WITHIN INDUSTRIES

In addition to responding to and influencing industry structure, firms must choose

a position within the industry. Positioning embodies the firm's overall approach to
competing. In the chocolate industry, for example, American firms (such as
Hershey and M&M/Mars) compete by mass-producing and mass-marketing
relatively limited lines of standardized candy bars. In contrast, Swiss firms (such
as Lindt and Spriingli and Tobler/Jacobs) sell mainly premium products at higher
prices through more limited and specialized distribution channels. They produce
hundreds of separate items, employ top-quality ingredients, and manufacture
using longer processing times. As this example illustrates, positioning involves a
firm's total approach to competing, not just its product or target customer group.

At the heart of positioning is competitive advantage. In the long run, firms

succeed relative to their competitors if they possess sustainable competitive
advantage. There are two basic types of competitive advantage: lower cost and
differentiation. Lower cost is the ability of a firm to design, produce and market a
comparable product more efficiently than its competitors. At prices at or near
competitors, lower cost translates into superior returns. Korean steel and
semiconductor producers, for example, have penetrated against foreign
competitors using this strategy. They produce comparable products at very low
cost, employing low-wage but highly productive labor forces and modern process
technology purchased or licensed from foreign suppliers.

Differentiation is the ability to provide unique and superior value to the buyer in
terms of product quality, special features, or after-sale service. German machine
tool producers, for example, compete with differentiation strategies involving high
product performance, reliability, and responsive service. Differentiation allows a
firm to command a premium price, which leads to superior profitability provided
costs are comparable to those of competitors.

Competitive advantage of either type translates into higher productivity than that
of competitors. The low-cost firm produces a given output using fewer inputs than
competitors require. The differentiated firm achieves higher revenues per unit
than competitors. Thus competitive advantage is directly linked to the
underpinning of national income.

It is difficult, though not impossible, to be both lower-cost and differentiated

relative to competitors.6 Achieving both is difficult because providing unique
performance, quality, or service is inherently more costly, in most instances, to
seeking only to be comparable to competitors on such attributes. Firms can
improve technology or methods in ways that simultaneously reduce cost and
improve differentiation. In the long run, however, competitors will imitate and
force a choice of which type of advantage to emphasize.

Any successful strategy, however, must pay close attention to both types of
advantage while maintaining a clear commitment to superiority on one. A low-
cost producer must offer acceptable quality and service to avoid nullifying its cost
advantage through the necessity to discount prices, while a differentiator's cost
position must not be so far above that of competitors as to offset its price
premium.

The other important variable in positioning is competitive scope, or the breadth of

the firm's target within its industry. A firm must choose the range of product
varieties it will produce, the distribution channels it will employ, the types of
buyers it will serve, the geographic areas in which it will sell and the array of
related industries in which it will also compete.

One reason that competitive scope is important is because industries are

segmented. In nearly every industry, there are distinct product varieties, multiple
distribution channels, and several different types of customers. Segments are
important because they frequently have differing needs: an unadvertised basic
shirt and a designer shirt are both shirts, but are sold to buyers with very different
purchasing criteria. Serving different segments requires different strategies and
calls for different capabilities. The sources of competitive advantage, then, are
frequently rather different in different segments, even though they are part of the
same industry. It is quite typical for firms from one nation to achieve success in
one industry segment (Taiwan in inexpensive leather footwear) while those from
a different nation are successful in another (Italy in fashion leather footwear).

Competitive scope is also important because firms can sometimes gain

competitive advantage from breadth through competing globally or from
exploiting interrelationships by competing in related industries. Sony, for
example, gains important advantages from sharing its brand name, distribution
channels, and technological skills across a wide range of electronic products on
a worldwide basis. Interrelationships among distinct industries arise from the
ability to share important activities or skills in competing in them. I will explore the
sources of competitive advantage from competing globally below.

Firms in the same industry can choose different competitive scopes. Indeed such
differences are typical among firms from different nations. The most basic choice
is between a broad scope and focusing on a particular segment. In the packaging
machinery industry, for example, German firms offer wide product lines while
Italian firms tend to focus on specialized end-use segments. In automobiles,
leading American and Japanese companies have wide product lines, while BMW
and Daimler-Benz (Germany) emphasize high-performance cars and Hyundai
and Daewoo (Korea) focus on compacts and subcompacts.

The type of advantage and the scope of advantage can be combined into the
notion of generic strategies, or different approaches to superior performance in
an industry. Each of these archetypical strategies, illustrated in Figure 2-2,
represents a fundamentally different conception of how to compete. In
shipbuilding, for example, Japanese firms follow the differentiation strategy,
offering a wide array of high-quality vessels at premium prices. Korean shipyards
pursue the cost leadership strategy, also offering many types of vessels but ones
of good not superior quality. Korean firms, however, can produce vessels at
lower cost than can Japanese firms. Successful Scandinavian yards are focused
differentiators, concentrating on specialized types of ships such as icebreakers
and cruise ships that involve specialized technology and which command prices
high enough to offset higher Scandinavian labor costs. Finally, Chinese
shipyards (cost focus), the emerging competitors in the industry, offer relatively
simple, standard vessel types at even lower costs (and prices) than the Koreans.

The generic strategies make it clear that there is no one type of strategy that is
appropriate for every industry. Indeed, different strategies can coexist
successfully in many industries. While industry structure constrains the range of
strategic options available. I have yet to encounter an industry in which only one
strategy can be successful. There may also be different possible variations of the
same generic strategy, involving different ways to differentiate or focus.

Competitive Advantage
Lower Cost Differentiation

Broad
Target Cost Leadership Differentiation
Competitive
Scope

Narrow Cost Focus Focused

Target Differentiation

FIGURE 2-2 Generic Strategies

Underlying the concept of generic strategies is that competitive advantage is at

the heart of any strategy, and that achieving advantage requires a firm to make
choices. If a firm is to gain advantage, it must choose the type of competitive
advantage it seeks to attain and a scope within which it can be attained.

The worst strategic error is to be stuck in the middle, or to try simultaneously to

pursue all the strategies. This is a recipe for strategic mediocrity and below
average performance, because pursuing all the strategies simultaneously means
that a firm is not able to achieve any of them, because of their inherent
contradictions. The shipbuilding industry also illustrates this problem. Spanish
and British shipyards have been declining because they have higher costs than
the Koreans, lacking any basis for differentiation relative to the Japanese, and
have failed to identify particular segments (such as Finnish yards have in
icebreakers) in which they can gain competitive advantage in a narrower arena.
They lack any competitive advantage and exist mainly on captive government
orders.
Additional Reading 3.2

“Competitive Strategies in the Organic Juices Industry”

Organic Monitor Oct 2002

UNSW, Copied under Part VB of the Copyright Act 1968, as amended, on

December 1993.
Competitive Strategies in the Organic Juices Industry
Introduction

The European organic juices market is becoming increasingly competitive with growth
rates slowing and consumer demand stabilising in many countries. Competition is
stepping up and companies need to re-examine their strategies if they are to achieve
positive business growth.

The strategic options available to juice companies can be illustrated by Porter’s Generic
Competitive Strategies*. This states that a company can achieve sustainable competitive
advantage in one of three fundamental ways. Organic Monitor outlines the application of
these in the European organic juices industry:

Cost Leadership Strategy

Juice companies can acquire competitive advantage via a cost leadership strategy. This is
usually gained by companies that are able to achieve economies of scale in production
and marketing. Such companies buy raw materials in bulk and they produce organic
juices on a large-scale. They are thus able to market organic juices at low prices and this
is usually to the mainstream food retailers.

France and the UK have organic juice companies that have gained market leadership via
this strategy. Conventional juice companies undertake this strategy in the organic juices
market because of their large production capacity and established contacts.

This strategy is not viable for new entrants that have low financial resources and
specialised products.

Differentiation Strategy

A differentiation strategy involves companies marketing a product that is clearly

distinguishable from others in the marketplace. In the organic juices market, this means
the product has attributes that are distinct from others, which can be in the form of
flavour, juice type or other characteristics.

Examples of companies undertaking this strategy are those that specialise in Not From
Concentrate (NFC) or freshly pressed organic juices. Competitive advantage is gained by
these products positioned differently from those organic juices that compete on price (-
Cost Leadership Strategy). The Grove Fresh brand in the British organic juice market is
an example of this strategy put in practice.

Focus Strategy

Whereas the previous two strategies are industry-wide strategies, this involves a
segmentation approach. This strategy involves companies focusing on specific segments
of the organic juice market, and segments can be in terms of flavours, juice type, or
marketing channels. Competitive advantage is gained via a Cost Focus or a
Differentiation Focus.

A Cost Focus strategy involves a company gaining competitive advantage by being the
low cost provider to the segment. An example would be a company that offers a wide
range of specialised juices (e.g. organic mixed vegetable juices) at low prices.

A Differentiation Focus strategy involves companies marketing a distinct or unique

product in the target segment. There are many examples of companies undertaking this
strategy in the European organic juices market. The leading companies in Germany
undertake this strategy whereby they specialise in supplying organic juices to certain
marketing channels. An example is the Demeter brand of organic juices.

What Strategy to Deploy?

As competition steps up in the European organic juices market, it is essential that

companies adopt one of the three fundamental strategies outlined in the model.
According to Porter, companies that ‘get stuck in the middle’ and do not have a clear
strategy, business failure could result. So which strategy is the most applicable?

The most appropriate strategy depends upon a number of factors that include the
company’s ambitions, corporate resources, current market position, and the stage of
market development. Small dedicated organic food companies could obviously not adopt
a Cost Leadership strategy, and this strategy would also be difficult for new entrants in
countries that are showing slow market growth.

The Cost Leadership strategy is the most fancied route of conventional juice companies
and such companies have achieved success in countries like Italy and the UK. A Focus
Strategy is probably the most practical for smaller companies however the potential of
target segments has to be accurately measured.

Conclusions

There are over 100 companies involved in producing and supplying organic juices in the
European market. As market growth rates slow and consumer demand stabilises, only
those companies that have a sustainable competitive advantage will survive. Organic
Monitor advises companies to undertake one of the three competitive strategies outlined.
Additional Reading 3.3

“Strategic Groups” from Chapter 6 “Competitive Strategies” in “Strategic Management

and Policy”

Charles Boyd, MGT487 Notes, 2002 www.mgt.smsu.edu/mgt487/compst.htm

UNSW, Copied under Part VB of the Copyright Act 1968, as amended, on

December 1993.
Strategic Groups

Who are an organization's competitors? It is critical for strategic managers to

answer this question correctly. A wrong answer almost guarantees that the
wrong strategy will be developed. A firm within an industry seldom competes with
all other firms in its industry. In most industries, two or more clusters, or groups,
of firms can be identified by the types of markets they serve. The firms within
each group compete most closely with each other, and do not compete heavily
with firms outside their group. All firms do, however, need to remain vigilant for
an attack from a firm in another group whose managers may decide to invade
new turf. Managers in any firm may decide to broaden their market to include
another group's customers. They may pick a firm they believe is weakest to
attack.

To visualize strategic groups more clearly, we will examine the dynamics

within two industries: automobiles and the U.S. chain saw industry. The
positioning of firms within these two industries is hypothetical here, done only for
illustrative purposes. Not all competitors are shown in these industries; only
enough to show the dynamics of competitive thinking.

Strategic Groups in the Auto Industry

High

Mercedes
BMWLow
Jaguar
GM
Price/ Ford
Quality Chrysler
Nissan
Toyota
Hyundai
Jogo

Low
Few Many
Market segments served

Above you see an industry grouping for the auto industry. The two dimensions
on which each auto brand is categorized are the market segments served and
the combination of price/quality as perceived by customers. Mercedes, Jaquar,
and BMW serve an elite market. These brands have high price and an image of
high quality, serving a few market segments. Hyundai and Jugo represent the
other extreme. They serve the low-income market segment with low price and
low perceived quality. The larger group consisting of GM, Ford, Chrysler, Nissan,
and Toyota serves the broadest number of market segments. This is because
each of these brands offers a range of cars to attract customers looking for
various price/quality combinations. None of these cars reaches as low as the
cheapest Hyundai or Jugo, and none reaches as high as the most expensive
Mercedes, Jag, or BMW. But between these extremes lies a huge and varied
market.

Strategic Groups in the Chain Saw Industry

High

Stihl
Low
Jonsereds Homelite
Husquama McCulloch
Solo
Quality/
Brand
image
Skil Beaird-
Poulan
Roper

Low
Dealers Mass merchandisers Private label
Retail distribution

The next example is the U.S. chain saw industry. Examine the chart above. The
first thing to notice is that the axes labels are different in this example. That will
be true for each industry. The X and Y axes should always be labeled with
whatever are the two most important competitive factors. That is a judgment call
based on an informed opinion about the particular market. Here we see the two
key competitive factors in the chain saw market are the quality image a brand
holds and the retail distribution channel through which the saw is distributed. You
see three groups in this chart: the Private label group, the branded mass market
group, and the professional group. Whoa: What about the Skil brand, sitting out
there by itself? Not to worry, we will get back to it after we discuss the other
groups.

The Beaird-Poulan and Roper are private-label brands; firms that produce
chain saws and put other firms' brand names on them. They are sold through
chain hardware and discount stores. These brands will be bought mostly by
people who only use the saws occasionally. The branded mass market brands—
Homelite and McCulloch—are also likely to be sold in some discount stores and
hardware chains, appealing to the more serious, quality-conscious user and
selling for a higher price than the private label brands. The brands in the
professional group are the highest-quality and highest-priced brands. They
appeal to the heavy user, often one who makes a living with the chain saw. They
are sold through dealers who carry the higher-quality lines of saws and other
tools.

What about Skil in this chart? It is sitting alone in a group because it is sold in
both the branded mass market and in the professional market. Since a strategic
group chart is actually a map of the industry, remember that each brand can
appear in only one place, just as Cincinnati is only in Ohio. This is why Skil is
placed between the two groups in which it is sold.

The key point in analyzing a strategic group chart like these two examples is that
a firm's strongest competitive threats usually come from the firms within its group.
But it is important to watch for a possible invasion from firms in one of the other
groups. For example, Chrysler's greatest threats come from GM, Ford, Nissan,
and Toyota. These brands compete with similar cars aimed at the same target
markets. Yet recently Mercedes is aiming some less expensive models at
Chrysler and its mid-market rivals. Chrysler and the others must construct
barriers to entry or mount some counterattack to protect their hard-won markets.
On the other hand, Chrysler may want to launch an attack at the Mercedes' low
end vehicles. To do so successfully, Chrysler executives need to understand
Mercedes' strengths and weaknesses, its points of vulnerability. This will help
them decide how best to mount such an attack. A carefully constructed and
thoughtfully studied strategic group chart can help choose the best strategies in
situations like these.

A case you analyze may contain information about the subject firm's
competitors. You would be wise to use that information to draw a strategic group
map of the industry like the ones above. It will help you choose an appropriate
strategy for your firm. Remember that each such chart is unique because each
industry is unique, and the factors that drive competition (your axes labels) are
therefore unique and will change over time as the drivers of customer value
inevitably change.
Additional Reading 3.4

“Trade-Offs? What Trade-Offs? Competence and Competitiveness in Manufacturing

Strategy”

C. Corbett and L. van Wassenhove, California Management Review, Summer 1993.

UNSW, Copied under Part VB of the Copyright Act 1968, as amended, on

December 1993.
Knowledge Workers: The Ultimate Factor? - As noted, continuous improvement is necessary just to
maintain one’s competitive position. Let us now draw a potential scenario of shifting qualifying and order-
winning over a product's life-cycle. An entirely new product has no qualifying criteria at all; any firm can
compete in such a market, assuming that barriers to entry (such as high initial capital investment) can be
overcome. All aspects of cost-time-quality competence are potential order-winners. After a while, the
product design standardizes, the market gradually matures, and customers come to expect a certain level of
quality, so that quality is transformed from an order-winner to a qualifier. Regarding the car that turned to
rust in three years, not too long ago this was not uncommon for some cars: but nowadays manufacturers
must offer up to ten years' guaranteed rust-free driving in order to stay in business. Anti-corrosive treatment
used to be an order-winning criterion for car manufacturers; nowadays it is a qualifying criterion.

As the market matures further, the time-based competitive dimensions also become qualifying criteria. In
the high-volume car manufacturing world, dependable Just-in-Time delivery from suppliers to assemblers
is the accepted standard, and any supplier who cannot meet this standard has no chance of competing.
Recently, a Toyota supplier's response time was reduced from 15 days to 1 when Toyota reorganized the
supplier's manufacturing organization: it was either reorganize or forget about supplying Toyota.

Fig 2 Qualifying Levels and Order Winning Criteria

Cost

Quality Time

Note: The outer cube represents the total range of possible cost-quantity-time combinations available: the
inner cube represents the qualifying levels for each dimension. Competition only lakes place in the
remaining space.
The example of the U.S. industrial door market shows the importance of flexibility and how it has almost
become a qualifying criterion. The industrial door manufacturers—faced with an almost infinite variety of
width, height, and material combinations - historically had needed almost four months to supply doors that
were out of stock or customized. The Atlas Door company became the market leader within 10 years by
being able to respond to any order within weeks. Already Atlas has replaced the leading door suppliers for
80% of the distributors in the country.

Rate of innovation (frequent introduction of new models and new products) is increasingly recognized as
an important dimension of competition. However, innovation can also become a qualifying criterion. This
has happened in the motorcycle market as a result of the Honda-Yamaha war. Honda introduced so many
new models in so little time that motorcycle design became a matter of fashion – where newness and
freshness are important attributes for consumers. A similar trend can be observed in personal hi-fi: a
walkman which was designed three years ago may still be just as good a walkman as any new model, but
there have been many design changes that it will look hopelessly out-of-date. Designing a musically good
walkman is no longer sufficient to be competitive, and a firm has to introduce style and color changes
continuously to keep up with what has essentially become a volatile fashion market. The Swatch revolution
is another example.

In the end, cost becomes the only dimension left to compete on. Once all firms have achieved comparable
competences with respect to quality and time performance (dependability, flexibility and innovation), the
task becomes how to manage operations in the most efficient way. For instance, in discrete parts
production, flexible Manufacturing Systems (FMS) are revolutionizing the business. An FMS consists of a
"computer-controlled grouping of semi-independent work stations linked by automated materials handling
systems”. Flexible Manufacturing Systems (FMSs) are very reliable, can make a wide variety of parts, and
can easily adapt to new demands. Quite a few of the Japanese FMSs are capable of running unattended for
several shifts. All costs in the development of tools, fixtures, and programs are sunk before the first unit is
produced. The only variable costs are those of materials and energy, which often amount to less than 10%
of total costs. In this environment, companies will have to concentrate on steady adjustments of product
mix and price to maintain full capacity utilization Simultaneously, there will be a need for pointed
emphasis on reduction of fixed manufacturing costs and the time required to generate new products,
processes, and programs. This whole process of continuously tightening market requirements is illustrated
in Figure 3.

Finally, when all firms have access to the same flexible technology, they can, at least in theory, all perform
equally well on quality, time, and cost. In this situation, the only difference between firms is the people
working for them and how the knowledge these people create is managed to enhance learning; human
resources management now becomes the critical competence. Let us look at a scenario where this is
happening.

Competing in the Fast Lane—Assume you operate in the industrial fashion clothes market (eg Benneton,
Gap etc.). Quick response and personalized design are rapidly becoming qualifying criteria. Therefore you
create team of highly creative designers, you supply them with the latest in CAD technology and put then
together in a posh building in some fashionable town (how about Milan?). You also buy the latest in high
resolution video conferencing equipment to allow your important customers (New York?) to create their
personalised garments on-line with the help of your designers. Telecommunications also allows you to
transfer any newly created designs within minutes to some offshore manufacturing facility (how about
Hong Kong?) where the CAM translation of the design can drive a machine. A new product (say, colourful
sweater) is ready within hours of its conception by the customer! The anxious customer can appreciate his
creation within 24 hours because you make sure that an express carrier flies it to him (from Hong Kong to
New York wasn’t it?). Your happy customer will obviously immediately place an order for 500 garments.
You anticipated this impulsive reaction and have in the meantime already contacted your network of
subcontractors over the globe by satellite to enquire who has the capacity and the willingness to
immediately produce the stuff (at the lowest cost of course.) Your happy customer neatly receives 500
items of his high quality product within 3 days after it was first conceived.
 Figure 3 The Competitive Squeeze

Cost Cost

Time
Quality
Time
Quality

Cost
Cost

Time Time
Quality Quality

Note: Although the outer cube is constant in size in this picture, advances in technology increasing the
range of cost-quality-time available will change the shape of the outer cube. In this way, the squeeze
becomes a repetitive phenomenon.

Does this example seem far fetched? Sorry to disappoint you. It is real! It shows what is happening in some
industries. It also shows how a clever combination of readily available technologies can revolutionise a
business in a matter of years. The global system design for rapid response is what makes it work, not any
particular technology or concept. The example also illustrates a simultaneous effort on cost, quality and
time, since all components are vitally important in this highly competitive and volatile global market.
Finally, this technology or system might soon be available to all competitors. When that happens, the
designers can turn out to be the only component that makes a difference.

"Hot" designers, who can interactively develop a flashy new design with a client via a computer system, are
extremely rare. When all firms in this market have access to the same technology, these designers will be
the bottleneck. A firm which is not able to stimulate its designers to be more innovative or, worse, loses its
designers to its competitors, may not survive despite the advanced technology. .In fact, any small group of
talented designers can itself be in business in no time. The ultimate consequence of our scenario as
presented lure is that in the end, manufacturing no longer provides a source of competitive advantage.
Rather, it would gradually shift into a service role to engineering and development. Although the trend is
clearly discernible in some sectors of industry, its consequences are not yet clear and deserve further
research.

This example goes even further than those given earlier—which show that time can be an important source
of competitive advantage—and demonstrates that even time can become a qualifying criterion.
Innovativeness lies in the hands of a relatively small number of knowledge workers and how they create
and enlarge the knowledge base of the firm through increased learning. We are still a long way from this
extreme form of competition in many sectors (and may not ever get there in many others), but the example
does help in appreciating the implications of the recent observations discussed in the previous section.
Additional Reading 3.5

“Update: COMPETING INTERESTS An Interview with Michael E. Porter”

Richard Pastore, in CIO, 1 October 1995

UNSW, Copied under Part VB of the Copyright Act 1968, as amended, on

December 1993.
 Update: COMPETING INTERESTS
An Interview with Michael E. Porter
by Richard Pastore

Competitive advantage is one of the three golden aspirations of any ambitious CEO. Along with
adding value and setting strategic agendas, creating competitive advantage is a pipe dream for
many a CEO. The main reason it's a dream more often than a reality is that information systems
departments are too often pigeonholed into an internally focused operational support mode. But
it doesn't have to be that way, says one of the most influential modern theorists in competitive
strategy.
Michael E. Porter, the Roland E. Christensen professor of business administration at the Harvard
Business School, wrote the landmark 1980 work, “Competitive Strategy: Techniques for Analysing
Industries and Competitors”. The ideas presented in the book, and its successors, Competitive
Advantage: Creating and Sustaining Superior Performance (1985) and The Competitive
Advantage of Nations (1990), reconciled historical views on competitiveness and defined the
concepts of unique positioning. Porter's ideas later became the basis for one of the required
courses at the business school.
Porter is now developing a follow-up to his seminal works, parts of which are expected to appear
in feature form in the Harvard Business Review this fall and more fully in a book he expects to
finish next summer. His recent research has been a reaction to what he sees as the last decade's
worrisome infatuation with operational improvement efforts-something he contends does little to
sustain competitive advantage. In effect, Porter tells CIO Senior Editor Richard Pastore, IT and
the businesses it serves are both missing the strategic mark.
CIO: What concerns you most about the way companies today are looking at
competitiveness?
PORTER: As companies emerge from the last decade, many are preoccupied with operational
effectiveness-restructuring, reengineering and improving efficiencies. These improvements are a
necessity in today's competition, but they alone are not enough. They are approaching a point of
diminishing returns. If companies are going to sustain competitive advantage, they can't do it by
being more efficient at running the business. They have to have a distinctive way of competing.
The necessity of carving out a distinctive competitive position is not understood as well as it
needs to be today. In a lot of companies, there is a mistaken sense that there is only one right
strategy for that industry, and if one company can be the first to discover and implement it,
they'll win. We've found from our research over the years that this way of thinking is ultimately
self-destructive. If everybody's racing to discover one right strategy, nobody wins.
CIO: Your past work has described the importance of making tough tradeoffs to
define a unique and sustainable competitive position-choosing which markets and
customers to serve and which to forgo. Has this become an even tougher prospect
today?
PORTER: When a company picks a unique competitive position, it has to be inconsistent or
incompatible with its competitors' position in order to be sustainable. If it isn't, its competitors
can simply replicate what it does at a modest cost.
Because they have been focusing on operational effectiveness and eliminating wasted effort,
companies have gotten used to enjoying the best of all worlds. They've lowered costs and
improved quality at the same time. Against that backdrop, managers are often unwilling to make
a choice of which markets and which customers to serve and, even more difficult, which not to
serve. But if they aren't willing to make those tradeoffs in their strategies, they're destined to
become stuck in the middle. They'll inevitably try to do a little bit of everything for a little bit of
everybody, and they won't have a competitive advantage.
CIO: What's behind your new theory of complementary activity systems?
PORTER: Rarely does sustainable advantage grow out of a single activity in a business. A
company doesn't get sustainable advantage simply because it has some unique product design or
a unique sales force. Those kinds of advantages tend to be visible targets to imitate. If a
company relies on one activity as its key strength, all its competitors are going to work very hard
to match that-especially if it is dubbed a best practice against which everybody else is
benchmarking.
Sustainable advantage comes from systems of activities that are complementary. These
"complementarities" occur when the way a company performs one activity provides not only an
advantage in that activity, but it also provides advantages in other activities. For example, if a
company has a very good inventory management system, it can also offer faster delivery and do
so cheaper than a company without the inventory management system. Companies with
sustainable competitive advantage integrate lots of activities within the business: their marketing,
service, designs, customer support. All those things are consistent, interconnected and mutually
reinforcing.
As a result, competitors don't have to match just one thing, they have to match the whole
system. And until rivals achieve the whole system, they don't get very many of the benefits. It's
like climbing a cliff; until you get to the top of the cliff, you can't stand and begin to walk again.
CIO: Where does IT fit into these concepts? Can it promote the creation of these
complementarities?
PORTER: Yes. In many cases, achieving complementarities across activities is heavily affected by
information technology. A production process can benefit a company's after-sales service if there
is effective information exchange. If IT people need a new rallying cry for how to create
competitive advantage, maybe it ought to be around the idea of tying activities together and
achieving complementarities.
CIO: You fault business for being too focused on operational effectiveness for the last
decade, but isn't the IT function operationally oriented by nature? How can it be
otherwise?
PORTER: In the mid-1980s, IT was all the rage as a tool for competitive advantage. Then we got
swept by the wave of reengineering and restructuring, and the IT function has really been
diverted back to the operational stuff. We now need to return to what was starting to happen
earlier, when IT was changing industry structure, altering the rules of competition and spawning
whole new businesses.
IT can be strategic, but my experience has been that a lot of IT organizations are inward looking.
Most IS departments today are too often defending their turf, too worried about policing the
behavior of renegade managers.
CIO: What should IT focus on to create strategic advantage?
PORTER: IT applications are absolutely fundamental to managing a company today, so IT is part
of a corporate strategy whether the management thinks that way or not. The challenge for IS
departments is to start understanding how to play the strategic role better. From a strategic point
of view, every in-house system should not be replicating somebody else's best practice but
instead be tailored to the company's unique positioning. The traditional way of doing that was to
develop proprietary systems. Today, more cost-effective off-the-shelf systems can be modified
around a particular strategy.
To play the strategic role, IT people have to know the customer, understand the manufacturing
process and take a business view of the company. Unfortunately, there is so much technological
change that you inevitably get specialists who tend to be fairly narrow people.
Another problem is metrics. The traditional criteria by which IT applications have been chosen
have been ones of operational effectiveness-How many people can we save? How much faster
can we process the paper?-rather than more strategic measures, such as how much have quality
or service levels gone up. That needs to change.
CIO: What can chief information officers specifically contribute toward competitive
positioning?
PORTER: CIOs understand the enabling technologies to allow distinctive positions to be created,
so the CIO has an important role to play. But that doesn't mean that systems should be built
internally, and it doesn't mean that the CIO should control all the systems activity in the
company. There will continue to be a need for integration and certain standards and protocols,
but that's getting easier because the software itself is pushing it. The idea of central IS as traffic
cop and enforcer is less important, and the CIO's role should increasingly turn to supporting
competitive advantage.
CIO: That suggests outsourcing should be considered for some systems. But isn't IT
outsourcing purely a non-strategic, cost-lowering technique? Can it contribute to
competitive advantage?
PORTER: Outsourcing may be very much the right thing to do in order to improve operational
effectiveness. If the company isn't world class in systems, then it had better find a way to get
there. Having said that, anything you outsource will rarely be a competitive advantage because
others can get that same outsourced service. Essentially, you've taken that activity off the
strategy table. Competitive advantages are established when you can create and control
something that is distinctive and unique to your organization.
I'm a big believer in outsourcing and think we have a long way to go toward shutting down
inefficient internal activities. There are many more systems activities that can be moved outside,
but let's not think that that's going to give us a competitive advantage. It's simply reducing a
disadvantage.
CIO: So should CIOs identify core competencies and protect them from outsourcing?
PORTER: That's too narrow a conception. IT people need to work with their colleagues on the
management team to define a distinctive and unique position for the company. Once they
understand that position, the IT director needs to determine where tailored, in-house systems
would add particular value to that distinctiveness. In those areas, full outsourcing doesn't make a
lot of sense. Those systems ought to be preserved and controlled inside the organization. When
a company chooses to outsource, it accepts an average way of doing things, and that's going to
make it more similar, not more different.
CIO: IT benchmarking is another pursuit that would seem to lead to imitation rather
than distinctive positioning. Is this another nonstrategic practice?
PORTER: Benchmarking can have strategic value, but it's only the first step. It can tell one
company where it stands versus another. But that comparison is fundamentally an operational
effectiveness question. Once the company finds the answer to that question, it has to use that
knowledge to get itself up to best practice level. Then the next question is how to be unique in
this practice, given the organization's strategy. Ideally, everything a company does ought to be
reinforcing its unique strategy, so it should never simply accept, say, the way some other
company processes orders.
CIO: Does your research with European and Japanese companies indicate that their
competitive contribution from IT is dramatically different from U.S. companies?
PORTER: In general, I have found European and Japanese companies are behind-in some cases,
significantly-in the strategic and even operational use of IT. In Japan, the companies are quite
advanced in the factory but not at all advanced in the office. The whole idea of networking and
groupware there is still in its infancy. One of the potential advantages that U.S. companies have
right now is IT. If I were an American company trying to compete with the Japanese, one of the
first places I'd look is IT. Japanese companies are slow to adapt to these new techniques.
CIO: Does that mean your new book will have a chapter on IT?
PORTER: Rather than dedicating a chapter to IT, it will be sprinkled throughout the book, in the
spirit of this conversation. The best way to think about IT is not as a separate thing, but as part
of what makes a company unique in all its activities.