COMPETITIVE STRATEGY

Firms, not nations, compete in international markets. We must understand

how firms create and sustain competitive advantage in order to explain what role
the nation plays in the process.1 In modem international competition, firms need
not be confined to their home nation. They can compete with global strategies in
which activities are located in many countries.
The basic unit of analysis for understanding competition is the industry. An
industry (whether product or service) is a group of competitors producing
products or services that compete directly with each other. 2 A strategically distinct
industry encompasses products where the sources of competitive advantage are
similar. In practice, drawing industry boundaries is inevitably a matter of degree.
The industry is the arena in which competitive advantage is won or lost.
Two central concerns underlie the choice of a competitive strategy. The first is the
industry structure in which the firm competes. The second central concern in
strategy is positioning within an industry.
Neither concern by itself is sufficient to guide the choice of strategy. A firm
in a highly attractive industry, for example, may still not earn satisfactory profits if
it has chosen a poor competitive positioning. Both industry structure and
competitive position are dynamic.
Industry attractiveness and competitive position can both be shaped by a
firm. Successful firms not only respond to their environment but also attempt to
influence it in their favor. Indeed, it is changes in industry structure, or the
emergence of new bases for competitive advantage, that underlie substantial shifts
in competitive position.
One nation's firms supplant another's in international competition when
they are in a better position to perceive or respond to such changes.
 THE STRUCTURAL ANALYSIS OF INDUSTRIES

The main idea is that competitive strategy must grow out of a sophisticated
understanding of the structure of the industry and how it is changing.
There are five competitive forces in which competition is embodied: (1) the
threat of new entrants, (2) the threat of substitute products or services, (3) the
bargaining power of suppliers, (4) the bargaining power of buyers, and (5) the
rivalry among the existing competitors.
The strength of the five forces varies from industry to industry and
determines long-term industry profitability. The strength of each of the five
competitive forces is a function of industry structure, or the underlying economic
and technical characteristics of an industry.
Buyer power, for example, is a function of such things as the number of
buyers, how much of a firm's sales are at risk to any one buyer, and whether a
product is a significant fraction of buyers' own costs which leads to price
sensitivity.
Every industry is unique and has its own unique structure. Industry structure
is relatively stable but can change over time as an industry evolves.
Industry structure is significant in international competition for a number of
reasons. First, it creates differing requirements for success in different industries.
Second, industries important to a high standard of living are often those that
are structurally attractive, which will earn more attractive returns to capital. By
targeting entry into structurally unattractive industries, developing nations have
frequently made poor use of scarce national resources.
A final reason why industry structure is important in international
competition is that structural change creates genuine opportunities for
competitors from a nation to penetrate new industries.
 POSITIONING WITHIN INDUSTRIES

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

choose a position within the industry.
At the heart of positioning is 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. Differentiation is the ability to provide unique and
superior value to the buyer in terms of product quality, special features, or after-
sale service.
Competitive advantage of either type translates into higher productivity than
that of competitors.
Any successful strategy, however, must pay close attention to both types of
advantage while maintaining a clear commitment to superiority on one.
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.
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. In shipbuilding, for example, Japanese firms follow the differentiation
strategy, offering a wide array of high-quality vessels at premium prices.
Successful Scandinavian yards are focused differentiators, concentrating on
specialized types of ships such as icebreakers and cruise ships that involve
specialized technology.
Indeed, different strategies can coexist successfully in many industries. 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.
 SOURCES OF COMPETITIVE ADVANTAGE

Competitive advantage grows out of the way firms organize and perform
discrete activities. Firms create value for their buyers through performing these
activities. To gain competitive advantage over its rivals, a firm must either provide
comparable buyer value but perform activities more efficiently than its competitors
(lower cost), or perform activities in a unique way that creates greater buyer value
and commands a premium price (differentiation).
Activities can be divided broadly into those involved in the ongoing
production, marketing, delivery, and servicing of the product (primary activities)
and those providing purchased inputs, technology, human resources, or overall
infrastructure functions to support the other activities (support activities).
Firms gain competitive advantage from conceiving of new ways to conduct
activities, employing new procedures, new technologies, or different inputs. But a
firm is more than the sum of its activities. A firm's value chain is an interdependent
system or network of activities, connected by linkages. Linkages occur when the
way in which one activity is performed affects the cost or effectiveness of other
activities.
Linkages also require activities to be coordinated. Coordinating linked
activities reduces transaction costs, allows better information for control purposes,
and substitutes less costly operations in one activity for more costly ones
elsewhere.
Competitive advantage is increasingly a function of 'how well a company
can manage this entire system. Linkages not only connect activities inside a
company but also create interdependencies between a firm and its suppliers.
The value chain provides a tool for understanding the sources of cost
advantage. The value chain also exposes the sources of differentiation. The value
chain allows a deeper look not only at the types of competitive advantage but also
at the role of competitive scope in gaining competitive advantage. Scope is
important because it shapes the nature of a firm's activities, the way they are
performed, and how the value chain is configured.
A prominent reason why firms gain competitive advantage is that they
choose a different scope from competitors, by focusing on a different segment,
altering geographic breadth, or combining the products of related industries.
 CREATING ADVANTAGE

Firms create competitive advantage by perceiving or discovering new and

better ways to compete in an industry and bringing them to market, which is
ultimately an act of innovation. Innovation here is defined broadly, to include both
improvements in technology and better methods or ways of doing things.
Much innovation, in practice, is rather mundane and incremental rather than
radical. It depends more on a cumulation of small insights and advances than on
major technological breakthroughs.
Innovations shift competitive advantage when rivals either fail to perceive
the new way of competing or are unwilling or unable to respond. This can be the
result of many causes, among them complacency, inertia, inflexible or specialized
assets, or mixed motives.
In international markets, innovations that yield competitive advantage
anticipate both domestic and foreign needs.
The most typical causes of innovations that shift competitive advantage are
the following:
 New technologies. Industries are born when technological change makes a
new product feasible.
 New or shifting buyer needs. Competitive advantage is often created or shifts
when buyers develop new needs or their priorities change significantly.
 The emergence of a new industry segment. The opportunity for creating
advantage arises when a new distinct segment of an industry emerges or a
new way is conceived to regroup existing segments.
 Shifting input costs or availability. Competitive advantage frequently
changes when a significant change occurs in the absolute or relative costs of
inputs such as labor, raw materials, energy, transportation, communications,
media, or machinery.
 Changes in government regulations. Adjustments in the nature of
government regulation, in areas such as product standards, environmental
controls, restrictions on entry, and trade barriers, are another common
stimulus to innovations which result in competitive advantage. Existing
industry leaders have tailored their activities to one regulatory regime, and
a shift in that regime may find them unable to respond.