Of Competitive Advantage: Kinetic and Positional.
The Dichotomy of Positional and Kinetic Advantages
The essence of competitive advantage can be interpreted as the asymmetry or differential among firms along any comparable dimension that allows one firm to compete better than its rivals. Simply put, a competitive advantage can be one of two types:
* positional--a status-defining position that leads to better company performance; or
Positional advantage often derives from ownership or access-based sources. Specifically, it comes from a company's unique endowment of resources, market positions, established accesses, and other traits that are relatively static in nature. And it is based on the company's status, social or economical, actual or perceived, in the eyes of customers, competitors, partners, regulators, and other stakeholders.
* kinetic--an action-oriented ability that allows a firm to function more effectively and efficiently.
In contrast, kinetic advantage typically arises from a firm's knowledge, expertise, competence, or capabilities--including those gained from accessing or tapping other firms' knowledge and capabilities. It is based on a firm's competence and skill in conducting business activities, including, but not limited to, the ability to identify market opportunities, knowledge of customers, technical know-how and capability, speed of action and response in the marketplace, and efficiency and flexibility of business or organizational processes.
Positional and kinetic advantages often reinforce each other. On the one hand, positional advantages often spawn kinetic advantages. On the other hand, kinetic advantages can lead to and strengthen a firm's positional advantages. In this sense, the latter could be interpreted as fossilized kinetic advantages, because the current position may reflect a firm's capabilities in a prior period of time. However, lacking kinetic advantages, a firm's future positional advantages will likely be at peril. By the same token, without positional advantages, a firm's kinetic advantages would be unlikely to fully reach their potential.
With high-speed changes in the current business environment, including globalization and advances in information technology, many positional advantages traditionally banked on by leading firms become less durable or irrelevant. Encyclopedia Britannica's positional advantage in its huge sales force was largely rendered obsolete by the availability of online references and CD-ROM technology as a substitute for its hard volumes. Similarly, in hypercompetitive industries such as personal computers, where, as Intel's
Andrew Grove (1996) puts it, "only the paranoid survive," positional advantage is much more difficult to sustain. Constantly operating at the industry frontier with a host of kinetic advantages--however temporal they may be--could just prove to be a necessary task in order to succeed in the long run.
WHAT COMPRISES KINETIC ADVANTAGE?
A firm can derive kinetic advantages from its proficiency--knowledge, skills, competence, and capabilities--in conducting business activities and processes. Whereas positional advantages are based on owning valuable assets and gaining superior access, kinetic advantages give a company an edge in what it actually does. They allow the company to perform its value-adding activities more effectively and/or efficiently than its rivals.
Based on prior strategy literature, four major aspects of a firm's capabilities can be identified that confer kinetic advantages: entrepreneurial, technical, organizational, and managerial. Within these capabilities, several major indicators can be chosen to characterize the different aspects underlying kinetic advantage: creativity, efficiency, speed, flexibility, and quality. Thus, a firm enjoys kinetic advantage if its knowledge and capabilities allow its business activities and processes to be more creative, efficient, and flexible, and if it can respond to customers and the markets quickly. As for quality, it applies not only to the end product but also to the business process. A firm with a quality-driven process can command competitive advantage. Based on all these aspects and indicators, we can outline the content of a firm's specific kinetic advantages, as illustrated in Figure 1, and discuss each separately below.
Advantage Through Entrepreneurial Capability
Through its entrepreneurial capability, a company can effectively align itself with its environment and broaden its business space. It enjoys an edge over its rivals if it can forecast trends and changes in its environment more accurately; if it possesses superior intimate knowledge of its customer base and is good at targeting and selecting customers; or if it has a keen sense of how to identify and create new market opportunities from environmental stimuli.
Ability to identify and understand valuable customers. Knowledge of customers is essential for success. The ability to identify customers, especially those who form the backbone of the customer base--loyal, predictable, and with high profit-generating potential--and gain intimate knowledge about them affords a firm competitive advantage. Attracting the wrong customers for a quick profit is perhaps a disservice to the firm. Customers lured by discount and promotional savings often defect. Serving the right customers and giving them what they really need benefit both the firm and the customers in the long run.
Consider the example of MBNA's credit card business. MBNA provides cards primarily to members of affinity groups, such as university alumni associations. Members of such groups are professionals and often share similar qualities. By targeting them, MBNA can better understand their common needs and serve them accordingly.
Ability to create new market opportunities. A firm gains advantage if it has superior capability in forecasting trends in its industry and the general environment and creating new markets. Sony has benefited greatly from its excellent capability in creating new market opportunities. Twice in its collaborative arrangement with Philips, the European electronics giant, Sony was able to formulate a marketing concept quickly and flood the market before Philips and other firms even had a clear vision of the market. Whereas Philips regarded the tape recorder as an expensive office product, Sony saw its potential as a commercial product that could reach millions of customers--hence, the introduction of the wildly successful Walkman. With the initial introduction of the CD player, Philips regarded it as a luxury product; but Sony treated it as a middle-class consumer good and quickly built capacities to preempt the market.
Ability to identify new market opportunities. As certain environmental changes unwind, some firms see threats, while some see opportunities, and others tend not to see at all. Companies that can quickly identify new market opportunities during environmental changes will likely gain advantages.
Consider American highways, where the traditional simple service/diners are growing into mall-like supercenters that consist of gas stations, dining rooms, shopping facilities, and even movie theaters and barber shops. To many tourists, such a supercenter provides fun and convenience. Companies that quickly identified the opportunity of service supercenters enjoyed first mover advantage.
But not all people are happy with such supercenters. Many professional truck drivers do not necessarily like the idea of sharing their stops with passenger cars. They want their own separate stops for their convenience. This spells opportunity for certain small businesses, which do not have the financial strength to build supercenters. Firms that are quick to see and capitalize on this opportunity can also gain advantage, although for the opposite reason than those who capitalized on supercenters. Some service stations, in fact, have chosen to service truck drivers only, and refuse to fuel passenger cars. Should they be able to establish their reputation among this focused and often highly profitable group of customers, such quick recognition of opportunity could well turn into a lasting advantage.
Advantage Through Technical Capability
While entrepreneurial capability helps a firm identify its core customers and market opportunities, technical capability deals with how it serves its customers through technologies and operating processes. A firm gains advantage if its technical capability allows it to be more efficient, flexible, and high-quality in its operation and quicker in response to customer needs. Specifically, technical capabilities include basic R&D strengths, core competencies, business-specific capabilities, and manufacturing strengths.
Basic R&D strengths provide a sound technical foundation for the entire firm, such as Sony's R&D prowess in many areas of consumer electronics. Core competencies, a firm's unique and often signature skills and capabilities, allow the firm to excel in multiple product markets. Sony's capability in miniaturization enabled it to lead in portable electronics ranging from Walkman to Discman to Watchman. The skills and expertise required to excel at a specific business add special strengths to a particular product or product line. Sony's Trinitron technology provided it with an edge in picture quality for color TV. And superior manufacturing enables a firm to produce quality products, often quickly and efficiently. Sony's manufacturing strengths played major roles in establishing its strong market position in the CD player business.
Creativity-inspired technical capability. A firm's creativity in developing and designing quality products suitable to consumer needs provides competitive advantage. Apple Computer's great run in the 1980s was due largely to its creative product design capability, which produced a score of great products such as the Macintosh, featuring user-friendly interfaces. Merck prides itself as "a research-driven pharmaceutical company." It outspends rivals on R&D with well-paid researchers, boasts advanced equipment and expensive research labs, and fosters a campus like research atmosphere. Its drugs are profitable because they stem from its superior and creative R&D capability.
Similarly, Gillette's ability to design and introduce new products has constantly advanced its level of excellence in the men's grooming product market. From its first creative idea to put an edge on sheet steel that could shave whiskers, to the sophisticated Gillette Sensor and most recently the MACH3, creative product designing has certainly helped Gillette gain an edge over its rivals.
Efficiency-focused technical capability. Making products efficiently helps a firm compete better with rivals, especially on standardized products and in situations in which cost and price are of primary concern and product differentiation is less likely. Ford's pioneering use of the assembly line stands as a classic example of efficiency-focused technical capability. By investing in large-sized plants that specialized in producing only one model, the Model-T, and adopting the assembly line format of production, Ford was able to achieve remarkable efficiency in manufacturing a car that the average working American could afford.
This efficiency enabled Ford to become the lowest-cost car maker and dominate the U.S. auto industry in the early 1900s. But such efficiency was not solely dependent on the assembly line. The company kept up constant improvement in product and process design and worker training and skills. And the efficiency concept permeated the whole organization mentally and culturally.
Flexibility-prone technical capability. If a firm's design and manufacturing process are more flexible than those of its competitors, it will enjoy kinetic advantage by responding more quickly to the market and offering products that Suit changing customer demands and tastes. Toyota's flexible manufacturing system affords it the ability to manufacture a diverse range of products at a lower cost than the conventional product assembly line. Toyota can use several techniques designed to reduce setup times for production equipment between job batches--a major source of fixed costs. Such a system and such techniques, as well as its famous just-in-time process, make small production runs profitable and allow Toyota to change its product mix quickly in response to customer orders. To be sure, the technological system itself is only part of the story. Worker knowledge, experience, and dedication are also an integral part of Toyota's capability in flexible manufacturing.
Quality-enhancing technical capability. Quality is job number one. As the saying goes, a company whose technical process and capability allow it to achieve high quality in its products and production gains an edge in the game of creating customer value. Superb design and manufacturing comprise the core of a firm's technical challenge regarding quality. Designing a product that conforms to customer needs is the first step. Designing a product that is suitable for manufacturing is the second. The company that has a superior technical routine in designing and manufacturing products at high-quality levels enjoys both cost and differentiation advantages.
Consider Motorola's legendary six-sigma quality commitment, which made the company famous. The practical meaning of the statistical term "six sigma" is simply that there will be no more than 3.4 defects per million parts; in other words, a job will be done right no less than 99.9997 percent of the time. The six-sigma program saved Motorola $500 million in 1990 alone. Such quality-enhancing capability comes from Motorola's relentless improvement in design and manufacturing processes, the integrated team efforts that involve customers and suppliers early on, and the extensive technical training of its own employees as well as those of its partners.
Speed-based technical capability. In a fast-paced business environment, a firm's speed in product design, manufacturing, and product introduction is essential for winning customers. Companies are indeed competing against time. A firm with technical know-how and capability that enables quick responses to customers needs possesses competitive advantage. "Moving at the speed of business," FedEx offers a classic example of how speed provides competitive advantage. Its ability to offer next-day delivery service nationwide is based on a series of technical routines that involve package collection, sorting, ground and air transportation, tracking, and delivery. Similarly, Jiffy Lube focuses its business on oil change and lubrication, offering quick service to its customers. With its well-trained technicians, specially designed shop entrance and exit, underground working area, and ground level support equipment, customers are able to pull in and drive out in about 15 minutes.
Advantage Through Organizational Capability
Organizational capability helps mobilize employees toward the common goal of creating customer value. It fosters organizational learning and facilitates change when needed. And it complements technical capability in carrying out a firm's business processes and activities. In fact, technical capabilities are often built into certain organizational routines.
Creativity-enhancing organizational Capability. In modern-day firms, innovation is less likely to be an individual effort than a collective process. And creativity is not just a technical phenomenon. Instead, it involves organizational process and skills. Merck may have a superb R&D force, but that won't translate into profit by itself. The company needs hard-nosed product managers to make sense of, shape, and get the most out of the work conducted at the research labs. Simply put, organizational capability helps put technical creativity into perspective and ensures that a firm will benefit from such technical innovation. Similarly, 3M's organizational capability to persistently encourage and systematically explore technical innovation has been a major factor helping to ensure its continued success through innovation and creativity.
Efficiency-enhancing organizational capability. A firm's operational efficiency can arise from both its technical and organizational processes often simultaneously. Lincoln Electric's technical efficiency comes primarily from its experience-based learning and continuous improvement. To encourage and facilitate such technical improvement, Lincoln has adopted various effective organizational systems and practices. It encourages long employee tenure, uses a compensation system that rewards productivity and quality, runs programs that help enhance employee learning, and maintains a lean organizational structure that promotes coordination and efficiency. These organizational factors nicely complement the technical processes, facilitating organizational-level learning and the achievement of experience-based efficiency.
Quality-enhancing organizational capability. The quality management process involves not only the use of statistical control methods and other technical systems, but also organizational process in team work and learning. Quality is a company mentality and a management philosophy. Superior organizational capability helps mobilize employees toward the firm's quality goals and enhance learning in the quality improvement process. The training program of Motorola was perhaps the single most important element of its drive toward quality improvement for years, providing the cultural transition that would forever change the company. It was estimated that in the 1980s, every dollar spent on quality training returned $33 in Motorola plants, where workers learned quality skills and managers supported quality programs.
Speed and flexibility-facilitating organizational capability. To respond to the market quickly is not only a technical task, it requires routines that facilitate the flexibility and speed of the firm's technical activities. Honda's ability to use existing factories and organizational set-up to introduce its Acura line in 1984 allowed it quick entry into the market. In 1995, GM launched its Saturn division, which was created outside the existing GM system. It took Saturn five years to finally enter the market with two models, while in 1991 Honda's Acura had already accumulated a total sales volume of 800,000 cars.
Similarly, USAA organizes its business activities in such a way that the centralized operation will give customers flexibility and quick response. As a major auto insurance provider, USAA has created a loyal customer base among military personnel, who move frequently. With its centralized data base and telephone sales representatives, it provides service that can be accessed from almost anywhere in the world. Compared to the traditional set-ups and practices of many insurance companies, USAA's technical and organizational capability in centralizing its operation gives it a competitive edge.
Organizational learning. It is not only which stage of the experience curve a firm has reached, or what it has learned that matters, but how quickly it can learn and adapt to an ever-changing environment is also important in gaining kinetic advantage. Organizational learning is a shared, collective process that involves people from grass roots to top management, and focuses on generating, accumulating, and applying knowledge to enhance effectiveness, efficiency, and creativity. When learning rather than planning dominates the strategy-making process, people at all levels of the firm can be strategists, contributing to the shape and evolution of its strategy.
Organizational learning helps firms gain advantage by developing superior knowledge and capability in serving customers better. Consider the example of Kao, which has often been on Japan's list of excellent companies. According to its president, Dr. Maruta, Kao prides itself as "an educational institution in which everyone is a potential teacher." It credits its success to the ability to integrate and enhance various capabilities--such as a mastery of technology and efficient marketing and information systems--through learning. Touting a "paper weight" organization in which the flat structure facilitates shared learning, Kao emphasizes integration across functions and the practice of "biological self control": All information is shared horizontally, not filtered vertically. With the sharing of information comes equality of participation for all aspects of the firm. And such equality forms the basis of trust and commitment. Maruta made the following comments regarding the importance of learning in the informa tion age:
In today's business world, information is the only source of competitive advantage. The company that develops a monopoly on information, and has the ability to learn from it constantly, is the company that will win, irrespective of its business. (Butler 1994)
Advantage Through Managerial Capability
Managerial capability enables a firm to build, coordinate, integrate, and reconfigure multiple streams of competencies and deploy them strategically to exploit changing market opportunities. It is a higher order capability that helps generate other capabilities and put them into productive use.
Integrating multiple competencies. Managerial capability is needed to coordinate and integrate multiple competencies to the manufacture of one particular product. For instance, research on air conditioner manufacturers demonstrates that performance is greatly related to the special organizational routine of gathering and processing information, matching design choice with customer preference, and coordinating factories and suppliers. Similarly, in the auto industry, coordinating routines and capabilities often affects development cost, lead time, and quality. Nike's success in the athletic footwear industry stems largely from its superior capability in coordinating and integrating multiple competencies--its design skills and marketing capabilities, its network of value-adding activities, its relationship with manufacturers and advertising agencies, its ability to leverage organizational capabilities, its encouragement of employee creativity, loyalty, and commitment, its competitive culture, and its uplifting attitude and spirit.
Leveraging core competence to multiple product markets. A firm's core competencies can also be applied to multiple product markets. To do so, the firm needs the appropriate managerial capability to leverage those competencies in the technical aspects, as well as the organizational and entrepreneurial aspects. Canon's superior managerial capability affords it competitive advantage in a whole range of product markets. It can integrate its various streams of knowledge and expertise in image processing--microelectronics, precision mechanics, and fine optics--and apply them to many products, from cameras to camcorders, fax machines to printers, copiers to scanners. Similarly, Honda's outstanding managerial capability allows it to leverage its competence in engine-building to several businesses, including automobiles, motorcycles, lawn mowers, and outdoor generators.
Such managerial capability deals with the other three capabilities. For cross-market leveraging, a firm must build multiple core competencies. Accumulating them often requires organizational capabilities that facilitate shared learning across divisions and units. To deploy them, market opportunities and customer groups and needs must be properly identified. Finally, they must be deployed selectively using sound managerial judgment. So it is the integrated capabilities from all four aspects that often underlie a firm's kinetic advantage.
Reconfiguring core competencies for new markets. Technical capabilities often need to be reconfigured and redeployed to capitalize on emerging market opportunities or neutralize competitive threats. This requires superb managerial skills and capabilities.
Consider the changes Bill Gates made at Microsoft in 1996. Knowing full well how as a small company, it had transformed the computer industry, Microsoft was very alert to any new phenomenon in the business. It was not about to sit on its laurels. Gates and his associates were quick to perceive the threats of Netscape and the Internet to their vision of a PC-based future for the computer industry. And their excellent managerial capabilities allowed Microsoft to adapt quickly to the new competitive situation. It out-sourced the development of its browser MS Explorer to a technical partner and incorporated its network software into existing operating systems and application software, in which it had its core competence and dominance. In about six months it was able to put up a formidable alternative to the pioneer Netscape browser.
A company with superior managerial capability is expected to survive and thrive through multiple rounds of technological trajectories or transformations of its core businesses. For instance, 3M transformed its core business from mining, to sandpapers and related abrasive and adhesive products, to today's multiple areas and variety of high-tech businesses. What has remained consistent is the superior managerial capability that weaves together technical, organizational, and entrepreneurial capabilities and skills. This helps sustain an organization that persistently thrives on institutionalized innovation.
WHAT COMPRISES POSITIONAL ADVANTAGE?
A business is usually defined on three dimensions: customer group (who are the customers); customer function (what do they want); and firm resource and technology (how to satisfy the customers). Eventually these dimensions will have to translate into two basic types of market: (1) product and/or service and (2) resource factors and input. Players and entities in both product and factor markets consist of what can be called a "business ecological sphere," in which they interact and co-evolve. The government is often an important player as well, affecting how a firm interacts with other players and creates value for its customers.
In striving for leadership within its focal business ecosphere, a firm's endowment and position or status vis-a-vis that of other players and entities in the ecosphere determine its positional advantage. Moreover, the ecosphere may also compete with other ecospheres, often for the same set of customers, especially in situations where competing industry standards are a concern. As such, a firm's position compared to that of players in other business ecospheres also determines its competitive advantage.
As can be seen in Figure 2, different business ecospheres often overlap each other. One firm can belong to several at the same time. Also, within any particular ecosphere, a firm can play multiple roles simultaneously. On any given day, Apple Computer and Microsoft can be both competitors (in operating systems) and collaborators or complementors (in application software) in the ecosphere known as the personal computer business, which in turn is part of a still larger ecosystem, the overall computer industry. The two players also represent subspheres within the industry, each serving as a keystone around which other players build and co-evolve. Microsoft and Intel define the Wintel format; Apple and Motorola define the Macintosh format. Individually, Microsoft straddles both subspheres. So do those third-party players, software writers, who may choose to serve both the Apple and Wintel systems.
Position Against Competitors
Size often confers advantage. A company that is bigger than its rivals in the same business typically indicates its strong market position. At least three types of factors underlie positional advantages with reference to rivals: market power, economy of scale, and economy of experience.
Market power. A large company often has deep pockets that can outlast rivals in battle, so it has the clout to issue and implement credible threats. It also has a greater margin of error in its actions and more bargaining power against suppliers and buyers. In the eyes of customers, size often suggests credibility and dependability. It may also intimidate and deter challengers, new entrants, or incumbent firms aspiring to grow. From a commitment perspective, size suggests a firm's will and determination to conquer and lead a market. It might be irrational for rivals to match its size, for overcapacity might result in no one being profitable. In many situations, smaller rivals may not even be able to respond to a larger firm's moves. Moreover, big companies often enjoy competitive or anti-competitive practices unavailable to smaller rivals, such as price leadership, product bundling, and easier access to external capital.
Economy of scale. Companies do not become big simply because of good fortune. Often, deep-seated economics enable their growth. Economy of scale is perhaps the single largest justification for size advantage. If a firm can spread its fixed costs over greater volumes of products or services, it enjoys lower costs because of its large scale in operation. The merger between Chemical Bank and Chase Manhattan in 1996 created the largest bank in the United States, which enjoyed an economy of scale because of the reorganization of its branches and the consolidation of back-office functions. By closing down excessive branches and consolidating its retail businesses, the new bank was able to enjoy better capacity use and generate basically the same volume of retail business with fewer branches. By combining back-office operations, it could reduce fixed costs in infrastructure, such as computer systems, and achieve better use of its back-office capacity.
Economy of experience. A firm can also gain advantage because of accumulated volumes in production and service independent of its absolute size. The experience curve effect suggests that every time a firm's cumulative output doubles, the unit cost of value-added for a standardized product decreases by a certain percentage, until a flooring level sets in. The cost reduction comes from experience or learning that has accrued while repeatedly producing the products or delivering the services, which increases efficiency and productivity.
In addition to technical processes, organizational processes may also benefit from experience, as coordination and planning of operations are optimized through trail-and-error learning, iteration after iteration. Lincoln Electric, the quintessential leader in the electric arc welder business, constantly works on its technical and organizational processes to improve quality and productivity through experience, learning, and innovation.
Positions with Collaborators and Complementors
A collaborator is a firm that produces the same or similar products and targets the same customers as the focal firm--a rival that can also be a partner in promoting a common cause and/or jointly fighting other rivals. A complementor is a firm whose products or services complement those of a focal firm, making them more valuable to customers. Bread and butter and software and hardware are examples of complementary products.
Relationship with Complementor. A firm can enjoy positional advantage over its rivals if it boasts a better relationship with its complementors. The reason Microsoft won the war of PC operating systems in the early 1980s was largely due to its aggressive co-option of complementors. It persuaded software writers to write applications for MS-DOS instead of rival systems, thereby enlarging MS-DOS's installed base.
The now famous PC standard in Wintel also features an advantage in good relationships between complementors. Hardware improvement, such as new generations of microprocessors makes it possible to develop more sophisticated software, taking advantage of more space and speed. Software revolution fuels the excitement about and need for faster microprocessors. With a good understanding of such a relationship, Microsoft and Intel constantly challenge and complement each other, leaving rivals far behind. When Mr. Software and Mr. Hardware put their heads together, you have dominance in the PC business and beyond.
Aggregate strengths of collaborators.
Smaller-scale companies can offset larger firms' size advantage and/or enhance their own advantage over smaller firms by joining forces or participating in certain trade alliances. Farming is a business that is generally very fragmented and undifferentiated. Yet by organizing in cooperatives, farmers can aggregate their strengths and increase their power and clout. We often see coordinated promotion efforts from trade associations in a certain business or region, such as the Florida Orange Juice campaign.
In the retail industry, smaller firms often join purchasing alliances in which they can pool their volumes and bargain with manufacturers for better deals. Such alliances help these smaller firms wield bargaining powers similar to that of a large retailer, thereby gaining advantage from aggregate economies of scale. Even major companies often pool resources and form purchasing alliances when dealing with health insurance providers. Such aggregate strengths provide competitive advantages over firms that have to go it alone.
Positions with Collaborators and Substitutors
Consider the following sound bites:
* Got milk?
* Beef. It's what's for dinner.
* Pork, the other white meat.
* Cotton, the fabric of life.
* Plastics make it possible.
Sound familiar? These well-known catchy phrases in various commercials in the U.S. promote the collective interests of the respective trades and industries, which are rather fragmented and whose products are generic commodities that are difficult to differentiate. Yet by joining forces through trade associations or business councils, companies in these industries are better able to position themselves and, it is hoped, derive some heterogeneous positional advantages from the "perceived" uniqueness and indispensability of their products over substitute products. Obviously, the advantage, if any, drawn from such advertising and promotional campaigns is often at the collective level for companies in the respective business or trade. Companies that are more united than providers of substitute products or services will likely possess such a collaborative edge.
Positions with Suppliers: Better Access or Exclusive Control
A company's positional advantages over rivals can be found in its access to suppliers in ways that are more convenient, cheap, or complete. A bottled water company will have a cost advantage stemming from convenient access to supply if it is located closest to the source of spring waters. A company that has a long-term contract with a supplier will have an edge over latecomers if they have to pay the supplier more for the same deal. In the case of retailing, a retailer that can cherry-pick or has access to the full range of a supplier's products will have an edge over retailers that must settle for undesirable products by the same supplier.
Former Hollywood power broker and super agent Michael Ovitz and his Creative Artists Agency (CAA) dominated the supply of stars in the movie and TV circuits, representing superstars ranging from Steven Spielberg to Michael Crichton, from Robert De Niro to Tom Hanks and Tom Cruise. With exclusive access to so many talented writers, actors, and directors, CAA could package those talents and present movie deals to the studios in integrative, ready-to-shoot packages the studio bosses could not refuse. As such, CAA fundamentally changed the Hollywood game, reducing the bargaining power of studio bosses and procuring astronomical fees for its stars and huge commissions for itself.
A diamond is forever. That's the message from De Beers to its customers across the world. A diamond is valuable because of its scarcity (or perceived scarcity) and hence the social prestige derived. With its ownership of many diamond mines and exclusive agreements with other diamond mine owners worldwide, De Beers has dominated and manipulated the supply of raw diamonds for about a century. Because of its tight control of supply, it could force the 100-plus buyers and manufacturers of fine diamond products in the world to accept its terms. By releasing only tiny amounts of the annual mining volume of raw diamonds, it was able to maintain the "scarcity" of the diamond supply--even though more diamond reserves are being found and mined, and diamonds are no longer as scarce as we once thought.
Positions with Distributors: Better Relationship or Exclusive Access
Proven brands are often staples of retailers' shelf contents. As such, firms with established brand names often have advantages over challengers in their respective relationships with and access to distributors. Foot Locker, a major athletic footwear retailer, often treats the various brands it carries differently. With famous names like Nike and Reebok, it may have to order and even pay in advance for the latest shoe models, which it needs to attract customers and generate the bulk of its revenue. Because they are such a major draw, those shoes typically have the best display, visibility, and sales clerk recommendations.
A company can also have an edge if it enjoys exclusive dealings with distributors. During World War II, Coca-Cola was chosen by the U.S. military forces as the official soft drink of American soldiers. Such exclusive contracts gave Coke unparalleled advantage against its major rivals in access to customers, boosting its reputation both domestically and globally. Similarly, the work done by Caterpillar in supplying the Allied Forces with tanks and armored vehicles had left Cat with an extensive maintenance network after the war, unrivaled by any other earth-moving equipment company in the world. Controlling such an exclusive network allowed Cat to deliver parts in 48 hours anywhere in the world, a tremendous positional advantage in distribution over competitors.
Position With Customers: Greater Brand Recognition
Owning brands that can be more respected or easily recalled by customers gives a company a big edge over rivals. The advantage comes from its having a unique rapport with its customers, or if its brand name is one of a kind that, in the mind of customers, has no substitutes for its distinctiveness. Coke tirelessly promotes its uniqueness in claiming itself "the real thing." To many customers, NutraSweet might well be the only acceptable brand of artificial sweetener in the U.S., thanks largely to its aggressive campaign that promotes its famous "Swirl" logo, and the fact that it has been an almost inseparable ingredient in many diet foods and drinks. Similarly, one of the most amazingly successful examples of marketing something that can't really be seen is the "Intel Inside" campaign launched in 1991 with an initial annual budget of $100 million. Customers, computer-literate or not, now often insist on having Intel Inside when they buy PCs.
Also consider French wines, Swiss watches, Cuban cigars, and oriental rugs. These country-or region-based "mega-brands" often conjure up images of authenticity and exclusivity. And customers often have irresistible good will toward their super brand names. If a particular firm's brand can achieve such a distinctive reputation among customers or certain customer groups, it can effectively shut off potential challenges from other brands because of the fixed image customers have of its uniqueness. To these customers, there will be no demand for substitute products.
Position with the Government: Favorable Policies or Treatment
Government policy can also confer positional advantages on companies. It comes in the form of more favorable treatment to a focal firm than to rival firms, quotas or licenses for importing and exporting, tax credits or relief, governmental subsidies, less regulation, and so on. To "window-display" the burgeoning economic reforms in China during the 1980s, the central government granted firms in the Shenzhen Special Economic Zone (SEZ) more favorable policies in taxation, regulation of form of ownership, and autonomy in managerial decision-making compared to other SEZs in China's coastal cities. Such advantages provided the opportunity for Shenzheners to become that bunch of people who "get rich first," and to build--literally, from swamp lands--a brand new economic powerhouse in a region that aspires to rival Hong Kong across the river. Similarly, when Raytheon Corporation, one of Massachusetts' largest employers, threatened to move out of state to an area with lower utility costs, the state intervened to pro vide a major break for its heavy utility bills.
Overall Position with Various Players: Dominant Industry Standard
The positional advantage a firm has over rivals is often reflected in its dominance in technological or industry standards, which indicates its strong position against various players in its operating environment. But such a firm often has to meet several conditions. First, it needs a unique and high-quality product that stands in contrast to those of its rivals, such as Intel's X86 series in computer chips. Second, it needs a larger installed base of customers, such as MS-DOS against CP/M and later against Macintosh in PC operating systems. Third, it needs collaborators who are willing to follow the standard, such as the companies that licensed JVC's VHS system over Sony's Betamax in the home VCR market. Fourth, it needs trusting complementors, such as when CD player producers needed the backing of record companies to promote the new format when it first came out. Finally, government can become a determining factor. For instance, in a country where government tightly controls and regulates the telecommunicat ion industry, the choice of standards for cellular phones and pagers by concerned governmental agencies could also make or break a company.
Company Endowment as Positional Advantage
The above discussion of positional advantages focuses on a firm's external relationships with players in its environment. But positional advantages also consist of endowments and strengths within the firm itself. In general, we can categorize a firm's endowments in the following areas: financial capital, physical assets, intellectual property, human resources, organizational capital, and managerial talents.
Financial capital. The financial capital of a firm includes all forms of monetary resources it possesses: cash reserves, reinvested capitals, and capital from bond holders, equity holders, and banks. A firm's financial endowment affects its position and ability to act in the market. Those with strong financial capital endowments have a positional edge over rivals with weaker ones.
Physical endowments. The physical endowments of a firm include all the fixed assets and real estate locations it possesses. If its physical assets are superior to those of rivals, it gains an advantage. Wal-Mart's preemption of premier locations in rural areas gave it advantages over rivals in customer access. Other examples include: AT&T's extensive assets in cables and optical fiber lines for international long-distance phone calls; TCI's extensive control of cable lines to U.S. households; and Hughes Electronics's vast satellite system for home TV.
Intellectual property. A company can also enjoy positional advantage if it possesses superior intellectual property rights, such as trade secrets, patents, and copyrights. Disney's vault of classic cartoon movies and MGM's collection of classic black-and-white movies provide positional advantages unmatched by their respective rivals. Glaxo was able to reap billions of dollars in revenues by exploiting its patent on the widely prescribed anti-ulcer drug Zantac, before the drug reached the nonprescription shelves and cheaper generic drugs were allowed to enter the market.
Human resources. HR provides competitive advantage if a firm's employees are better trained, highly motivated, and loyal, with sound skills and knowledge. USAA spends 2.7 percent of its annual budget on employee training and education, doubling the industry's average; this helps enhance its service quality. Similarly, the experienced and highly skilled technical workers at Lincoln Electric form the foundation of the company's efficiency and productivity. The skills, knowledge, commitment, and enthusiasm of employees at Southwest Airlines play an integral part in its overall strategy and contribute greatly to its on-time performance, baggage handling, and overall customer satisfaction.
Organizational capital. Organizational capital refers to a firm's collective human capital and its form of being and deployment within the firm. This includes organizational structure, systems, processes, and culture. A firm will have positional advantage over rivals if it possesses unique organizational capital that allows it to function more effectively and/or efficiently. Moreover, an often derived advantage is that well-managed firms with better organizational capital attract superior employees.
Managerial talents. Superior managerial talents create better value for customers and shareholders. Poor management ruins and destroys value. The supply of elite managerial talents--those with vision, experience, courage, and proven track records--is limited. And there is no substitute for managerial talents. Firms possessing such rare talents therefore enjoy a heterogeneous positional advantage over those that have to settle for second best. The talents symbolize the firm and set industry and competitive standards. Managerial talent is the master of value creation.
KINETIC AND POSITIONAL ADVANTAGES: RELATIONSHIPS
Positional and kinetic advantages are often closely related to each other. The former can lead to gaining and sustaining the latter, and vice versa. Positional advantages define a firm's competitive status, whereas kinetic advantages define its ability to act--its advantage-in-motion. Together, they define its overall competitive profile. These relationships can be explained in more detail, with some examples.
From Positional to Kinetic Advantage
What a company can do in the market depends largely on what it possesses and what it can access. Toyota's kinetic advantage in efficient, flexible, quality manufacturing is based on its positional advantages in owning advanced technological systems, having good relationships with suppliers, and employing and keeping knowledgeable workers. Microsoft's kinetic advantage in quickly introducing its Internet browsers is based on its ownership of the operating system standard and the huge installed base for its software.
A firm with strong market positions can further strengthen its kinetic advantage by attracting superior resources. Microsoft's market position and reputation attract the most talented engineers fresh out of school to replenish its knowledge base and creative force. Such superior access to a critical supply of talent for software development (an intellectual-property-based business) enables Microsoft to maintain strong technical capability to create new, innovative products.
From Kinetic to Positional Advantage
Positional advantages are often the reward of a firm's kinetic advantages. A company that is creative, efficient, flexible, responsive to customers, and quality-focused will likely enjoy better access to customers and resource providers, possess better relationships with collaborators and complementors, and win stronger market positions against competitors and substitutors. Nike's current market power and reputation have been carefully built through various kinetic advantages in its business over rivals. Its design capability, marketing strengths, and ability to manage the various players in its empire contribute to its gaining and strengthening market positions.
Kinetic advantages not only help a firm gain positional advantages but also help strengthen them. Intel's dominant position in the microprocessor business is not maintained merely through erecting barriers to imitation or using other anti-competitive practices. Instead, it consolidates its position through a host of kinetic advantages in developing a series of new products through innovation. Similarly, Disney's kinetic advantages in creating new animated characters and spanning the boundaries of people's imagination constantly help polish its image and strengthen its market position.
A firm may have certain kinetic advantages yet lack the endowments to further pursue and establish its positional advantages. Consider the classic example of EMI in the CT scanner business. It had a kinetic edge in developing innovative products with great commercial potential. Yet it lacked manufacturing strengths and marketing muscles, so it could not translate that edge into positional advantages in the form of market leadership. Instead, market later-comers with strong endowments, like GE, were able to dominate the CT scanner market. And Sony's flop in the VCR business also illustrates this point. With a kinetic advantage in developing a superior product, yet lacking support from collaborators and/or complementors, the expected positional advantages in market dominance did not materialize.
A firm's positional advantages often indicate its past glories. Without ongoing kinetic advantages to enhance its positions and create new positional advantages, the firm is likely to experience a downward spiral. Kmart is still a company whose size puts it in the upper echelons of the Fortune 500 firms. However, it cannot match the superior capabilities of Wal-Mart in moving merchandise efficiently. With its kinetic advantages diminishing against Wal-Mart and category killers like Home Depot and Toys 'R Us, Kmart's once enviable positional advantages in discount retailing became shaky. It was forced to lay off employees, close stores, and face downgraded credit ratings.
Obviously, a company needs both types of advantages if it is to achieve persistent superior performance. The examples of Nike and Wal-Mart demonstrate that as they shifted the dominance from more positional advantages, such as outsourcing or location, to more knowledge- or capability-based kinetic advantages, such as the ability to coordinate multiple strengths in multiple aspects of their businesses, they further strengthened their positional advantages, instead of downplaying them. Just because one has mastered a martial art does not mean one need not have an alarm system in one's house. Similarly, a business firm needs positional advantages to preserve the achievement brought by the kinetic advantages. Even more important, it needs to leverage its positional advantages to gain and exercise its kinetic ones further. Microsoft does not sit on its achievement, having gained its strong positional advantages in the dominance of PC operating systems. Instead, it constantly and actively searches for new opportun ities to use its skills and gain new capabilities.
Putting both kinds of advantages to use and attending carefully to their timely renewal stand as the fundamental tasks of general managers in striving for persistent superior performance. As the escalation of globalization and technological advancement continues, more and more positional advantages may become less durable and reliable. This means having to pay even greater attention to kinetic advantages in operating effectively and efficiently, rather than simply banking on past glories. The framework developed here should help managers perform such tasks.
Hao Ma is an assistant professor of strategic management at Bryant College in Smithfield. Rhode Island. The author would like to thank the editor of this journal for insightful comments and suggestions on an earlier version of this article.
D.A. Aaker, Building Strong Brands (New York: The Free Press, 1996).
D.F. Abell, Defining the Business (Englewood, NJ: Prentice Hall, 1980).
J.B. Barney, "Firm Resources and Sustained Competitive Advantage," Journal of Management, March 1991, pp. 99-120.
J.B. Barney Gaining and Sustaining Competitive Advantage (Reading, MA: Addison-Wesley, 1997).
Boston Consulting Group, Perspectives on Experience (Boston: BCG, 1968, 1972).
A.M. Brandenburger and B.J. Nalebuff, Co-opetition (New York: Doubleday, 1996).
Charlotte Butler, with Sumantra Ghoshal, "Kao Corporation," in B. De Wit and R. Meyer (eds.), Strategy Process, Content, Context: An International Perspective (St. Paul, MN: West Publishing, 1994): 647-663.
L. Dobyns and C. Crawford-Mason, Quality or Else: The Revolution in World Business (Boston: Houghton Mifflin, 1991).
N. Fast and N. Berg, "The Lincoln Electric Company," Harvard Business School Publishing, Case #9-376-028 (1983).
K. Freiberg and J. Freiberg, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success (Austin, TX: Bard Press, 1996).
"Gates and Grove: Mr. Software and Mr. Hardware Brainstorm Computing's Future," Fortune, July 8, 1996, pp. 42-58.
P. Ghemawat, Commitment: The Dynamic of Strategy (New York: Free Press, 1991).
S. Ghoshal and C.A. Bartlett, Individualized Corporation: A Fundamentally New Approach to Management (New York: HarperBusiness, 1997).
A. Grove, Only the Paranoid Survive (New York: Doubleday, 1996).
S. Lipin, "Joining Fortunes," Wall Street Journal, August 28, 1995, p. Al.
S.G. Makridakis, Forecasting, Planning, and Strategy for the 21st Century (New York: The Free Press, 1990).
A. McGahan, "Philips Compact Disc Introduction," case series, Harvard Business School Publishing (1991).
A. Miller, "The US Athletic Shoe Industry," in G. Dess and A. Miller, Strategic Management (New York: McGraw-Hill, 1993): 457-468.
J.F. Moore, The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems (New York: HarperBusiness, 1996).
M.E. Porter, Competitive Strategy (New York: Free Press, 1980).
C.K. Prahalad and G. Hamel, "The Core Competence of Corporations," Harvard Business Review, May-June 1990, pp. 79-91.
F.F. Reichheld, The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value (Boston: Harvard Business School Press, 1996).
R. Slater, Ovitz (New York: McGraw-Hill, 1997).
G. Stalk, P. Evans, and L.E. Shulman, "Competing on Capabilities," Harvard Business Review, March-April 1992, pp. 57-69.
G. Stalk and T. Hout, Competing Against Time: How Time-Based Competition Is Reshaping Global Markets (New York: The Free Press, 1990).
D.J. Teece, G. Pisano, and A. Shuen, "Dynamic Capabilities and Strategic Management," Strategic Management Journal, August 1997, pp. 509-533.
S. Walton, Made In America: My Story (New York: Doubleday, 1992).
D. Yoffie, "The World VCR Industry," Harvard Business School Publishing, Case No. 9-387-098 (1990).
|Printer friendly Cite/link Email Feedback|
|Date:||Jan 1, 2000|
|Previous Article:||Understanding the Market Environment of India.|
|Next Article:||Knowledge Transfer an Management Consulting: A Look at "The Firm".|