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Strategic profiles, market share, and business performance.

Strategic Profiles, Market Share, and Business Performance

There are two schools of thought on strategic profiles, and both have assumed different perspectives on the conceptualization and adoption of competitive strategies. The two schools have suggested various relationships between competitive strategies and market share. They have also considered different relationships between the adoption of single vs. combination competitive strategies and the level of business performance. This article synthesizes the contributions of the two schools of thought.

Notable is that the academic positions on competitive strategies have been supported by studies of very large organizations. Thus, the propositions may not be applicable to the majority of businesses, which are smaller. Can select propositions of the two schools of thought apply to a fragmented industry, in which many smaller organization operate?

Two schools of thought have emerged on the conceptualization and adoption of competitive strategies as well. One school of thought has, for the most part, concluded that viable companies can seek either efficiency or differentiation. The more efficiency is sought by management, the less differentiated the company would be, while the more differentiation is sought by management, the less efficient the company would be.

Porter, representing this school of thought, has even conceptualized low costs vs. differentiation in terms of a continuum, with low cost at one end and differentiation at the other end. According to Michael Porter, "A company will ultimately reach the point where further cost reduction requires a sacrifice in differentiation. It is at this point that generic strategies become inconsistent and a company must make a choice." This inconsistency, or according to Porter, becoming "stuck in the middle," leads to poor performance.

Within this context, this school of thought reasons that the value chain required for the low-cost strategy is qualitatively different from the value chain required for the differentiation strategy. The emphasis of the differentiation strategy is on achieving (even at considerable costs) superior quality and image throughout the value chain, while the emphasis of the low-cost strategy is on lowering costs wherever possible. Because of different thrusts of the strategies, according to this school of thought, profitable companies tend to compete with one strategy only. For example, in "Competitive Strategy," Porter writes: "The generic strategies imply different organizational arrangements, control procedure, and inventive systems. As a result, sustained commitment to one of the strategies as the primary target is usually necessary to achieve success. (A company) either must take the steps necessary to achieve cost leadership . . . or it must orient itself to . . . focus . . . on differentiation."

Writing in "Competitive Advantage: Creating and Sustaining Superior Performance," he continues, "The benefits of optimizing the company's strategy for a particular target segment (focus) cannot be gained if a company is simultaneously serving a broad range of segments (cost leadership or differentiation)."

At least one researcher has theoretically excluded the possibility of companies competing with more than one strategy, and proposed that even though competitive strategies may be found among various industries, not all of them would be found within any one industry setting. This implies that a low-cost strategy would be unlikely to exist in a dynamic industry.

Others have suggested that the competitive strategies represent broad types of strategic groups. Consequently, the choice of strategy can be viewed as the choice of which strategic group to compete in; that a company's membership in a strategic group would be determined by which strategy the company adopted - thus, at least theoretically, excluding the possibility of an enterprise simultaneously adopting more than one generic strategy.

The second school of thought has proposed that the low-cost strategy and the differentiation strategy may be simultaneously and profitably adopted by an enterprise. According to this school of thought, the adoption of the differentiation strategy would entail promoting higher product quality. This would likely involve bearing higher costs across a number of the functional areas in order to support the differentiation strategy, but high-quality products would presumably channel greater market demand toward the company. Greater market demand allows the company to also adopt the low-cost strategy through the attainment of higher market shares and cumulative volume of production.

Viewed in this context, the adoption of the differentiation strategy would mainly consist of bearing higher costs in a number of functional areas in order to support differentiation. The adoption of the low-cost strategy would primarily consist of achieving lower per-unit cost of production by attaining scale economies.

Representing this school of thought, costs have been explained in terms of production costs and transaction costs. Productions costs include costs involved in the manufacturing process while transaction costs include costs related to inter-company exchanges of goods and services. This point of view regards transaction costs as costs of differentiation, involving other functional areas of the company besides the production function.

Extending this premise, a company competing mainly with the low-cost strategy would have lower average total costs (which are composed of lower average production costs and lower average transaction costs) vs. a company competing chiefly with the differentiation strategy. And a company simultaneously competing with the low-cost strategy would have lower average total costs (addition of average production and average transaction costs) than a company that competes primarily with the differentiation strategy. Alternately, a company simultaneously competing with the low-cost strategy and differentiation strategy would have higher average total costs than a company primarily emphasizing the low-cost strategy.

Jones and Butler, in promoting this premise, specify that the simultaneous adoption of the low-cost strategy and the differentiation strategy consists of a combination of low cost production and high cost transactions, involving other functions of the company. Implicit in their argument is that higher transaction costs improve product quality, which channels more demand to the company, enabling the company to enhance its market share and thus achieve scale economies.

For instance, some leading enterprises tend to combine low-cost production with higher transaction costs to simultaneously achieve low-cost and differentiation. Jones and Butler have summarized the theme of this school of thought by criticizing Porter's conceptualization of a continuum of low cost vs. differentiation. These authors have submitted that "the real underlying dimension is cost (low to high ), not low cost vs. differentiation." Hence, they have visualized a different kind of continuum - one in which low cost and high cost are at opposite ends. If a company chooses to compete with only the low-cost strategy, all the functional areas of the company should ideally have their costs approach the low-cost end of the continuum. On the other hand, if a company chooses to compete only with the differentiation strategy, all the functional areas of the company would probably have their costs approach the high-cost end of the continuum. And a company simultaneously competing with the low-cost strategy and the differentiation strategy would ordinarily have its production costs approach the low-cost end of the continuum while a number of its other functional areas would probably approach the high-cost end of the continuum.

The results of a three cluster model, which were found to best meet the criteria mentioned in the previous section, are shown below. Included are cluster means and standard deviations for each of the variables used to cluster the companies, Also included are means and standard deviations for return on investment (ROI), relative market share (RMS), and growth in relative market share (GRMS).

As the table on this page shows, the first cluster consists of 22 companies that compete primarily with the low-cost strategy. They tend to demonstrate their emphasis on low costs by stressing expenditures on process R&D. Also, they have low relative direct costs and high capacity utilization. Additionally, they charge low prices and they eschew product changes, as shown by their low score on product R&D.

The second consists of 15 companies, that compete mainly with the differentiation strategy. They stress product R&D in order to develop improved or new products/services, as shown by their high score on this category. The charge high prices for their unique outputs, and they tend to demonstrate their reduced concern for achieving a low cost position through their low score on process R&D. Their subdued concern (or ability) for cost containment is also shown by their high relative direct costs and low capacity utilization.

The third cluster consists of 10 companies that compete with both of the strategies. On the one hand, they demonstrate their emphasis on differentiation by stressing product R&D and charging high prices. On the other hand, they show their emphasis on low costs by stressing process R&D. And they have been successful in maintaining low costs, since they have high capacity utilization and low relative direct costs.

Differences in the sizes of the companies among the three clusters are not significant; nor is growth in relative market share significant as a performance variable among the three clusters. However, return on investment is significant as a performance variable. Considering table, the first proposition of the paper is not supported by the results. The businesses that compete primarily with the low-cost strategy have not performed well, as they have significantly lower ROIs than businesses in the other two clusters. The second proposition of this article is also not supported by the results. Although the enterprises that compete primarily with the differentiation strategy have higher ROIs than those companies competing with the low-cost strategy, the profitability of the differentiated businesses trails significantly behind the profitability of companies that compete with both of the strategies simultaneously. The third proposition of the paper is partially supported by the results of the study. Companies that simultaneously compete with both strategies have the highest ROIs.

Since strategic management is a relatively young field, its theoretical offerings are limited. Consequently, researchers focus on variables that various prescriptions/empiricisms have provided as guidelines. Within this context, there are a number of observations that may be made with regard to the results of this study. Subsequently, the limitations of the study and suggestions for future research are discussed.

The results tend to be somewhat supportive of the submissions of the members of the second school of thought. That is, companies that adopt the low-cost strategy and the differentiation strategy outperform those businesses that compete mainly with either the low-cost strategy or the enterprises that compete primarily with the differentiation strategy. Why is this so? What seems plausible is that businesses that emphasize low costs only or differentiation may, in some cases, be competitively vulnerable.

On one level, a company that chooses to compete only on the basis of low costs and prices (low-cost strategy) may have a profit margin squeeze. In this case, management's ability to implement measures to improve products, to augment products with superior services, or to expend more on marketing activities, is limited. Thus, such a company maybe vulnerable to competitor moves that may draw customers away from it. A strategic tendency, in this event, might be to lower prices further, which would put even more pressure on profit margins. Therefore, the prospects of business units that compete primarily with the low-cost strategy may not appear promising.

On another level, a company that chooses to compete primarily with the differentiation strategy, while not stressing low-cost operations, may be vulnerable to competitors that have lower cost positions and might offer counter products, occasionally at predatory prices. Possibly, the threat of substitute products is also greater for such a company. However, companies that compete with both the low-cost strategy and the differentiation strategy simultaneously seem to benefit by achieving greater profit margins.

Although the results are somewhat supportive of the proposals of the members of the second school of thought, they nevertheless suggest different perspectives from that offered by these and other scholars.

Studies suggest that companies that either compete only with low costs or compete with a combination of low costs and differentiation would likely be larger (larger relative market shares), while the businesses that compete primarily with the differentiation strategy may be smaller. However, the results of this study do not show significant differences in sizes of companies among the three groups.

Perhaps this characteristic of fragmented industries is enduring, since growth in relative market share, among the three clusters of companies, is also not significant. A plausible explanation may be that in stable fragmented industries, significant growth by any one group of companies may be difficult to achieve. In such industries, customers tend to have specialized needs. It may ordinarily be difficult for a cluster of enterprises to specifically and effectively address specialized needs, if their sizes (and their numbers of customers) significantly increase from year to year.

The benefits of competing with the combination of both strategies has been expressed in terms of quality products increasing the demand for a company's outputs and hence enabling the company to increase its market share and achieve scale economies. But, as mentioned above, the differences in the sizes of the companies and their growth rates in this study are not significant among the three clusters. Consequently, the theoretical explanations provided by the members of the second school of thought (based on investigations of very large organizations) regarding why competing with both strategies is beneficial, do not seem to provide an explanation on why the companies in this study, which have combined both strategies, have the highest profitability.

Apparently, in some fragmented industries, combining low costs and differentiation tends to be advantageous. However, the advantage does not appear to be based on quality products allowing a group of enterprises to attain significantly greater sizes and scale economies compared to the other competitors, but rather on mutually reinforcing benefits that may be elicited from a company's emphasis on product improvements as well as its emphasis on process improvements and cost controls. In fact, a number of authors have provided evidence that, in select instances, product improvements may not only heighten differentiation, but may also lower costs of operations. While in other instances, these authors have provided evidence that process improvement may not only lower costs, but might also promote differentiation. And these potential product and process improvements that may be gained are not related to size/growth possibilities. The mutually reinforcing benefits that may be elicited from a company's emphasis on product/process improvements, not related to size/growth considerations, may be the reason why another perspective from the literature is provided by the results.

It has been said before that competing with both of the strategies represents a compromise between a pure costs leadership and a differentiated strategy - hence, the levels of costs and differentiation of companies that compete with both strategies fall between those companies that compete with low costs only and those companies that compete with differentiation only. However, the results of this study portray different strategic profiles.

Apparently, the companies that compete with both strategies simultaneously surpass the companies that only compete with the low-cost strategy in cost containment efforts, since they have lower relative direct costs and higher capacity utilization. Also, the companies that compete with both strategies simultaneously seem to surpass (in differentiation) the companies that compete only with the differentiation strategy, since they have been able to charge significantly higher prices. The explanation for this may also possibly be the mutually reinforcing benefits that are drawn from a company's emphasis on product/service innovations, process innovations, and cost controls.

Peter Wright is with the department of management in the Fogelman College of Business at Memphis State University. Mark Kroll is with the University of Texas at Tyler. Ben Kedia is with the department of management in the Fogelman College of Business at Memphis State University. Charles Pringle is with James Madison University.
COPYRIGHT 1990 Institute of Industrial Engineers, Inc. (IIE)
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Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related articles
Author:Wright, Peter; Kroll, Mark; Kedia, Ben; Pringle, Charles
Publication:Industrial Management
Date:May 1, 1990
Words:2599
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