#21 Success factor no. 1: Competitive advantage or core competence?
Cost leader, differentiator or would you prefer to rely on your own core competencies?
In the jungle of strategy approaches, models and tools, strategy managers often ask themselves the question: what use is all the gray theory from textbooks or business schools for the real day-to-day running of a company? In case of doubt, can (and must) I not do everything at the same time in order to remain competitive?
Strategy coach Christian Underwood and Professor Dr. Jürgen Weigand, Deputy Dean of WHU (Otto Beisheim School of Management), discuss what really counts in order to shed some light on this issue. Listen to the new episode of our podcast HOPE IS NOT A STRATEGY #21 "Success Factor No. 1: Competitive Advantage or Core Competence?" And understand what significance the gray theory can have for your practice and what strategic mistakes can be avoided if you don't just superficially follow the strategy classics.
SHOWNOTES:
Christian Underwood:https://www.linkedin.com/in/christianunderwood/
Prof. Jürgen Weigand:https://www.linkedin.com/in/j%C3%BCrgen-weigand/undhttps://www.juergenweigand.com
Underwood GmbH:https://www.underwood.de
Detailed episode description:
Competitive advantage and core competencies - inside out or outside in?
The simplest definition of the dazzling concept of competitive advantage, without attaching an understanding to the term, is that customers are more likely to buy from your company than from a competitor. If this is the case, then the company has an advantage somewhere and understanding this is part of the strategy.
Inside out here means looking at the market from within the company. The aim is to find out where the best positioning is for the company and its products. Proactive consideration is given to how the company can be structured so that it can establish itself in the market as successfully as possible.
Outside-in, on the other hand, means that the market situation is first examined and consideration is given to where the company can be positioned there. This is a rather reactive process.
The gray theory On the one hand, there is the market-oriented approach developed by Harvard Professor Michael Porter, and on the other, a resource-based approach. Both approaches are still two absolute classics of strategy theory today.
They can be seen as complementary, as both approaches must be seen hand in hand in order to achieve a strategic fit. A strategic fit means that the company is active in line with market developments and the market environment.
Theories are used to explain the phenomena we observe. Just as in the natural sciences, this also happens in the field of strategic management. Michael Porter, the guru of strategy, long ago considered how things are related in different industries, sectors and markets. In order to generalize, you need a suitable approach that allows you to generalize and helps you to find out which relevant influencing factors exist.
However, as reality is too complex and not all factors are equally important, it is necessary to abstract from reality to a certain extent. When developing the theory, it is therefore necessary to consider which are the decisive influencing factors for the target variables, such as the profitability of a company.
Porter's five competitive forces
Porter's approach is about industry forces and an industry structure analysis. He thus provides a tool that can already be used for analysis. His approach also deals with the attractiveness of the industry. He describes five competitive forces that help the company to position itself correctly. In these famous five market forces, there are two dimensions - the horizontal and the vertical dimension.
The horizontal dimension describes which active processes exist in the industry and in the company itself. It looks at which companies are direct and indirect competitors, whether there are possible substitutes, as well as who is on the supply and demand side and the position of the company in competition. According to Porter, this is known as industry rivalry. At this level, it is mainly about the demand side. The preferences and needs of customers are examined. However, in addition to current competition, future prospects are also examined. At the horizontal level, market entry and market exit barriers play a particularly important role here.
The vertical dimension, on the other hand, is concerned with the value chain. It discusses where the input factors are supplied from and who ultimately receives the generated added value. The participating parties in the value chain are also explained. This relates on the one hand to the upstream - from the suppliers - and on the other hand to the downstream - on the sales side. A good example of this is the automotive industry. They are normally in a better position to approve part of the value creation than the suppliers, who tend to be smaller and have less market power. So it's all about who gets the biggest slice of the cake in the end.
Porter's generic competitive strategies
In Porter's classic view, there are three different types of strategy.
On the one hand, there is the issue of cost leadership, i.e. keeping costs as low as possible and leading the competition in this respect. The other is differentiation, which is often achieved through innovation. Finally, there is focusing, i.e. so-called niche strategies.
Many companies try in vain to apply all types of strategy to their projects at the same time. The attempt to be the innovation leader and cost leader at the same time fails. A simple explanation for this is that a company only has limited resources and skills at its disposal. Therefore, not everything can succeed at the same time in the short term. However, certain things can be developed in the future.
One example is Toyota, which has made the transition from a cost-cutting position to innovation. This is a sequential process. Toyota did not strive for cost leadership and innovation leadership at the same time, but it was a development that took many decades.
Due to their cost advantage, they were able to offer lower prices than the competition and produce corresponding volumes. This generated cash flow, which they reinvested and then used for innovation. In the meantime, Toyota has developed into an innovation leader in two respects. On the one hand, in terms of production processes, with new concepts such as just-in-time deliveries. But also in terms of the market. Toyota has developed many innovations, particularly in the field of electric vehicles. In summary, sequential makes sense, but simultaneous is difficult due to limited resources. You have to decide and focus.
Core competencies using the example of Apple
Apple's outstanding core competence lies in the generation of product ideas. For example, there were no radical innovations behind the iPod and the iPhone, but Steve Jobs was able to filter out the best of many things and combine them in a new way. The iPod was the modern version of a Sony Walkman and the iPhone's design is reminiscent of the Braun pocket calculator from the 1950s and 1960s.
As Joseph Schumpeter, an Austrian economist, said at the beginning of the 20th century, innovation is "doing things differently", which means combining things that already exist to create something new. Many people think of the term innovation as something quite radical, something that has never been done before. However, most innovations come from a combination of things that already exist, which makes it particularly interesting. So if the company wants to become the innovation leader, the first step is to define what innovation means for the company and in the industry. Only then can other things be done in parallel. Of course, the cost side always plays a major role for companies, which is why they are looking for ever more efficient resources. However, it is also clear to see that companies such as Apple, whose core competence lies in new products that are strong in design and marketing, invest a lot of money. All of this has to be financed on the one hand and covered by volumes on the other.
Apple has gained an advantage by outsourcing the entire production to specialists. The company's focus is primarily on marketing and product innovation. This means that most of the steps in the value chain outlined by Porter do not take place at Apple, but have been outsourced.
The core competencies portfolio - the resource-oriented approachThe approach of Gary Hamel and C. K. Prahalad's approach assumes that the high degree of imitability of products and services as well as potential access to a variety of markets is a key factor for customer benefit as a core competence.
In the model, this is represented by a tree. The company's core competence represents the root, which is then carried into as many large markets as possible.
This model can also be recognized at Apple. The company uses a linear business model. This means that if they want to sell more smartphones, they have to win more customers. This is a very direct relationship between Apple and the customers. On the other hand, similar to the tree model, they have introduced a clever platform model. This offers the advantage that the company does not have to take on all the tasks. The Apple Stores are a good example here - others produce for this platform and Apple participates in every respect. So the traditional, linear business model has been very successfully transformed into a platform business.
Exploiting potential with limited resourcesCompanies are often well entrenched in their business areas and still have to identify potential in existing markets with existing products in order to help the company achieve new growth. This represents a major challenge for corporate strategists. There are also only limited resources available to further leverage current potential and develop new potential. It is therefore necessary to decide which projects should be pursued and whether the company can realize something truly new within the existing organization.
In most cases, this process becomes increasingly difficult as the company grows, which is why large companies often try to outsource their labs in the hope that there will be more creativity at another location so that something new can be created. This is one of the main challenges: Directing things internally in a way that is truly free and, most importantly, thinking outside the famous box. The longer a company has been successful with its previous strategy, the more difficult it becomes to break out of it. There are so-called path dependencies that people are reluctant to leave. These play a particularly decisive role if they are not recognized in time. A classic example of this is the companies Nokia and Kodak. However, there are also many habits in the private sector that have become established over a long period of time and are therefore likely to continue in the future. It is difficult to find a way out of path dependency.
Different strategic approaches: Market or resource orientation?
We live in a very volatile world. On the one hand, there is the fight against corona, on the other hand, cost inflation is rising massively and the availability of materials has declined in many manufacturing industries. In addition, there is the ongoing shortage of skilled workers - to name just a few examples - and when a company wants to develop a new strategy, it is often faced with different strategic views and the question of market or resource orientation.
As a first step, the company should always carry out an honest analysis of the situation and face up to the truth. It must be examined where the company currently stands and the environment in which it operates. This often involves talking about markets, sectors and industries, which in most cases are intertwined. It must therefore be clear what the operational and strategic environment is at the present time and what it could be in the future. Another important point is to examine how the current situation has been achieved - what has generated success for the company and will these drivers continue to define success in the future? An even more general question that should be asked is: Why is the company relevant in the first place and why did customers choose that particular product? Customer surveys can be helpful here to find out honestly how easily replaceable your own products are for customers. Because this question of relevance is existential for the company, it is the core of the situation analysis. This analysis should not be glossed over. Bad results are bad and if the results are good, it must be questioned whether they could have been better or whether they are only good because things happened in your own favor in the environment that were not even considered. In other words, a clear analysis with a view to honest and truthful results, what the company is all about at the moment, how it is positioned externally in the market and internally.
Choosing the right approach
There are a number of tools on the market, such as Michael Porter's market-oriented tool. There are also many well-known internal strengths and weaknesses analyses. The challenge often lies in simply tackling them.
It is important to choose a structured approach and a systematic procedure. Special care is required here and it should be avoided to skip individual steps for time reasons. This is the only way to find out what customers' expectations and needs are and where the company really stands. Various approaches can be used for this. It should be clear what developments are currently taking place in the company and whether these are the result of reactive or proactive behavior or customer pressure. Things need to be brought together and you need to be clear about the resources - i.e. the resource-based approach. You also need to decide which markets the company wants to be active in and what it needs to do so.
As described by Michael Porter, strategy and above all competitive strategy is about being different from the competition. Being different means being better than the competition and attracting and retaining profitable customers for your own company. Competitive strategy is therefore first and foremost about differentiation. It should set itself apart from other companies and thus create a winning proposition. This point is often neglected in value proposition design. The decisive factor here is to achieve a superior profit that is higher than that of the competition in order to stay ahead.
The famous Unique Selling Proposition or Unique Value Proposition can also be emphasized here. In this case, we speak of a so-called value proposition. By consuming the company's products or services, the customer is promised a benefit that is greater than that of competing products. However, this requires an equivalent on the cost side - a paying proposition. The business must be profitable, as this is the only way the company can generate this value and realize the benefit. It must focus on which customers are to be acquired and how it can be profitable as a result.
In this context, Jürgen and Christian cite a classic quote from Michael Porter: "The essence of strategy is knowing what not to do." This focus, this awareness of resource limitations and competition, is crucial. If the company wants to be an innovation leader, it cannot be a cost leader at the same time. Cost leadership means keeping everything to a minimum with the given resources. Innovation, on the other hand, requires investment and creativity. This creativity often requires time and freedom, which must be financed.
Tip from Christian and Jürgen: Have the courage to look at your own realities honestly
Finally, Christian and Jürgen give tips on how to approach such a process correctly and how to make the right choice from the multitude of strategic analysis tools.
One tip is the situation analysis, a key component and core module in the StrategyFrame developed by Christian and Jürgen, which will be published in their book "Hope is not a strategy" in October.
In addition, Jürgen recommends above all approaching the matter with an open mind and really putting the selected thought framework - regardless of which one has been chosen - on the table. This is best done haptically, so that everyone can touch and see it and then try to fill it in. Finding answers to the questions that arise and having the courage to take a really honest look at your own realities and dare to take a step backwards to look at the big picture is a success factor.