All Srategy Is Local

Topics: Rate of return, Marketing, International finance Pages: 73 (27776 words) Published: November 9, 2008
True competitive advantages are harder to find and maintain than people realize. The odds are best in tightly drawn markets, not big, sprawling ones. "STRATEGIC" IS THE MOST OVERUSED WORD in the vocabulary of business. Frequently it's just another way of saying, "This is important" The reality is that there are only a few situations in which companies' strategies affect outcomes. Such situations are, however, worth trying to create since the alternative, achieving superior efficiency, is a more demanding route to success, and a more impermanent one. The aim of true strategy is to master a market environment by understanding and anticipating the actions of other economic agents, especially competitors. But this is possible only if they are limited in number. A firm that has privileged access to customers or suppliers or that benefits from some other competitive advantage will have few of these agents to contend with. Potential competitors without an advantage, if they have their wits about them, will choose to stay away. Thus, competitive advantages are actually barriers to entry. Indeed, the two are, for all intents and purposes, indistinguishable. Firms operating in markets without barriers -- that is, where competitive advantages do not exist or cannot be established -- have no choice but to forget about strategy and run their businesses as efficiently as possible. Even so, many neglect operations and divert attention and resources to purportedly strategic moves like acquiring companies in related businesses or entering bigger markets. In markets without barriers, competition is intense. If the incumbents have even brief success in earning more than normal returns on investments, they will find new entrants swarming in to grab a share of the profits. Sooner or later, the additional competition will push returns down to the firms' cost of capital. The process that drives down profits also makes strategy irrelevant since there will be too many other players to take into account and their roster will always be changing. (See the sidebar "Efficiency in Place of Strategy.") Even for companies operating behind solid barriers to entry, life is not necessarily serene. If the incumbents are well matched, they may try to gain market share by cutting prices, improving services, or making some other costly move. However, chances are good that they will succeed only in lowering their returns. Still, such competitors might recognize that the market is roomy enough not to require head-to-head confrontation at every turn. Avoiding competition that leaves every participant worse off is an especially enlightened choice, and one that deserves to be called "strategic." The erosion of profitability due to increased competition from new entrants isn't confined to commodity markets, as one might expect. It occurs as well in markets for differentiated products, so long as all actual and potential competitors have equal access to customers, technology, and resources. Consider the luxury car market in the United States. When Cadillac and Lincoln were the only significant competitors, their brands commanded higher prices, relative to costs, leading to high returns on invested resources. These returns attracted other competitors to the market: First the Europeans (Jaguar, Mercedes-Benz, BMW), and then the Japanese (Acura, Lexus, Infiniti), started to sell cars in America. The arrival of these competing products did not lower prices as it might have for a commodity like copper. Differentiation protected against that possibility. But profitability still suffered. Cadillac and Lincoln lost sales to the newcomers. As sales volumes fell, fixed costs per car sold -- such as advertising, product development, special service support, market intelligence, and planning -- inevitably increased, since these costs had to be covered by the revenues from the smaller number of units sold. Margins fell -- same old prices, higher unit costs...
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