DEFINING THE PEER GROUP For instance, consider the example of the sporty cars segment (given in the strategic map of Exhibit 6.7). Is the relevant industry for the Porsche Boxster actually automobiles in general, or should it be two-seat European roadsters? Or transportation? Peers are those products or services that are reasonable substitutes in the customer’s mind. For instance, most brands of ketchup are peers in narrow definition—but considered in terms of competition in “sauces,” brands of ketchup, salsa, steak sauce, and gravy might be peers. One can aim to identify peer groups through competitive analysis, the use of focus groups, or the U.S. government’s “SIC”3 code. As discussed elsewhere in this book, the selection of a peer group for comparison will have a huge impact on the insights to be derived.
Classic Successful Strategies
To illustrate the importance of positioning, Porter (1985) described three classic strategies that seemed to yield special competitive advantage:
1 Low-cost leadership. This seeks to create a sustainable cost advantage over competitors and is often seen in industries where the product or service is a commodity. The attainment of this leadership position permeates the firm and is achieved through focusing on cost containment, strict asset management, an annual budgeting process characterized by great scrutiny, tough negotiation of union and raw materials agreements, and low-overhead central office operations. The advantage of this strategy is that the low-cost leader can’t be undersold: This company will always win in a price war. A disadvantage of this strategy is that cost-minimization often requires a commitment to a particular product or process technology; such a commitment sacrifices flexibility. With technological innovation by competitors, this commitment can quickly turn from an advantage to a disadvantage.
2 Differentiation. This seeks to create a sustainable competitive advantage through distinguishing the firm or its products sufficiently to command a higher price and/or a strong customer franchise. It is seen in industries where customer demand is diverse and therefore unable to be satisfied with a commodity product. In pursuing this strategy, one must ask whether the pricing power achieved through differentiation is sufficient to compensate for the investment necessary to achieve it. Differentiation succeeds to the extent that it is hard to imitate and that it generates superior investment returns. Firms pursuing a differentiation strategy will focus on innovation, techniques of market segmentation, brand management, product quality, customer service, and warranties.
3 Focus or specialization. The focuser creates a competitive advantage by finding and dominating a market niche—there, the advantage springs from cost leadership or differentiation. This will be attractive where one can identify a niche of sufficient size to permit profitable and growing operations and where the firm has capabilities sufficient to serve demand. The disadvantage of a focus strategy is that the firm has all its eggs in one basket: Should the niche be successfully penetrated by a competitor, there will be no other market positions with which to mitigate the consequences.
In addition to defining these classic success strategies, Porter’s analysis raises an equally important point: Don’t get stuck in the middle. He argues that it is very difficult to establish a sustainable competitive advantage through hybrids of these approaches. By trying to be all things to all people, hybrids may become nothing to anyone. Skeptics of this point to Wal-Mart and Toyota, firms that successfully pursue cost leadership and the differentiation of products or services. Still, the difficulty of finding successful hybrids may justify them as the exception, rather than the rule.
EXPANSION BY INORGANIC GROWTH
M&A transactions should flow from the business strategy for the firm. Yet mergers and acquisitions are only part of the range of possible transactions a firm might contemplate in seeking to implement its strategy. Exhibit 6.10 charts the variety of tactics and shows that they extend from transactions that grow or diversify the firm to transactions that restructure or focus the firm.
In contemplating expansion of the business, executives first must decide upon the classic “make versus buy” decision: Should growth be organic (i.e., through internal investment) or inorganic (i.e., by investing or structuring an affiliation outside the firm)? A decision about make versus buy will typically follow from a strategic analysis and estimation of the prospective returns on investment from the alternatives.
Motives for Inorganic Growth
Strategists and scholars point to five main reasons why firms pursue inorganic growth:
1 Maturing product line.
2 Regulatory or antitrust limits.
3 Value creation through horizontal and vertical integration.
4 Acquisition of resources and capabilities.
5 Value creation through diversification.
GROWTH IN THE CONTEXT OF A MATURING PRODUCT LINE Many businesses experience a life cycle of growth, as depicted in Part A of Exhibit 6.11. The explosive growth rates of the start-up phase of the business are eventually replaced by more sedentary growth. This is to be expected: High growth tends to attract imitators, who may sap the growth of the leader. Also, all the forces of turbulence (see Chapter 4) such as technological innovation, demographic change, deregulation, and globalization render products (and industries) obsolete. This degradation of the business in its maturity years can produce headaches for CEOs. A common response is to acquire new businesses, still early in their life cycles, to create a total growth trajectory. This strategy of buying growth to sustain a growth curve is illustrated in Part B of Exhibit 6.11. The executive must retain two criticisms about this motive:
EXHIBIT 6.10 Range of Transactions in a Decision Framework
EXHIBIT 6.11 Life Cycle of the Firm
1 May harm shareholder value. This product life cycle perspective can create a frenzy for added revenue or earnings that ignores costs, investments, risks, and the time value of money. It is possible to achieve higher revenue growth and at the same time destroy shareholder value. See Chapters 9 and 17 for more about this.
2 Is it sustainable? In the limit, a trajectory of a high real growth rate (i.e., relative to the real growth rate of the economy) is bounded by the size of the economy. Growing at an excessive rate for a sufficiently long period of time, the firm will eventually own the entire economy.
GROWTH TO