“Strategies in the Computer Market: A Case Study of Dell”
1. Executive Summary
2. Introduction
The PC business is mature and its biggest players are desperate for new sources of growth, even if that means taking on entrenched players in an equally cutthroat business.
Technological innovations that began as early as the 1600′s – such as the first mechanical calculating device – have ushered our society into what is now called “the information age.”( 1986)
The microcomputer or personal computer industry has undergone major changes in its market structure. The market structure changed in the computer industry as the PC segment developed ( 1988). According to (1988), the industry has grown substantially from its beginnings in January 1975, when the first microcomputer, the Altair 8800, was introduced. During its early development, the industry was dominated by a few small-scale companies, mainly hobbyist-run. Entry into the market was determined by technological innovation and the availability of system-compatible software. Companies tended to design their own software, with little compatibility among systems.
In the PC market, few such technical barriers to entry were present. Existing technology typically has been widely available and components often manufactured by other firms. Despite the seemingly easy entry into the market, however, firm entry and new product introduction required sunken entry costs, such as establishing retail channels and advertising. With the continuously evolving market, few companies managed to survive in the market beyond one or two years.
Increased sales in the computer industry have stemmed from the public’s demand for affordably priced computers that are faster and more powerful so that users can retrieve and send data, play games, and run programs. Businesses have found that computers can save them money by automating many tasks and allowing owners to analyze and retain many crucial records. One of the most important advances is the speed at which computers are capable of processing data.
The extraordinary speed of today’s computers is not the only important development. The rapid decrease in cost, a fiercely competitive market also is critical. Lower prices of computers occur when new technology is introduced at lower prices, which pushes the prices of existing technology even lower. As each new technological breakthrough makes its way into the market, the previous “best product” becomes very affordable. One company enjoyed an edge in the market when they introduced the next generation in microprocessors. It was not long until competitors caught up and introduced similar microprocessors at lower prices. To stay competitive, manufacturers must quickly slash prices and start planning their next better, faster product. This constant pressure has led the computer industry to reduce prices while continuing to improve their products.
Project Overview
In the PC market, existing firms have significant advantages over potential entrants ( 1979). For example, consumers are more likely to buy familiar brands, and older firms may have long-term contracts with distributors, lowering their costs relative to those of new firms. According to (1984), because of such considerations, new entrants may be forced to search for empty market segments to avoid price wars with more established firms. Hence, incumbents would be expected to distribute their models along the entire spectrum to make entry difficult for new firms (1977).
Dell Computer, consistently growing annually, has become the one of the top PC supplier. The PC supplier, growing two to three times faster than its rivals, boasts of earnings and unit shipments that are escalating at four times the industry average. Dell’s continued innovation and its unique direct marketing model are credited with sustaining the company’s unmatched success (1997). And electronic commerce is emerging to afford the company significant sales gains along with increased distribution and manufacturing efficiencies. Company officials assert that leveraging its build-to-order manufacturing with electronic commerce enables it to compress its supply chain and become much closer to its customers.
Dell Computer may be growing consistently growing however in the business reality there are intense rivalries between the players in the industry which may hinder the continuous success of the company. The paper attempts to identify these challenges and problems in which the PC supplier may face and to recommend strategies that would enable the company to survive the rapid phase in the market environmental changes.
Objectives
The objective of the paper is to analyze how big computer companies, like Dell Computer, survive in the fast moving PC industry. This would involve a case study of Dell Computer. The case study would include its company background and analysis of its problems encountered.
Dell Computer is a leading company in the computer market. However, with the presence of competitors and in competing in the price war market, this has created a difficulty on the Dell Computer to sustain its previously created competitive advantage. Currently, Computer is facing a tough challenges coming from the new industry standard and the profit of the PC become smaller.
This paper attempts to analyze problems encountered by Dell and suggest strategies which it may adopt to enable it to stay competitive and achieve continuous growth in computer industry. In addition, the paper analyzes how Dell Computer can use these strategies to create its innovative and technological competitive advantage.
Terms of Reference
Economies of Scope – exist when it is cheaper to produce several products jointly than each one separately. For example, it may be cheaper to produce screws and nails together than each in a separate establishment, since the bulk of the investment (factory, machines, and labor) has already been made.
Market – refers to all existing and potential customers for a company’s products or services, including all the tools and techniques that companies use to understand and better serve their customers
Market Interlacing – is the process in which the firms preempt the entire market by placing new products further away the product space.
Market Segmentation – is the process in marketing of dividing a market into distinct subsets (segments) that behave in the same way or have similar needs.
3. Literature Review
In the computer market, the models that are integrated in the operations of the business is not only technological but rather strategic. Components of the computers are largely produced by other firms other than the firms selling the complete system. Thus, it can be assumed that the technology embodied in making the storage devices and microprocessors can be available to any firm at any time. Each firm has its own choice of what strategy to impose for the business operation given the constraints imposed by the existing technology. These firms face two choices. The first choice is whether the company place their strategy in a single segment of the market by pacing their new models close to their existing ones. With this strategy, the firm can take advantage of the economies of scope in the locality however at the same time create substitutes for their previous models. This strategy results to market segmentation where each can produce only one close substitute.
Secondly, the firm can preempt the entire market by placing new models further away in product space. With this strategy, firms can avoid cannibalizing their existing models and occupy an empty market niches before entrants do. This strategy leads to market interlacing, where various firms’ models alternate.
When the firm chooses to implement the first strategy, it may be too risky since the firm may steer away their existing customers for their existing products in favor of their new product offerings. In addition, entering a new market segment is also too risky as it needs to established new technology before it would be offered to the market and accepted by the consumers.
According to several literatures, in the computer market, being an existing firm is more favorable as the customers are more likely to buy familiar brands. In addition, the existing firms have already established long-term contracts with distributors and can relatively lower their costs compared to the new firms. Thus, forcing the new entrants to seek for empty markets segments to avoid price competition with the established firms. Therefore, existing firms are expected to distribute their models along the entire spectrum to make entry by new firms difficult (1977; 1979; 1984). Under this scenario, models of existing firms will be more dispersed in product space than new entrants’ models.
Hotteling’s (1929) model of spatial location has started the development of several theoretical models of entry deterrence and preemption in a multiform market. In Hotelling’s model, two identical firms locate next to each other along a line. The results change in the case of heterogeneous firms, sequential entry, and companies producing several products, but few analyses deviate from the standard assumptions.
The results of the theoretical studies are inconclusive. While some support the market segmentation scenario, others conclude that market interlacing is more likely. The results depend heavily on the assumptions of specific models, such as number of competitors, order and timing of their entry into the market, whether they produce one or more goods, and whether the products are identical or differentiated. The market segmentation results are shown in (1978) and in (1979). In (1978), the market was dominated by a small number of colluding firms, which localized their brands in order to deter entrants most effectively. In (1979) model, an incumbent monopolist in a growing industry introduces a substitute for his own product before an entrant does, in order to preempt the market.
Market interlacing results from the models of (1987), (1976), and (1984). (1987) showed that with no threat of entry, existing firms would locate as far away as possible from each other. If they faced a threat of entry, incumbents would deter entrants by greater product dispersion, in order to create competition in all market segments and make entry unprofitable. In (1976) model, a firm would not offer substitutes for its own product, as that would lower demand for its existing commodity. The firm would opt for more distant products instead. (1984) showed that with no entry, a segmented market structure yields higher profits, but a possibility of entry reverses the result.
The study of Porter (1985) has concentrated on the strategies that would be able the companies to gain competitive advantage. In addition, in order for firms to develop a strategy that can provide superior performance, these firms must achieve and sustain competitive advantage. In order for these firms to survive in the highly competitive market, it has been suggested to develop some degree of competitive advantage.
In the case wherein the products and services are virtually identical, advantage is minimal and firms in these market struggle to remain profitable and grow. In the case of a convenience store or a gasoline station, competitive advantage would as simple as having a favorable location. However, in many industries, competitive advantage would be more complex. Competitive advantage is derived from the combination of product appeal, pricing, marketing practices, distribution capability, and many others.
According to (1985), outstanding performers usually obtain their competitive advantage from more than one source. Ideally, competitive advantage should be sustainable in that the strategy that provides it cannot be imitated by competitors.
In (1985) book, “Competitive Advanatge: Creating and Sustaining Superior Performance,” he has identified three basic sources of competitive advantage that can also be integrated with the computer companies. These are referred as generic strategies.
First is cost leadership which means competitive advantage can be achieved through having the lowest cost in the industry (1985). The sources of cost advantage vary depending on the characteristics of the industry but can include determinants such as economies of scale, preferential access to raw materials and superior proprietary technology. However, cost leadership is effective only if the company can command prices close to the industry average, and does not have to give away its cost advantage by discounting prices.
The other is differentiation in which competitive advantage can be achieved through making a product or service unique so as to be able to charge a higher price and/or attract a consistent, high sales volume (1985). The differentiation can be in the product characteristics, its delivery system, quality of service, or, for example, its channel of distribution. It can be real – that is derived from the superior quality and/or performance of the product or service – or intangible, based on its image, fashion or brand recognition. Differentiation may impose higher costs on a company, but this is acceptable if it can more than recover these from a premium price.
And finally, focus which is based on adopting a narrow competitive scope in an industry (1985). These segment opportunities can arise from product specifications, buyer characteristics and even geography. Focus can be based on differentiation that targets a specific segment of the market with unusual needs that are not being met by others. Alternatively, in cost focus, the company may have specialized machinery that can handle specific market needs efficiently, such as the ability to handle short production runs.
According to the study, these different sources of competitive advantage are useful for the success of many companies however, oftentimes they are difficult to implement on the company’s situation (1985). However, there are different ways in which a company can look at these variables to help it identify potential sources of competitive advantage.
According to (1985), one of the most common causes of weak industry performance results from the companies in it being squeezed between suppliers and customers who both have high bargaining power. The conventional strategic remedies that should be considered are: to differentiate the product or service to gain influence over the buyer; find substitute inputs; or integrate forward to gain greater control over the market, or backward to control the source of supply
It is almost impossible to establish competitive advantage while trying to be all things to all people. The strategic decision on what market segment to pursue is important to the establishment of competitive advantage because it defines what you must do well and helps you focus your efforts.
Market positions can be defined by the combination of the value provided and the price charged. The value-based market positions are usually the more profitable. It is, therefore, a common strategy to try to move upward in the market by introducing a premium line. This requires careful separation of the brands to minimize the association between them in the perceptions of the market. Value-based positions also usually rely on intangible appeals, particularly when it is difficult to demonstrate real differences.
Companies producing branded products will often also supply private brand or no-name products, a “same-for-less” position that can make a contribution to earnings by absorbing overhead costs, but at the risk of cannibalizing their own sales.
The strategic decision on the choice of market position is, however, only the starting point. Competitive advantage requires the ability to serve the chosen market better than competitors. A value-based position requires the ability to provide a differentiated product or service. A price-based position requires cost leadership. The issue then becomes one of achieving operational effectiveness, which is primarily a challenge of implementation.
Operating effectiveness means being able to do things better than your competitors. At the outset, this requires identifying which function that the company performs in bringing its product or service to market is the most important in providing superior overall performance. This can be done by value chain analysis.
Operational effectiveness can be achieved in three ways: through developing and exploiting a core competence in the activity that is critical to the success of the business; having an efficient structure; and by effective operating practices.
Core competence is the ability of a company to perform a function that is important to its success exceptionally well. Such core competence can be based on superior product technology such as the Intel, employee skills such as Microsoft, or functional expertise such as Nike in marketing. The companies that exploit their core competence effectively usually concentrate their activities in those areas, and outsource other functions. Ikea designs its furniture and merchandises it, contracting out almost all other functions including manufacturing.
Structure-based advantage arises from the way that the functions and facilities are arranged. A good example of exceptionally efficient distribution system is Wal-Mart, a leader in retailing. The system is based on grouping stores around distribution centers with satellite links from point of sale to the suppliers to minimize inventory and the risk of costly stock-outs.
Competitive advantage derived from operating practices arises primarily from how well the employees do their jobs. The procedures and processes of most companies within any industry tend to be similar, but the ones with a creative and motivated labor force can substantially outperform the others. This superiority may come from innovative work practices, attention to quality, or, for example, responsiveness to customer needs. Awareness of and attention to what is important to the success of the business should become engrained in the culture of the organization, both reinforcing and perpetuating it. Competitive advantage through operating effectiveness requires that something be done not just well, but exceptionally well and better than the competitors.
Another study by (1994) has proposed a framework for obtaining competitive advantage in this era of hypercompetition under conditions of penetrable industry barriers, changing rules-of-the-game, iconoclastic rivals, fickle customers and, consequent to all the above, unsustainable competitive advantages. It has been traditionally emphasized by many resource-based theorists that in order to obtain a sustainable advantage, the firm should possess inimitable resources and distinctive capabilities or competencies that results from the combination of these resources. (1996/1991; 1991; 1990). By contrast, (1980) competitive analysis framework emphasized industry attractiveness and its characteristics, such as the potential to enhance the firm’s power versus buyers and suppliers, thwart potential entrants and outposition competitors, as being the key determinants of competitive advantage and long-term profitability. The sustainability of these competitive advantages was determined by the firm’s ability to create defensible niches. In addition, (1992) acclaimed that an important structural characteristic, inherent in the firm’s capabilities as well as the nature of the market niche, was the presence of “isolating” mechanisms that enabled the firm to protect and shield these competitive advantages. While resource-based theorists primarily emphasized internal firm capabilities, Porter relied on the firm’s capabilities only to help mitigate the ill effects of the competitive environment.
Moreover, another set of game-theoretic strategic interaction approach is focusing on achieving competitive advantage is by disorienting rivals by signaling, through exploitation of asymmetries of information, strategic collaboration and pricing (1989;1997). With this perspective, the firm can enable to kept its competitor off-balance and can be disrupted from its comfort zone through implementing tactical strategies with the firm capabilities, industry selection, and strategic positioning. With the initiation of disruption, the initiator can gain a temporary and unsustainable competitive advantage.
(1994) emphasizes shorter-term tactical maneuvering and market disruption as being essential for obtaining short-term, unsustainable competitive advantages especially in today’s high velocity-industry environments with low-entry barriers. The four arenas of hypercompetition relate to external arenas where different sets of competitive dimensions might be employed to provide increased “value” to customers. Firm capabilities are subsumed under the New 7Ss, each of which relates to the firm’s ability to disrupt markets and obtain a temporary competitive advantage. Longer-term competitiveness was enhanced only by stringing together a series of temporary, unsustainable advantages (1994).
This can be done by linking and reconciling some of the tenets of the “resource-based,” competitive analysis and strategic interaction frameworks with the approach suggested by (1994). This would also be accomplished by linking each of the four arenas of hypercompetition described by (1994) with (1980) generic business strategies and the appropriate firm-specific resources and capabilities. By steering hypercompetition in their industry into the arena, where their generic strategy orientation and capabilities are most appropriate, the firm can obtain short-term, unsustainable competitive advantages.
The first leg is (1996) assessment of the different approaches to market positioning, the advantages thereof, and the types and ranges of value each provides to customers. The second leg is firm-specific capabilities and competencies ( 1996/1991; 1990) arising from the resource-based theory of the firm (1991), and their role in supporting different business strategies and providing types of customer value. A match between the above two legs is crucial for obtaining some form of (albeit temporary) competitive advantage. Their long-term sustainability is, however, a function of the availability of isolating or shielding mechanisms ( 1992) which constitute the third leg of our proposed tripod. The presence of such isolating mechanisms enhances the durability and reduces both transferability and replicability (1991) of the firm’s resources, thereby enhancing the longevity of the competitive advantages obtained.
Economists place the intensity of competition along a continuum ranging from monopolistic to perfect competition ( 1980). At the monopoly end of the continuum, the firm makes excessive profits, while at the latter extreme, the bargaining power shifts to the consumer in a highly competitive industry, and firms make only marginal profits. The intensity of competition is dictated primarily by market-based characteristics (1985), and (to a lesser extent) by internal firm-specific resources and their interactions (1996). Since this perspective assumes that industry structural characteristics are exogenous ( 1959; 1981; 1997) and beyond the firm’s control, and that the firm’s resources are sticky and inflexible in the short-term, decision-makers need to consider both characteristics and the impacts they will have over time.
(1994) hypercompetition is characterized by disruption, intensity, and speed, where firms have only intermittent, temporary, unsustainable advantages with concurrently low profits. The greater the intensity of hypercompetition, the lower is the returns. Moreover, under these hypercompetitive conditions, greater returns often go to the player who is prepared to change the existing rules of competing (1996) and disrupt the status quo (1994). Organizational resources, capabilities and the firm’s strategic profile all play roles in determining the firm’s ability to compete under the existing rules of competition. For example, if the organization’s existing resource base is configured for a differentiation strategy based on technological leadership (such as IBM in the early 1990s) while the arena of hypercompetition in the industry necessitated cost-leadership (such as PCs in the early 1990s), the firm’s resource base and strategic orientation will hinder the firm’s competitiveness. Consequently in 1993, IBM was forced to radically restructure and take the largest loss in its corporate history (1997b; 1996; 1997). As the example suggests, incongruence between the organization’s resource base, its strategy and its hypercompetitive arena, hinders the firm’s ability to compete.
(1996) refers to three types of positioning and the type of customer needs that they satisfy. The first, variety-based positioning, relies more on the choice of product or service variety rather than customer segments. Here the company produces particular products or services, concentrating its distinctive competence in a sub-set of value adding activities. (1996) gives the example of Jiffy Lube, which offers only automotive lubricant services. This serves a wide array of customers, but for most it will meet only a subset of their needs. Alternatively, they may be lured away by firms that fulfill a more comprehensive range of the customer’s needs. Or they may be enticed away by fulfilling the same set of needs more efficiently through an alternative configuration of value-adding activities. The resources that are employed here fit (1992) description of fast-cycle resources. Product andservice ideas are easy to copy, customer loyalty is low, and markets are characterized by dynamic price and cost pressures, fast profit margin compression and accelerated capital depreciation ( 1992). The technology is widely disseminated. Isolating mechanisms that might shield these resources are absent. Examples of fast-cycle resources are cellular phones, the Sony Walkman, fashion houses, and children’s toys. Since variety-based positioning originates from the firm’s internal capabilities rather than by focusing primarily on customer value enhancement or appropriate industry or market positioning, isolating mechanisms arising from business or market characteristics or geographic location that can shield such competitive advantages ( 1992) are likely to be absent. Consequently, competitive advantages are likely to be short-term and transient.
Alternatively, under needs-based positioning, the firm initially identifies a target segment of customers and their needs and tailors a set of value-adding activities to best serve those needs (1996). As long as the customer’s needs remain unchanged (and the lead firm does whatever is needed to be the most efficient in providing those needs), it takes added effort on the part of other firms to disrupt the status quo. Thus, competitive advantages are more sustainable than in the previous case. However, the presence of isolating mechanisms due to industry or market characteristics or geographic location is again unlikely, unless the buyer group belongs to a specialty market, or the customer segment is localized. More typically, this group conforms to (1992) description of standard cycle resources. Such resource-bases are less specialized, and sustaining competitive advantage is based more on preemptively moving down the learning curve taking customers along and building a reputation for consistency, reliability and efficiency.
The third type of access-based positioning focuses on the geographic isolation of the customer segment. Value-creating activities are configured, that is based on firm resources or capabilities, to meet the unique nature of demands arising from this group’s location. (1992) provides examples of isolating mechanisms that slow down the onset of competitive pressures. They include airline leases on gates at major hub airports, and the private relationships that Goldman Sachs has with its investment banking clients (1992). Competitive advantages are the most sustainable under such shielded conditions.
To summarize, the sustainability of competitive advantages is considered to depend on the following three factors, which includes the different approaches to market positioning and type or specificity of customer needs met and the value provided; the idiosyncratic nature of the firm’s resources or capabilities; and the availability of isolating mechanisms that can shield these competitive advantages from rival onslaught ( 1992).
However, the most widely followed generic business strategies are (1980) differentiation, cost leadership, and focus types. They offer different types of value to customers, and each strategy is predicated on specific, unique and different sets of firm competencies and resources ( 1996). Moreover, different strategies might result in differing levels of performance ( 1980). Thus, the differentiation strategy provides unique and superior value to customers in terms of product quality, special features, or after-sale service. In return, the company is rewarded with buyer loyalty. It can often charge a premium for its product. The increased development costs are passed on to the customers.
Alternatively, the cost leadership strategy is based on producing and marketing a product more efficiently than competitors. The company’s lower costs often translate into lower prices for customers. The lower costs enable the company to earn adequate returns under heavy competition. The company’s relatively large market share offers it greater bargaining power with its suppliers. The lower prices serve as an entry barrier since potential entrants are often unable to match the company’s cost advantages. Finally, the focus strategy, either differentiation focus or cost focus, concentrates on a particular buyer group, product line, or geographic market. Porter also proposed that a firm’s competitive advantage within its industry is determined by its competitive scope that is, the breadth of the firm’s target market. A firm exploits the focus — competitive alternative when it implements a cost-leadership or product differentiation strategy within a narrow market segment (1996) better than its competitors can.
The capabilities for environmental scanning and forecasting, for providing superior perceived quality, and for changing the perceptions of what is superior quality are imperative. Also important is knowing how to perform activities at a comparable cost but in unique ways that create greater buyer value than competitors can (1985).
A differentiation strategy could be followed at the upper end of the constant value line. The emphasis here is on enhancing perceived quality and thereby adding value. At this end of the cost-quality continuum, customers are likely to be early adopters, innovators, and opinion leaders. Their risk propensity is higher. Sometimes their notion of quality may lie in the need to be different from the rest of the crowd. Up to a point, such customers are not price sensitive, as long as the novelty and uniqueness offered are viewed as value-enhancing. By emphasizing these attributes in its attempts at differentiation, a company may be able to attract high-end customers and obtain a competitive advantage from its rivals.
In attempting to offer perceived uniqueness to a broad range of their customers which is the essence of a differentiation strategy, the firm is attempting a type of variety-based positioning (1996). This is based on attaining superior proficiency in a sub-set of the firm’s value-adding activities. This emphasizes firm-based capabilities. The company does not begin by initially identifying customer needs. On the contrary, its unique capabilities to satisfy unmet or unsensed needs that customer might have. Thus, as already suggested, rivals could entice away these customers through other approaches, which satisfy the same, alternative, or a broader range of their needs. The firm’s resources and market setting are likely to conform more to (1992) definition of fast-cycle resources, where there is a lack of isolating mechanisms. Consequently, there are many opportunities for rivals to disrupt the status quo and seize the competitive initiative.
By contrast, the cost-leadership strategy may be more appropriate at the lower end of the cost and quality arena. Tight cost controls enable a company to provide the same offerings as other competitors at lower prices. This positions it along the lower end of the same constant value line described above. It may even be able to, offer, customers higher value, than differentiators (that is shift the value line to the right) by lowering its prices (provided it has the cost-efficiencies to do so) while offering the same level of product or service quality
At this lower end, customer preferences are clearly articulated as lower priced product or service offerings. The efficient process capabilities (which are required to supply these needs) are not easy to replicate in the short-term. Here, the firm employs a needs-based positioning based on the need for low prices ( 1996), and other resource-based theorists suggest that it is improbable that rivals can come up with a more efficient configuration of value-adding activities (i.e., based on firm capabilities) in the short run. Firm capabilities take time to develop and are inherently sticky. Consequently, the lead firm’s competitive advantages are difficult to disrupt and inherently more sustainable, unless customer needs change. Since we earlier argued that this category fits with (1992) standard cycle resources, the firm can hope to sustain its competitive advantage, as long as it keeps moving preemptively down the learning curve, while taking its customers along. The joystick (that determines the sustainability of competitive advantages) is under the firm’s control rather than in the hands of its rivals. Consequently, the sustainability of competitive advantages is higher than in the earlier case.
As we mentioned, the focus strategy originates from identifying specific customer segments and their needs and then developing the unique sets of firm capabilities and value-adding activities that satisfy them. Consequently, competitive advantages which in this case are based on fulfilling these specific customer needs employing the firm’s capabilities and competencies, are inherently more sustainable. Short-term disruptive tactics adopted by rivals may not succeed with the firm’s core customer group. Further, with access-based positioning (which is the case with some focus customer segments), isolating mechanisms that shield the firm’s resource base may exist (1992). That increases the sustainability of resulting competitive advantages. Such resources (and competitive advantages) meet some of the characteristics of slow cycle resources.
In addition, another strategy is on being a first mover or a follower. There are differences between first-movers versus followers in their strategic identities and the types of competencies and resources they embody (1989; 1978). Typically first-movers rely on product innovation. They possess good R&D, marketing, and environmental scanning skills. They may also hedge their technological bets by relying on multiple technologies ( 1978).
By contrast, a follower firm must possess good reverse engineering skills, be able to either further differentiate, reengineer or strip-down the product, and be able to establish alliances with key distributors and suppliers, other manufacturers, and trade associations, in order to neutralize the first-movers’ many advantages. In addition, they need superior process skills to neutralize the first-movers’ experience curve advantages and be able to offset the disadvantages of built-up customer switching costs, either by offering compatible products or through offering customers inducements to switch.
A differentiation strategy may be more applicable for a first-mover firm. Differentiation enables the firm to cater to customers’ unfulfilled needs. A differentiation strategy enables the firm to identify and capitalize on a broad array of possible opportunities. This strategy provides customers with perceived value through offering novelty and uniqueness. The true nature of the customer’s needs in the emerging market is still being flushed out. The early lead from being a first-mover provides the firm with a price umbrella thereby enabling it to charge a premium price and recover its development costs before imitators enter. Such a strategy would follow (1996) variety-based positioning, which relies primarily on firm capabilities and to a relatively lesser extent on
There are many advantages that accrue to first-movers, such as the response lags of followers, the time to build economies of scale, the ability to build switching costs for customers, obtaining preemptive access to channels of distribution and other scarce resources, the ability to become the industry standard, and the added time to benefit from learning effects ( 1994). However, the sustainability of competitive advantages is low here. Since the firm did not start out by first identifying customer’s needs (A) as is practiced in needs-based positioning, customer loyalty is likely to be low. Opportunities abound for rivals to entice customers away and thereby disrupt the status quo. Customer needs are amenable to redefinition and reinterpretation (by enterprising rivals), thereby overcoming the switching cost advantages enjoyed by the first-mover. Again, the `fast-cycle’ resources that are typically employed here are not accompanied by isolating or shielding mechanisms that protect the firm’s resources or accompanying competitive advantages.
By contrast, a cost leadership strategy may be more applicable to a close-follower. The lower costs (derived from superior process skills) enable the imitator (following a cost leadership strategy) to neutralize the early entrants’ experience curve cost advantages. In addition, these lower costs may also induce some customers to switch, thereby overcoming the advantages of customer switching costs built up by the first-mover.
Close-followers employ a needs-based positioning approach ( 1996). Customers are looking for specific attributes, and the firm has configured its capabilities to meet them. Consequently disruption, of this firm’s competitive advantages is difficult, unless rivals figure out how to supply the same products or services at an even lower price. Even if they do succeed in figuring out alternative methods, these rivals may not be able to accumulate all the required value-adding activities in a relatively short time period.
Finally, a late-entrant could employ either a differentiation-focus or a cost-focus strategy, depending on the nature of the customer segment and the specific tactic it is pursuing. This is a needs-based positioning approach ( 1996), which is possible because by this time in the growth cycle of the product, customer segments and their needs have become more clearly defined.
With the needs-based positioning approach suggested here, the customer segment’s needs are fairly specific and defined. Moreover, the firm has configured its value-adding activities towards meeting these needs. It is difficult for rivals to easily disrupt these competitive advantages. In some instances, the firm may even be catering to customer segments that by virtue of their geographic isolation or by virtue of the idiosyncratic nature of their demand, offer the firm the advantages of slow-cycle resources (1992).
The strategy of the firm is predicated upon the firm’s internal resources and capabilities. In addition, these capabilities also strengthen the firm’s capacity to disrupt markets and gain temporary competitive advantages. They are also relevant for implementing the three generic strategies. Thus, matching the appropriate business strategy with internal resources and capabilities provides the firm with a temporary competitive advantage. Stringing together a series of such temporary advantages can enhance a firm’s long-term competitiveness. However, the sustainability of temporary competitive advantages is dependent on a combination of the customer needs that are being fulfilled, the firm’s resources and capabilities, and the existence of isolating mechanisms in the industry or business environment.
Firm competencies are immutable, since the firm has irrevocably sunk resources into developing these capabilities. Moreover, for a company to be successful, business strategy must be based on these capabilities. In the external environment, the intensity of competition is not completely under the firm’s control. Since competitive advantages for the firm will depend on the match between its strategy (i.e., mode of competing based on its internal resources and capabilities) firms must endeavor to achieve the best fit between their preferred business strategies and these exogenous mandates from the market.
Credit:ivythesis.typepad.com
0 comments:
Post a Comment