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Gaining Advantage Over Competitors McKinsey 2012
Gaining Advantage Over Competitors McKinsey 2012
You can outstrip your competitors in myriad ways, many of which call for you to rewrite the standard rules of your industry.
One major theme of business strategy is that companies should focus primarily on rivalry and defeating the competition, whether by beating their competitors in a particular market or protecting themselves against erce competition by creating and exploiting barriers. A concept that is central to this view of strategy is that of a sustainable competitive advantage, a special asset or competence that enables a company to earn supercompetitive prots for an unusually long time.
But what, exactly, is a sustainable competitive advantage, and how can a company know that it has one? In his 1984 staff paper, Sustainable competitive advantage, Kevin Coyne painstakingly analyzes the term, setting forth a rigorous test to determine whether a company has an advantage upon which a strategy can be based. In Coynes view, a sustainable competitive advantage begins with a unique capability that shields a company from competitionusually something measurable, physical, and concrete, not a vague abstraction such as technological leadership. This capability must pertain to at least one of the few product features upon which customers base their buying decisions. And, suggests Coyne, the whole arrangement must be likely to last for a long
This article can be found on our Web site at www.mckinseyquarterly.com/strategy/gaad00.asp.
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time. Similar capability-based views of strategy were to become a major theme of business theory during the 1990s. New-game strategies, a staff paper written in 1980 by Roberto Buaron, explores a particularly powerful method for achieving a sustainable competitive advantage. Buaron considers strategies in which a company rewrites the rules of an industry from the ground up in such a way that the company is uniquely positioned to play by the new rules. Such strategies, Buaron argues, are the really decisive contests of the business world and promise to bring their winners the greatest rewards although, as he warns, they can also entail the highest risks. Buaron introduces the strategic gameboard, depicting strategy as a set of choices about where and how to compete in each market. Where ranges from niche markets to the entire market, and how ranges from the traditional modes of competition to the sorts of new games that Buaron is concerned with. One way to rewrite the rules of an industry is to recognize the moment when its prevailing technology is about to reach its fundamental limits and then to invest decisively in a new technology that has a chance of leading the next phase of development. In a 1986 McKinsey Quarterly article, Attacking through innovation, Richard N. Foster presents a blueprint for doing just that: his concept of the technological S-curve. A new technology generally exhibits slow returns early on, as each dollar invested in it yields modest results. It then enters a period of rapid growth, followed by a retreat into ever-diminishing returns as it approaches its fundamental limits. The beginning of this nal phase of decay is the moment when a company can get a jump on the next big technology, thus rewriting the rules of the industry to suit the companys own competencies. These three articles about crafting and maintaining a sustainable competitive advantage all t neatly into the work of the positioning school of strategy.1 This group saw its inuence reach a high-water mark in the mid- to late 1980s, and much of McKinseys early work was consistent with its main ideas. However, there were always other points of view within the Firm. Amar Bhides 1986 Harvard Business Review article, Hustle as strategy, is an early shot across the bow of the positioning school. Written while Bhide was an associate in the Boston office and a doctoral candidate at Harvard Business School, the article challenges the idea that strategy is only about major decisions designed to build and protect structural advantage. Using the nancial-services industry as an example, Bhide argues that, in some industries, the most important strategic advantage comes from day-to-day execution, exibility, speed, and frontline skillsin short, from hustle. Even today, Bhides article still has tremendous appeal for many of our nancial-services clients, especially those in the investment-banking industry, and it is highly relevant in many of todays other fast-changing industries.
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See Henry Mitzberg, Bruce Ahlstrand, and Joseph Lampel, Strategy Safari: A Guided Tour Through the Wilds of Strategic Management, New York: Simon & Schuster, 1998.
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strategy. But what exactly is such an advantage, and how do you know when you have it? The answers are not always clear, and many carefully planned strategies have come to grief because the competitive advantages they were designed to achieve turned out to be ephemeral, irrelevant, or both. It may be worthwhile, then, to take a more rigorous look at sustainable competitive advantage and its implications for running a business. In simple terms, producers who sell their goods or services at a prot enjoy a competitive advantage when customers choose to buy from them instead of from their competitors. But some advantages are worth more than others. In particular, for a competitive advantage to have any strategic meaning, three things must happen. 1. Customers must perceive a consistent difference between a companys product or service and those of its competition, and that difference must occur in one or more key buying criteria that is, in one or more of the few product attributes that actually shape the purchasing decisions of consumers. 2. The difference must come from a capability gap between the favored company and its competitors. 3. The product difference and the capability gap must endure over time.
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That is why the differentiation must reside in key buying criteria. These key criteria have little to do with the producers internal characteristics, such as plant location or choice of raw materials, unless these features translate into product or delivery attributes that inuence buying Only some key attributes will matter decisions. Instead, the buying criteria are usually attributes that in a given market segment, and affect the price consumers pay for any useful differentiation must the product, the way they perceive target at least one of them the product, or their access to it. These attributes could include quality, appearance, functionality, and the availability of after-sales service. But in any case, they are likely to be fundamental to the concept of the product or service being sold. Only rarely do they include add-ons or features. Price itself isnt always such an attribute, as Texas Instruments learned when it lowered the price of wristwatches to the point where customers no longer valued further reductions. Only some of these critical attributes will matter in a given market segment, and any useful differentiation must target at least one of them.
A gap in capabilities
Differentiation alone is not enough. The advantage must also stem from a fundamental gap in the capabilities of the competing companies a gap that cannot be bridged, at least not with an economically rational amount of effort. True capability gaps consist of specic, often physical, differences and are likely to be prosaic and measurable. Abstractions such as technological leadership rarely qualify. Capability gaps tend to fall into four categories: 1. Business-system gaps, which result from the ability to perform individual functions better than competitors do. 2. Position gaps, which result from prior decisions, actions, and circumstances. They can include reputation, consumer awareness and trust, order backlogs, and irreversible investment choices, such as better plant locations. 3. Regulatory and legal gaps, which result from government action. They can include patents, import quotas, and consumer safety laws. 4. Organizational or managerial quality gaps, which result from an organizations ability to innovate and adapt more quickly and effectively than the competition, consistently.
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Only the factors in the rst categorybusiness-system gapsare under the short-term control of producers. Frustrating as it may be to the strategist, competitive advantage or disadvantage often results from factors that cannot be altered quickly.
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Finally, remember that although the attainment of sustainable competitive advantage is the goal of competitive strategy, such an advantage is not an end in itself but rather a means to an end. The corporation is not in business just to beat its competitors. It is in business to create wealth for its shareholders. Thus, actions that contribute to sustainable competitive advantage but detract from shareholder wealth may be good strategy in the competitive sense but bad strategy for the corporation.
New-game strategies
Roberto Buaron
Traditionally, companies compete in their markets either by enhancing
the value of a product or by lowering its price. But there is another, often overlooked, mode of competition: prevailing over your rivals. Here, instead of accepting the market-dened rules of the game and competing obediently within them, the strategic competitor seeks to inuence the rules themselves, creating a new game in which its own particular strengths become prerequisites for success. I call such approaches new-game strategies. An example helps make the point. Between 1975 and 1977, Savin Business Machines Corporation increased sales to over $200 million, from $63 million, in the $2.6-billion-a-year US office-copier market, which until then was dominated by Xerox. Savins strategy: attack the low- and medium-speed submarket by using a new liquid-toner technology and novel approaches to manufacturing, distribution, and service. Savin appealed to companies in the more time- and cost-sensitive market segment by offering them the opportunity to buy several cheaper machines for key office locations rather than leasing a costly, higher-quality Xerox machine and installing it in a central office the existing paradigm. In the chosen market segment, Savin changed just about every step of the competitive game. Where Xerox machines used custom-made components, the Savin
Roberto Buaron is an alumnus of McKinseys New York office. This article is adapted from a McKinsey staff paper dated March 1980. Copyright 1980, 2000 McKinsey & Company. All rights reserved.
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product took low-cost standardized ones. And because Savins machines were priced for sale rather than leasing, the company sidestepped the need to nance a large leasing operation. Then, rather than building up a direct-sales force to rival Xeroxs, EXHIBIT 1 Savin recruited independent office products The strategic gameboard dealers, enabling the company to take competitors by surprise. Emulate market Rewrite industry rules To visualize strategy in a way that allows for such radical realignSelective Resegment the market Create and pursue a ments of the competi(market niche) to create a niche unique advantage tive landscape, you can use the strategic gameSame game New game boarda matrix that (traditional rules) (rewritten rules) shows where to comHow to compete pete on one axis and how to compete on the other (Exhibit 1). Where ranges from a single market niche, at one end of the spectrum, to the entire market, at the other. How ranges from playing by the traditional rules to rewriting them completely. It is this latter variable that determines whether the strategy involves a same-game or a new-game approach.
Where to compete Across-the-board (entire market) leaders functional approach, strengths to exploit a unique, industry-wide advantage
Same-game approaches
The most common strategies fall in the relatively safe upper-left-hand corner: same-game/across-the-board competition. A company that follows such a strategy must accept the leaders denition of the market, copy the leaders functional approach to the business, and emulate the leaders strengths. Rarely does such an emulator take the lead itself. A second class of company is shrewder. In this category come the same-game/ selective players. They accept the conventional denitions of products and markets but seek to gain an advantage by choosing market niches that play to their strengths. The more innovative among these companies resegment the market, tailoring their product designs or marketing approaches to a segment never before viewed as a coherent group. Take a particular consumer durables market that has traditionally been segmented by price. A producer might resegment it on the basis of consumer attitudes and lifestyles, perhaps targeting consumers who are more interested in saving energy or time than money.
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For a challenger, the same-game/selective approach is often less daunting than confronting the market leader head-on. However, because the challenger has made no basic changes in technology, manufacturing, or distribution, others can go after the newly discovered segment as well. In a sense, then, the same-game/selective player relies on the forbearance of its competitorsand this often lasts only as long as they regard the new market segment as too small to be worthwhile. American Motors Corporation (AMC) learned this lesson in 1959. In just two years, AMC had increased its sales to 6 percent of the American automobile market, from 2 percent, by focusing on the small-car segment and persuading US car buyers to think small. As soon as the companys success caught the notice of General Motors, Ford, and Chrysler, the Big Three introduced compacts of their own, and by 1965 AMC was back down to 3 percent of US sales and operating at a loss.
New games
Occupying the riskier, right-hand side of the matrix are the new-game strategies. They are less common than the same-game approaches but carry correspondingly greater rewards. Like same-game strategies, new games can focus on select niches or on an entire market, as reected by the vertical axis of the matrix. Stanley Works embarked on a selective new-game strategy when it noticed that many of its professional hand tools were being purchased by do-ityourself homeowners. The company developed a cheaper line and a massmarketing approach, tapping into large, unexploited market segments. Stanleys risk was limited: if the consumer line failed, the company could still fall back on its professional clientele. This is a common characteristic of new-game/selective strategies. The downside is limited precisely because the strategy is selective. The riskiest of the four kinds of strategyand the one that bestows the richest prizes on its winnersis the new-game/across-the-board approach. Following this path means nothing less than rewriting the rules of an entire industry to suit your own companys strengths. It often means changing the way some customers purchase, congure, or use your product or service. Y may nd yourself helping customers meet a need that they, or even you, ou had never associated with your product. Hanes Corporations decision to sell pantyhose through grocery and discount chains is a good example of a newgame/across-the-board approach, as is Procter & Gambles pioneering venture into disposable diapers. When the new-game/across-the-board approach works, it can leave competitors stranded, like a river port town left high and dry by a change in the watercourse.
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None of the varieties of strategy on our matrix is right or wrong for every circumstance, so the timing of the choices can be as important as the decisions themselves. For instance, even if you ultimately plan to play a newgame/across-the-board strategy, you may want to start more cautiously with a new-game/selective strategy, expanding to the entire market only after successfully redening a certain niche. That is what Texas Instruments did in the mid-1970s. First it created a new segment simple, four-function, handheld consumer calculators. Encouraged by success there, it then attacked the higher-end scientic and educational segments of the calculator market. Similarly, a company with high market share may want to pursue a safe same-game/across-the-board strategy for a while, launching a new game only when market conditions shift. Thus, even market leaders must constantly scrutinize their industries to determine when to shift strategies.
New-game strategies are not for every occasion. They are hard to pull off, and successful examples are rare. But executives must always be alert to new-game opportunities, because when the conditions are right the rewards can be especially high.
that tomorrow will be more or less like today. Believing that signicant change is unlikely, unpredictable, and in any case slow, they strive to make their operations ever more cost-effective. While valuing innovation, and espousing the latest theories on entrepreneurship, they still regard it as a highly personalized process that cannot be managed or planned to any great extent. They believe that innovation is riskyriskier than defending their present business.
Dick Foster is a director in McKinseys New York office. This article is adapted from Attacking through innovation, which was published in The McKinsey Quarterly, Summer 1986. Copyright 1986, 2000 McKinsey & Company. All rights reserved.
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Companies such as Hewlett-Packard, Johnson & Johnson, and Corning make the opposite assumptions. They know that when change comes, it comes swiftly. So being in the right technologies at the right times, having the ability to protect your competitive position, and having the best people are more important to such companies than becoming ever more efficient in their current lines of business. They assume that the ultimate competitive advantage will go to the companies playing the role of attacker in the innovation war. They assume that, as risky as innovation is, failing to innovate is riskier. They are right. And these insights are rare because they stem from something that too many companies lack: an understanding of the dynamics of competition, and in particular, of the relationship between the effort put into improving a product or process and the results achieved over time. When charted, this relationship appears as the familiar S -curve (Exhibit 2). At rst, as funds are put into development, progress is frustratingly slow. Then, as research EXHIBIT 2 uncovers the key pieces Payoff from technology investment follows S-curve of information necessary to make advances, the pace surges. Fundamental limit Finally, progress slows of the technology down again, and each successive innovation requires a greater outlay of resources.
Performance
Ultimately, the S -curve levels off entirely, often as the technology approaches some fundamental limit for Investment in a particular technology example, the ultimate density of devices that can be squeezed onto a silicon chip. Indeed, it is important to pay attention to such limits, as they are the best clues a manager has for recognizing when a new technology must be developed within the company. It is comparatively easy to see how technological limits will affect the sales of a product that is closely related to the technology, as computers are to silicon chips. It is not so easy, however, when dealing with air travel, say, which combines thousands of technologies. Still, there are usually no more than a handful of technologies that are crucial to a certain product or process, and these are the ones managers should identify and nurture if they hope to anticipate change.
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The important thing, therefore, is to spot the technological opportunities. A company should watch its rivals: when one competitor is nearing the top of the S -curve, others are likely to be exploring alternative technologies that could give rise to curves of their own, leading to discontinuities that could take a slower company by surprise. Think about the switch from vacuum tubes to semiconductors, from cloth to paper diapers, and even from conventional tennis rackets to those with enlarged sweet spots. Today, technological discontinuities are arriving with increasing frequency. The scientic knowledge that underpins our products and processes is multiplying by leaps and bounds in elds as diverse as quantum physics, surface chemistry, cell biology, mathematics, and the structure of knowledge itself. Furthermore, every day brings further learning about the process of innovationhow it works and how Every single day brings further it can be made to work better. learning about the process of
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but almost continuously. And that will happen only if the CEO helps to develop the right management practices and corporate culture. Being up-to-date on every technology the company uses is probably unnecessary, but a CEO must understand, in what may To innovate in new technologies, sometimes seem like obscure detail, CEOs must help to develop the the critical ones: germaniums band right management practices gap versus silicons, the differences in molecular structure between napthalene and orthoxylene, the compositions of complex and simple sugars. These details dictate the range of options managers have at their disposal. It isnt as complex as it sounds. To push a company toward better and more sustainable strategies, a CEO need only ask some basic questions about technologyand insist on honest answers: For the markets my company competes in, or intends to compete in, which alternative technologies might meet the customers requirements? Which rivals are pursuing each approach? What are the two or three key parameters that inuence the customers decision to buy? How do these relate to the technical performance factors or design parameters of each alternative technology? How far is my company from the limits of each alternative technology? Are there ways to circumvent these limits? How much would the customer value the remaining technical potential? How much would it cost to realize this potential? What portion of a technologys value to the customer can a producer capture, given the industrys structure, the alternatives available to the customer, and expected legislation, if any? Is the portion of value large enough to provide adequate returns on investment? When will each alternative technology be competitive in the marketplace, and how long will it remain so? Can my company, or any other, develop each technology rapidly enough to meet the timing requirements? Questions like these help CEOs see technology for what it is: a battleeld of ever-changing S -curves. Armed with the answers to these questions, CEOs will be in a far better position to tackle the ongoing process of technological innovation successfully and to exploit the attackers advantage.
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Hustle as strategy
Amar Bhide
Strategy, its High Church theologians insist, is about outanking competi-
tors with big plays that yield long-term rents from a sustainable advantage. But it is questionable whether this proposition is itself sustainable. These strategy theologians overlook the records of the many successful companies that do not have such long-term strategic plans or an obsessive preoccupation with rivalry. These are the companies that concentrate on operating details and on doing things well. In a word, their strategy is hustle. And executives at these companies may be doing exactly the right thing for their industries.
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These rewards stem largely from superior execution and the ability to adjust quickly to take advantage of transitory opportunities, not from structural competitive barriers. Many wholesale banks earn higher-than-normal prots simply by doing what their competitors do but getting it right. They make fewer credit mistakes and therefore dont suffer large write-offs. They get a higher share of corporate cash balances because their account officers stay close to their clients. They provide accurate and informative statements. In short, they hustle.
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business, the competition isnt the point. I dont view competition as an obstacle, says the head of one of the most successful banks. Our most signicant challenge is internalmaking certain we manage our resources so that we are the best in the business.