Competitive strategy and profitability
A question of considerable general interest relates to how a business can maximize its profitability, or at least become the most profitable performer in its industry. Maximum profitability can, in principle, only be achieved in one of two ways: either by minimizing costs or by maximizing prices. Thus any useful business strategy must aim to follow one or other of these aims: to be the lowest-cost producer or the highest-price seller.
Porter (1988) argues that failure to make the choice between cost leadership and differentiation means that a company is ‘stuck in the middle’, with no competitive advantage. This results in ‘poor performance’. There is no doubt that there is a danger of this happening and it has long been emphasized by many other writers (e.g. Drucker’s (1964) assertion that concentration is the key to real economic results). Moreover, the basic concept of strategic direction seems to suggest much the same thing. Many companies which have a clear direction and a distinct position are also demonstrably either cost leaders or differentiators, but not both. Names like Rolls Royce, Bic, Cartier and KwikSave, for example, can be immediately classified in one camp or the other. Some researchers have even suggested that the most effective strategies for some situations comprise systematic oscillation between cost leadership and differentiation (Gilbert and Strebel, 1988).
When ‘focus’ was introduced initially as a generic strategy it obscured the simple structure of the model which argued that profits could be maximized either by achieving lowest costs or highest prices. Competition reduces profits by the introduction of substitutes, new entrants, etc. as suggested by Porter. Moreover, perfect competition erodes profitability perfectly. Minimizing competitions would minimize erosion of profits and this could be done by focusing on areas of the market where there are the fewest competitors. This in turn is a recommendation for the adoption of the ‘focus strategy’. However, it is debatable as to whether ‘focus’ is really a strategy in its own right—at the end of the day all strategies are focused to some extent. Even Ivory Soap (Clifford and Cavanagh, 1985), which has a very broad appeal, is carefully positioned as a multi-dimensional brand aimed at a fully researched customer profile.