Two Faces of Competitive Advantage
Managers often have great difficulty figuring out where to start when analyzing the nature of their competitive advantage or lack thereof relative to competitors. Let’s say you’re trying to compare IBM vs. Accenture in IT services or Coke vs. Pepsi in cola-flavored sodas. Where would you start? How would you bring a structured approach to the analysis?
In analyzing your competitive advantage relative to one or more competitors, the key is remember that there are two faces of competitive advantage: “onstage” and “backstage.”
Onstage competitive advantage (or disadvantage) refers to the perceptions of target customers about how your goods and services compare with those of competitors along the criteria that are important to them in making their buying decisions. In the case of the enterprise customers targeted by both IBM and Accenture, these criteria might include the innovativeness and quality of IT solutions that each company offers, the responsiveness of each company to the customer’s unique needs, the prices associated with these services and so forth. In the case of Coke vs. Pepsi, customer buying criteria may include perceived taste, brand image, ubiquitous availability and price.
Onstage competitive analysis must always be the starting point in figuring out what competitive advantage you do or do not enjoy. Customers’ beliefs are far more important than what you believe. You may think that you are an innovative company or that you produce really high quality products. However, if the customer does not perceive that your products and services are better (or that your prices are lower for similar products and services), then you clearly do not enjoy any onstage competitive advantage.
Backstage competitive advantage (or disadvantage) refers to how your resources, capabilities and relationships compare with those of your competitors. Backstage advantages are what enable the company to create and sustain onstage advantages. Trying to create onstage advantages without the enabling backstage advantages is almost always a suicidal path. Take the case of Kmart vs. Walmart. Detailed case studies tell us that Kmart had a consistently higher cost structure than Walmart – a backstage disadvantage. Yet, during much of the 1980s and 1990s, Kmart tried to compete with Walmart on price. The outcome was entirely predictable. While, Walmart has gone from strength to strength, Kmart has withered and is today a shadow of its former self.
Backstage advantages refer to not just the advantages that the company is able to create within its four walls (e.g., the hardware and software that Apple is able to build into its iPhone vis-à-vis what Samsung can do) but also those advantages that the company can access via its relationships with suppliers and partners. In the case of the iPhone, it would refer to the suppliers of components as well as the thousands of app developers. Similarly, in the case of Samsung, its relationship with Google for the Android operating system would be an important part of backstage competitive analysis.
Building on the above ideas, here’s what you may want to think about: Take one of your product lines. For this product line, focus on the most important targeted customer segment. Identify the four most important buying criteria that are important to these customers. Along these criteria, how do these customers perceive your products, services and prices relative to those of your competitors? The answers will give you a sense for your company’s onstage competitive advantages and disadvantages. Now, think about the four most important enabling resources and capabilities for any supplier of these products and services. In terms of these enabling resources and capabilities, how does your company compare relative to your competitors? The answers will give you a sense for your company’s backstage competitive advantages and disadvantages.
Globalization – A Double-Edged Sword
By virtually every measure – growth in international trade, foreign direct investment or cross-border flows of technology – globalization is becoming increasingly pervasive. Many of the barriers that kept the industries and economies of different countries relatively isolated from one another are either declining or vanishing. Witness, for example – worldwide ideological shifts from state-controlled economies to market-driven economies, emergence of regional free-trade zones (such as the EU, ASEAN, NAFTA, and Mercosur), globalization of currencies, globalization of media and revolutionary changes in the cost and effectiveness of international communications and transportation technologies.
Given these trends, it is not surprising that globalization is no longer confined to enterprises in industries such as electronics, pharmaceuticals, automobiles, or branded consumer goods. A global footprint has now become a reality even for companies in historically local businesses such as the neighborhood cafe (look at Starbucks), supermarkets (look at Walmart) and cement (look at Cemex). For most mid- to large-sized companies in almost any industry, globalization is beginning to appear a strategic imperative rather than a discretionary option.
Nevertheless, it can be perilous for managers to overlook the fact that globalization is a double-edged sword. Although a global or globalizing enterprise can reap many benefits from the vast potential of a larger market arena, scale and location-based cost efficiencies, and exposure to new product and process ideas, globalization also exposes the firm to numerous strategic and organizational challenges emanating from a dramatic increase in diversity, complexity, uncertainty and the fixed cost of doing business. How managers address these challenges determines whether globalization yields a competitive advantage or disadvantage.
We discuss below the most common mistakes that companies make in the quest to spread their wings over the global landscape.
Mistake No 1: Viewing globalization as an escape from domestic weakness
Global expansion almost always requires upfront investment of capital and the leveraging of technological, cost or other strengths from the home base to foreign markets. Domestic strength gives the company these resources and enables it to ride out the rough learning curve that it is likely to encounter during the early years in foreign markets. However, domestic weakness not only deprives the company of any financial, managerial and organizational slack, it also adds unneeded complexity and distraction at a time when the focus should be on fixing the home market problems. The typical outcome is that escapism often ends up looking like jumping from the frying pan into the fire.
Gateway, the United States-based computer company, provides a good example of such a mistake. Similar to Dell Computer, Gateway had historically followed a direct sales and distribution model whereby customers configure and order their machines over the telephone or the Internet. However, a persistent problem for Gateway was that they are smaller and operationally less savvy than Dell. Given this competitive scenario, Gateway never became more than an also-ran and has had financial difficulties on a periodic basis. Global expansion proved to be an utter failure for Gateway and, by 2001, the company had announced a complete shutdown of virtually all operations outside the US. In recent months, Gateway was acquired by Taiwan-headquartered Acer.
Mistake No 2: Overlooking or becoming a prisoner of cross-border diversity
Notwithstanding the homogenizing influences of global media, narrowing income gaps across many countries, and widespread fluency in the English language, diversity along multiple dimensions (consumer behavior and buying power, distribution systems, national cultures, language, regulatory regimes, cost structures, and resource availability) is likely to remain an enduring feature of humanity for a very long time. Ignoring it or assuming that it does not matter can be ruinous to corporate health.
China’s TCL learned this lesson the hard way. When it acquired the French company Thomson’s television and DVD player business in 2003, it was one of China’s trailblazing globalizers.
However, given its lack of experience at cross-border acquisitions, TCL was unable to integrate the acquired businesses successfully into its operations. The results have been very painful for TCL as well as Thomson.
It is important to remember that, while sensitivity to cross-border diversity is crucial, it can be equally hazardous to become a prisoner of diversity. Smart globalization requires that managers undertake a fine-grained analysis of diversity in order to make more discriminating decisions: Which elements of diversity are market or operational imperatives and thus necessitate adapting what the company sells and how it operates in a country? Which elements of diversity can be leveraged globally? Which must be treated as fundamental barriers to conducting business within the particular country? And, which are unimportant or likely to be short-lived?
Haier Group has become a master at managing cross-border diversity. Even though the national cultures, industry structures and distribution systems for appliances are quite different in countries as diverse as China, the United States, Germany, and India, Haier has been a growing success in all of these markets.
Mistake No 3: Getting caught up with simplistic notions such as multinational vs transnational
Some of the popular literature on global strategy suggests that globalizing companies should pick a clear strategy to define who they are and what they want to become: multinational vs international vs transnational, etc. Based on our research and consulting work with hundreds of companies, we find this advice at best simplistic and at worst misleading. Every company – be it Intel, Coca-Cola, or Huawei – consists of multiple activities in the value chain: research, product development, sourcing, production, distribution, marketing, selling, after sales service, financing, cash management, etc. No matter the industry or company, some activities need to be centralized globally, some need to be globally coordinated but operationally decentralized, while others need to be decentralized and best left uncoordinated.
Consider, for example, Coca-Cola. It is clear that managing the Coca-Cola brand is an activity that Coca-Cola must carry out on a pretty centralized basis. Yet, decisions such as what portfolio of beverages it must introduce in a market or how it should manage relationships with retailers have to be decentralized to local management. In essence, some activities within Coca-Cola are best managed on a globally centralized basis, others on a coordinated transnational basis, and yet others on a decentralized multinational basis. Coca-Cola is not any one of these. It is all of these. To sum up, simplistic classifications may be good for cocktail conversations. However, they can be very costly when used for decision-making in the boardroom.