Strategies look good in PPT; they never fail in the boardroom, but in the execution
In 1980, Michael Porter described three generic strategies that a company of any size (small, medium or big) can choose to pursue its competitive advantage. These strategies are lowering the cost of product, product differentiation, and focus on the niche market. A company either chooses to lower the price of its products to beat the competitors, or chooses product differentiation along the dimensions valued by customers to command a higher price; sometimes, it chooses the focus strategy by concentrating on a small segment of the market to satisfy the segment’s unique needs or demand, which is called niche marketing. Implementing one of the generic strategies successfully goes out to show an organisation’s strategic power.
A firm is said to be stuck in the middle when it does not fit into one of the generic strategies. Some firms fail to effectively pursue one of the generic strategies due to their myopic approach. When a firm does not offer features that are unique enough to convince customers to buy its offerings, or its prices are high compared to its competitors’, or when it does not cater to a niche market’s requirements, the firm is said to be stuck in the middle—such firms generally perform poorly because they lack a clear vision.
Levi’s dominated the jeans market for decades, but in the early 1990s competitors moved their production function offshore, dramatically reducing their expenses. Levi’s prices remained higher than its rivals, causing big retailers to focus selling efforts on lower-priced store brands. Its competitors and buyers started following a low-cost strategy, and Levi’s lost a big chunk of its market share. It closed almost all of its US factories. The cost leadership strategy is necessary just to survive in the apparel industry. The company felt the closures are an absolutely necessary part of ensuring the long-term competitiveness of its business.
Similarly, Holiday Inns founded the market for average price, average quality motel rooms. But, in the 1970s, the chain ran into trouble because it failed to see that the market was fragmenting, creating the need for different kinds of products, ranging from luxury resort features to basic, no-frills accommodation. Holiday Inns was left stuck in the middle, with its undifferentiated product and average costs. In the 1980s, the company fought back by differentiating to offer a range of products, from low-cost rooms named Hampton Inns chain to the luxury Crowne Plaza.
Porter argued that stuck in the middle is not a deliberate strategy, rather it is the result of not being able to successfully pursue any of the three generic strategies. The result of not having the lowest costs, not being really differentiated in the minds of the consumer, or not successfully targeting a market segment results in weak profitability and weak existence. The firm stuck in the middle is almost always associated with lower profitability and mediocre market share. When a firm is stuck in the middle, it must make a fundamental strategic decision.
Let me give examples of organisations that have successfully used generic strategies to their advantage: Wal-Mart Stores was the first organisation in world that successfully used the cost leadership strategy.
Wal-Mart can offer special discounted prices because it can buy products from the manufacturer at much discounted prices than it sells to any retailer. The magic is in the volumes. Countless manufacturers became steadily reliant on Wal-Mart, while their margins slimmed down. Charles Fishman has deeply researched examples of this in “The Wal-Mart Effect”, while Fortune magazine has covered the negotiating clout of Wal-Mart with huge suppliers like Procter & Gamble.
Wal-Mart also controls the distribution with its own massive warehouses and logistics equipment. By doing so, Wal-Mart could save its operating costs by 8-20% and add it to markup. A distribution centre’s operating costs with an average 500 employees inside and 500 truck drivers goes fairly high. A bigger store with more categories of goods it carries becomes powerful. Because of its self-sufficiency, Wal-Mart is consistent in selling goods at cheaper prices.
Nike’s product differentiation strategy helped it to establish as the standard in athletic wear. By focusing on their product line, they are able to produce high-quality products that meet customer expectations. Though Nike’s product line is not wide, it has maintained differentiation uniquely. It offers athletic shoes, workout clothes and a very limited number of additional products. Their focus is clear: Give the athlete the equipment they need to succeed. This single-minded focus has allowed them to develop efficient networks of suppliers and manufacturers who can provide high-quality materials.
Café Coffee Day caters to a niche of customers who want to relax, socialise, and enjoy the best coffee and good food. The challenge for the company was to break the consumer mindset that Café Coffee Day was “just another coffee shop”. The outlets are strategically located, and people who want to discuss matters at leisure over a cup of coffee will choose CCD over any other outlet.
Porter has noted that strategy is as much about executives deciding what a firm is not going to do as it is about deciding what the firm is going to do. In other words, a firm’s business-level strategy should not involve trying to serve the varied needs at a go. While executives pour their energies on focusing on strategies, unfortunately they spend too little time figuring out how to implement that strategy throughout the organisation. It’s an irony—strategies look beautiful in PowerPoint presentations; they never fail in the boardroom, but in the execution.
-Vidya Hattangadi is Management thinker and blogger