Strategy Talk with Christian Underwood and Professor Dr. Jürgen Weigand
Cost leader, differentiator or would you rather rely on your own core competencies?
In the jungle of strategy approaches, models and tools, those responsible for strategy often ask themselves: what use is all the gray theory from textbooks or business schools for the real day-to-day running of a company? In case of doubt, can't (and don't I have to) do everything at the same time in order to survive in the competition?
To shed some light on this again, strategy coach Christian Underwood and Professor Dr. Jürgen Weigand, Deputy Dean of WHU (Otto Beisheim School of Management), discuss what really counts. Listen to the new episode of our podcast HOPE IS NOT A STRATEGY #21 "Success Factor No. 1: Competitive Advantage or Core Competence?" And understand what meaning the gray theory can have for your practice and what strategic mistakes can be avoided if you don't just superficially follow the strategy classics.
SHOWNOTES:
Christian Underwood: https://www.linkedin.com/in/christianunderwood/
Prof. Jürgen Weigand: https://www.linkedin.com/in/j%C3%BCrgen-weigand/ And https://www.juergenweigand.com
Underwood Ltd: https://www.underwood.de
Detailed episode description:
Competitive advantage and core competencies - inside out or outside in?
The simplest definition for the dazzling concept of competitive advantage, without at the same time attaching an understanding to the term, is that customers are more likely to buy from one's own company than from a competitor. If this is the case, then the company has an advantage somewhere and understanding it is part of the strategy.
Inside out means looking at the market from within the company. The aim is to find out where the best positioning for the company and its own products is. Proactive consideration is given to how the company can be structured so that it can establish itself in the market as successfully as possible.
Outside in, on the other hand, means first examining what is happening in the market and considering where the company can be positioned there. This is a rather reactive process.
The gray theory
On the one hand, there is the brand-oriented approach developed by Harvard Professor Michael Porter, and on the other, a resource-based approach. Both approaches are still two absolute classics of strategy theory.
They can be seen as complementary, as both approaches must be seen hand in hand to achieve a strategic fit. A strategic fit means that the company is active, aligned with what is happening in the market and the market environment.
Theories are used to explain the phenomena we observe. Just as in the natural sciences, this also happens in the strategic management field.
For this purpose, Michael Porter, guru of strategy, already a long time ago posed considerations on how things are connected in different industries, sectors and markets.
In order to generalize, a suitable approach is needed that allows generalization and helps to find out which relevant influencing factors exist.
However, since reality is too complex and not all factors are equally important, a certain degree of abstraction from reality must be made here. In theory building, therefore, it must be considered which are the decisive influencing factors for the target variables, such as the profitability of a company.
Porter's five competitive forces
Porter's approach is about industry forces and an industry structure analysis. In this way, he provides a tool that can already be used for analysis. Furthermore, his approach is about the attractiveness of the industry. He describes five competitive forces that help the company to position itself correctly. In these famous five market forces, there are two dimensions - the horizontal dimension and the vertical dimension.
The horizontal dimension describes which active processes exist in the industry and in the company itself. Here, the focus is on which companies are direct and indirect competitors, whether there are possible substitutes, as well as who is on the supply and demand side and the position of the company in the competition. According to Porter, this is the so-called industry rivalry.
At this level, it is mainly about the demand side. The preferences and needs of customers are examined. However, in addition to current competition, future prospects are also examined. On the horizontal level, market entry and market exit barriers play a key role.
The vertical dimension, on the other hand, is concerned with the value chain. It discusses where the input factors are supplied from and who receives the generated value at the end. In addition, it explains which participating parties exist in the value chain. This refers on the one hand to the upstream - from the suppliers - and on the other hand downstream - on the sales side.
A good example is provided by the automotive industry. They are usually in a better position to approve part of the value creation than the suppliers, who tend to be smaller and have less market power. So it's all about who gets the biggest piece of the pie in the end.
Porter's generic competitive strategies
In Porter's classic view, there are three different types of strategy.
On the one hand, there is the issue of cost leadership, i.e. keeping costs as low as possible and leading the competition in this respect. The other is differentiation, which is often achieved through innovation. Finally, there is focusing, i.e. so-called niche strategies.
Many companies try in vain to apply all types of strategies to their projects at the same time. The attempt as a company to be the innovation leader and cost leader at the same time fails. A simple explanation for this is that a company has only limited resources and capabilities at its disposal. Therefore, not everything can succeed at the same time in the short term. However, certain things can be developed in the future.
An example is provided by Toyota, which has made the move from a cost reduction position to innovation. This is a sequential process. Toyota did not strive for cost leadership and innovation leadership at the same time, but it was a development over many decades.
Due to their cost advantage, they were able to offer lower prices than the competition and produce corresponding volumes. This generated cash flow, which they reinvested and then used for innovation. Meanwhile, Toyota has become an innovation leader in two respects. On the one hand, in terms of processes in production, with new concepts such as just-in-time deliveries. On the other hand, however, also with regard to the market. Particularly in the area of electric vehicles, many innovations have emerged at Toyota. So in summary, sequential makes sense, but simultaneous is difficult because of limited resources. You have to decide and focus.
Core competencies using the example of Apple
Apple's outstanding core competence is generating product ideas. For example, there were no radical innovations behind the iPod and the iPhone, but Steve Jobs was able to filter out the best of many things and recombine them. The iPod was the modern version of a Sony Walkman, and the iPhone's design parallels the Braun pocket calculator from the 1950s and 1960s.
As Joseph Schumpeter, an Austrian national economist, said at the beginning of the 20th century, innovation is "doing things differently," which is understood to mean combining things that already exist and then in turn creating something new. Many people think of the term innovation as something quite radical, something unprecedented. However, most innovations come from a combination of things that already exist, which makes it particularly interesting. So if the company aspires to become the innovation leader, the first step is to define what innovation means for the company and in the industry. Only then can other things be done in parallel. Of course, the cost side always plays a major role for companies, which is why they are looking for ever more efficient resources. However, it can also be clearly observed that companies like Apple, for example, whose core competence lies in new products that are strong in design and marketing, invest a lot of money. All of this has to be financed on the one hand, and on the other hand, it has to be covered by volumes.
Apple gives itself an advantage by outsourcing the entire production to specialists. The company's focus is primarily on marketing and product innovation. Thus, most of the steps in the value chain shown by Porter do not even take place at Apple, but have been outsourced.
The core competencies portfolio - the resource-based approach
The approach of Gary Hamel and C. K. Prahalad assumes that heavy imitability of products and services, as well as potential access to a variety of markets, is a major factor in customer value as a core competency.
In the model, this is represented pictorially by a tree. The core competence of the company represents the root, which is then carried into as many large markets as possible.
This model can also be seen at Apple. The company uses a linear business model. This means that if they want to sell more smartphones, they have to attract more customers. This is a very direct relationship between Apple and the customers. On the other hand, similar to the tree model, they have adopted a clever platform model. This offers the advantage that the company does not have to do everything. Apple stores are a good example here - others produce for this platform and Apple participates in every way. So the traditional, linear business model has been very successfully transformed into a platform business.
Exploiting the potential with limited resources
Companies are often strongly entrenched in their business areas and yet still have to identify potential in existing markets with existing products in order to help the company achieve new growth. This represents a major challenge for corporate strategists. There are also limited resources available to further leverage current potential and develop new potential. So a decision must be made as to which projects should be pursued and whether the company can realize something truly new within the existing organization.
In most cases, this process becomes increasingly difficult as the size of the company increases, which is why large companies often try to outsource their labs in the hope that creativity will be higher in another location so that something new can emerge. This presents one of the main challenges: Directing things internally in a way that can be truly free and, most importantly, think outside the famous box.
The longer a company has been successful with its previous strategy, the more difficult it becomes to break out of it. There are so-called path dependencies that people are reluctant to leave. These play a particularly decisive role if they are not recognized in time. A classic example of this are the companies Nokia and Kodak. However, there are also many habits in the private sector that have become established over a long period of time and will therefore most likely continue in this way in the future. It is difficult to find a way out of path dependencies.
Different strategic approaches: Market or resource orientation?
We live in a very volatile world. On the one hand, there is the battle against Corona, on the other hand, cost inflation is rising massively and the availability of materials has declined in many manufacturing industries. In addition, there is the ongoing shortage of skilled workers - to name just a few examples.
When a company now wants to develop a new strategy, it is often faced with different strategic views as well as the question of market or resource orientation.
As a first step, the company should always conduct an honest situation analysis and face the truth. It must be examined where the company stands at the present time and in which environment it operates. Here, people like to talk about markets, sectors and industries, which in most cases are interwoven. It must therefore be clear what the operational environment is at the present time and what the strategic environment may be in the future.
Another important point is to examine how the current situation was achieved - what has generated success for the company and will these drivers continue to define success in the future? An even more general question to ask: Why is the company relevant in the first place, and why did customers choose that exact product? Here, customer surveys can be helpful to honestly find out how easily replaceable one's own products are for customers. Because this relevance question is existential for the company, it is the core for the situation analyses. This analysis should not be glossed over. Bad results are bad and if the results are good, it must be questioned whether they could have been better or whether they are only good because things happened in the environment that were not considered at all. So a clear analysis with a view to honest and truthful results, what the company is about at the moment, how it stands externally in the market, as well as internally.
Choosing the right approach
There are many tools on the market, such as Michael Porter's market-oriented tool. There are also many well-known internal strengths and weaknesses analyses. The challenge often lies in simply tackling them.
It is important to choose a structured approach and a systematic procedure. Particular care is required here and individual steps should be avoided due to time constraints. This is the only way to find out what customers' expectations and needs are and where the company really stands. Various approaches can be used for this purpose. It should be clear what developments are currently taking place in the company and whether these have come about as a result of reactive or proactive behavior or as a result of customer pressure. Things have to be brought together and one has to be clear about the resources - i.e. the resource-based approach. In addition, it must be decided in which markets the company wants to be active and what it needs for this.
As described by Michael Porter, strategy, and especially competitive strategy, is about being different from your competitors. Being different means being better than the competition and attracting and retaining profitable customers for your own company. Competitive strategy is therefore primarily about differentiation. It should be differentiated from other companies and thus brought into a Winning Proposition. This point is often neglected in value proposition design. As a decisive factor, a superior profit must be achieved that is higher than that of the competitors in order to stay ahead.
The famous Unique Selling Proposition or Unique Value Proposition can also be highlighted here. In this case, it is referred to as a value proposition. By consuming the company's products or services, the customer is promised a benefit that is greater than that of competing products.
However, this requires an equivalent on the cost side - a paying proposition. The business must be a profitable one, because only then can the company generate this value and realize the benefit. It must focus on which customers are to be won and how this will enable it to be profitable.
In this context, Jürgen and Christian cite a classic quote by Michael Porter: "The essence of strategy, is knowing what not to do." This focus, this awareness of resource limitations and competition is critical. If the company wants to be an innovation leader, it cannot be a cost leader at the same time. Cost leadership means keeping everything to a minimum with the given resources. Innovation, on the other hand, requires investment and creativity. This creativity often requires above all time and freedom, which must be financed.
Tip from Christian and Jürgen: Courage to look at your own realities honestly
Christian and Jürgen conclude with tips on how to approach such a process in the right way and how to make the right choice from the multitude of strategic analysis tools.
A tip is the situation analysis, as a very essential component and also as a core module, in the, StrategyFrame developed by Christian and Jürgen, which will be published in their book "Hope is not a strategy" in October.
In addition, Jürgen recommends above all to approach the matter in an unbiased way and to really put the selected thinking frame - no matter which one was selected - on the table. This is best also haptic, that it can be touched and seen by all, so that then it is tried to fill this. Finding answers to the questions that arise and having the courage to really look at one's own realities quite honestly and to dare to take a step backwards to look at the big picture is what makes a success factor.