Our Strategy is What We Sell

Shiv S. Mathur and Alfred Kenyon

First Principles
The purpose of business is to create financial value:
to earn more than the cost of capital. Some people’
dispute this financial objective. However, in a free
market economy, a business cannot survive long as
an independent business if it earns less than its cost
of capital. It will be taken over or go bankrupt. After
that, how can it honour any obligations to ‘stake-
holders’?
Where does a business seek to earn its cost of capi-
tal? It normally does that in competitive markets. Suc-
cess in these markets is the reward for successfully
targeting profitable customers. For these customers,
the business provides better value than its competing
substitutes. Better value of what? Of the products or
services, here called ‘offerings’ for short, which the
business offers to customers.
Business success therefore involves two different
markets. There is Market 1,the ‘commercial’ market
where our offering competes with those of its com-
petitors. If our offering is preferred by enough profit- The Revolut ionary Effect on
able customers, it will earn returns in excess of its Competitive Strategy
cost of capital and thus satisfy Market 2, its ‘financial’
market. Market 2 is where our business competes for That competition is between offerings may seem as
funds. Market 1 is the competitive arena, Market 2 self-evident as it is fundamental. Yet managers as well
sets the goalposts. as writers again and again assume that competition is
What concerns us here is that it is the ‘offering’ that between companies or between profit centres, such as
competes for customers, not the company which may divisions. Unilever’s Walls division may contemplate
well market a number of offerings. Mars sells pet a new plant in Finland, or Mars one in Bavaria. In one
foods as well as chocolate bars and ice creams, but sense these are competitive actions by the companies.
pet foods and ice creams do not have the same sets of It may make numbers of each company’s offerings
customers and competing substitutes. Customers do cheaper or more attractive. Yet the customers in Aus-
not choose between Mars ice creams and Spiller’s tria are unaware of these new factories, Their choice is
Winalot dog food. Winalot does however compete still between competing offerings, i.e. between those
with Mars’ Pedigree Chum. ‘output’ features of the offerings that influence cus-

Pergamon Long Range Planning, Vol. 30, No. 3, pp. 455 to 458,1997
PII:SOO24-6301(97)00026-5 0 1997 Elsevier Science Ltd. All rights reserved
Printed in Great Britain
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tomers as they make their choices. In the sense of
‘being chosen by customers’, only offerings compete,
not companies.
This goes to the heart of what competitive strategy
is. It positions a single offering in a triangular relation-
ship with customers and competitors. To choose a
competitive strategy is to select the customers and the
competitors we intend to face. If our company has 27
offerings, it is contesting 27 markets with 27 com-
petitive strategies.

Positioning and Differentiation

The positioning of an offering occurs in two principal
dimensions:
?? differentiation;

0 price.
come in the way we have to think about our com-
In the context of strategy, differentiation is more fun- petitive markets.
damental than price. If the price needs to be changed, Traditionally, a market was visualized as a closed
this can usually be done at very short notice. Price set of substitutes, in which each offering competes
changes are a tactical weapon. Differentiation, on the with all the others, but with none outside the set. We
other hand, is the collection of non-price output fea- can think of such a market, illustrated in Figure 1,as
tures which characterize the offering, and those fea- the model of pure competition. In that model all the
tures normally take time to change. Sometimes a lot offerings are homogeneous, so that there can only be
of time. A change in differentiation is invariably a one equilibrium price that clears the market.
change of strategy. However, that model could accommodate a modest
An offering can be differentiated in a rich variety of degree of differentiation between the offerings. It
ways.’ We can change not only the physical features must be so weak that customers 1. treat all the mem-
noted by customers. Often it is more effective to mod- bers of the set as effective competitors and 2. have
ify its support features, such as meeting customers’ no cause to compare the offerings with substitutes
personal preferences and needs, after-sales support, outside the group. With such modest differentiation
the convenience with which the offering can be the group will not have a single equilibrium price,
bought and serviced. but a varied set of prices at which marginal customers
Differentiation is an increasingly dominant feature find them all equally attractive-equal value for
of an advanced modern economy. By giving cus- money. We call this the model of the ‘public market’.
tomers wider and more personal choices, it reduces As illustrated in Figure 1,its set of members is
their interest in the price. This in turn gives sellers
more freedom to set prices at profitable levels. That ?? publiclyvisible-membership is known to insiders
means either better margins at higher prices or better and outsiders:
volumes at lower ones3
Price is thus secondary in the process of positioning ?? all-inclusive-each member is a close enough sub-
an offering. First, our freedom to set the price depends stitute to every other member;
on the degree of differentiation. Those who greatly
?? exclusive-none compete with non-members.
prefer a Haagen-Daas ice-cream will not choose a com-
peting offering in order to save just a few cents. Sec-
However, in the more common case, where offerings
ondly, our price can be changed at much shorter
are more than modestly differentiated, these con-
notice than our differentiation. ditions do not hold.
An adhesive tape like sellotape competes with
other adhesive tapes of varying price and quality.
Differentiated Markets are Private, Customers who use such tape to secure packages can
use string as a substitute. Others who use sellotape to
not Public attach one piece of paper to another can use paper-
The rising tide of differentiation in advanced econ- clips, staples or Blu-Tack. Blu-Tack can also be used
omies has dramatically changed the way business is to attach a piece of paper to a notice-board and may
conducted. Perhaps the most dramatic change has there compete with drawing-pins. However, drawing

Strategy at the Leading Edge

pins do not compete with string. Sellotape, like glue, We need to make an accurate and complete list
can be used to re-seal envelopes, but Blu-Tack, string of all those offerings which are likely to restrict our
and drawing-pins do not compete for that application. freedom to price our proposed new offering from the
In other words, there is no public market in these time it is due to hit the market, and over the period
fastening products, only ‘private’ markets, private to needed to recover its cost of capital. The illustration
each offering. Each offering has its own set of com- from adhesive tape may make this sound quite a sticky
petitors. That set is not exactly shared with any of its job, but in practice it tends to be quite straightforward.
competing substitutes, although there are con-
siderable overlaps among these private markets. This
is illustrated in Figure 2. In Figure 1 each of the offer-
ings A-E is in competition with all four of the others.
Figure 1 therefore describes a public market. By con- The Irrelevance of ‘Industries’
trast, in Figure 2 A-E is A’s market: A competes with Much traditional theory and practice of competitive
all the other four, but with no other substitute. E’s strategy has focused on the concept of the ‘industry’.4
market on the other hand contains A, D, F and G. F Is the industry attractive ? What percentage of the
and G are outside A’s market, and B and C are outside industry will our offering represent? Is it a growth
E’s, but not outside A’s market. B’s market contains industry? All these questions equate an ‘industry’
A and C plus two unlettered competitors, but B does with a public market. If the offering had a public
not compete with D or E. Every offering has a market market, and if that public market corresponded with
which is private to itself. an industry, then these questions would make sense.
Does any of this matter to the practical strategist? A Is it a growing or a shrinking market? What will be
competitive strategy positions a new offering. That our share of it? Is there overcapacity in it?
offering will be viable if it attracts a profitable com- We have however argued that very few offerings
bination of price and volume. However, price and have public markets. If we thought about our offering
volume are determined by the degree of competition as being (say) in a widely defined fastenings industry,
in the market, and to assess that, we need to be very we might ignore some important facts such as:
clear about the boundaries of that market.
If we run a courier service, our freedom to raise ?? even if the demand for string and drawing-pins is
prices must ultimately be affected by competition declining, adhesive tape may be a growth market;
from fax services and e-mail. We therefore ignore ?? Blu-Tack may well enjoy much greater pricing free-
those substitutes at our peril. On the other hand if dom than Sellotape, if it has fewer close substitutes.
our focus is on long-distance destinations in other
continents, then a local motor-cycle service in rural
Wales does not affect our market, and we should not
use statistics or other market data which are sig-
nificantly weighted by such services. We cannot hope Organizing Competitive Strategy for
to design a profitable offering if we cannot identify
and evaluate its market with some precision.
Offerings
The simple message of this article is that a com-
petitive strategy must be devised for each individual
offering. This is because the people who will decide
whether our offering is successful-its customers and
competitors-are different for each offering. There
will be overlaps, but important sets of customers and
competitors will not be common to any two or more
of our offerings.
Alas, offerings do not easily or naturally fit into
organization structures. Companies tend to be div-
ided into profit or cost centres, and rightly so. Offer-
ings do not have identical customers or competitors,
but they commonly use shared resources and costs.
These resources and costs is what a company needs
to control. So it will naturally-and quite correctly-
structure itself by cost or profit centres. Worse still,
there are usually many more offerings than profit or
cost centres, nor do offerings always neatly belong to
just one such centre. They may well be produced by
two or more of them. How can an offering-centred

Long Range Planning Vol. 30 June 1997

view of competitive
structure?
strategy be fitted into such a
Summary
The answer to that has some complexities, but the This article proposes a revolutionary change towards
main principle is simple. Each offering needs a spon- an offering-centred approach to competitive strategy.
sor who intimately knows its private market. Many The offering alone competes for customers and with
offerings will no doubt share a sponsor. The sponsor competitors. Those markets are private and specific
will belong to a profit centre, preferably the most to each offering, not public. This holds in the normal
downstream profit centre: the one nearest the case where offerings are differentiated from their sub-
customer. Sponsors will therefore normally report to stitutes. These private markets are not ‘industries’. A
the profit centre manager. They will, however, be company can structure itself for this offering-based
negotiating with other profit centres, if these con- approach by ensuring that each offering has its spon-
tribute to the offering.’ sor.
The sponsor will make the proposal for investing
in the new offering, negotiate with those who control
the necessary resources, sponsor the offering through ALFRED KENYON is a former visiting professor at City
its approval stages and remain responsible thereafter University Business School, London, UK.
for monitoring its implementation, its results and any
need to abort, modify or reposition it. This last func-
tion may be triggered by changing news from the SHIV MATHUR is a senior lecturer at City University
market. Business School, London, UK.

References
1. J. Kay, The Business ofEconomics, pp. 81-148, Oxford University Press, Oxford (1996).

2. S. S. Mathur and A. Kenyon, Creating Value: Shaping Tomorrow’s Business, Chap. 5,

Butterworth-Heinemann, Oxford (1997).

3. Microeconomics analyses this with the tool of price elasticity.

4. See M. Porter, Competitive Strategy, Free Press, New York (1980). Porter sets his framework
out in terms of the industry, but also takes care to draw attention to the difficulties by
allowing for 7. competition with substitutes outside the industry and 2. strategic groups
within the industry.

5. Mathur and Kenyon, op. cit., Chap. 21.

Strategy at the Leading Edge