Doctor of phylosofy, professor,
Lomonosov Moscow State University,
The article investigates a company’s competitive profile, which is understood as a set of a company’s characteristics which determine it’s competitive strategy. By analyzing different approaches to determining company’s competitive profile, author draws attention to the importance of the dynamic nature of competition in the selection of a company’s competitive strategy. Determining a company’s competitive profile using the dynamic approach will ensure not only the close relationship between strategy and competitive environment, but will also allow us to predict the consequences of a company’s strategic choices, as well as to prepare for them.
Keywords: competitive strategy, company’s competitive profile, strategic position
It may give the impression that the problem of the competitive strategy choice is an optimization problem, which solution is to find a strategy that best meets the restrictions set by company’s terms of operation. However, its optimality is not determined by the degree of compliance with the limits specified. The optimum criteria in competition is a sustainable advantage over competitors. This means that optimal competitive strategy for the company is strategy, which enhances its behavioral features. The greater the number of options available to a company, the more adaptive to changes in competitive environment and the more stable to situation on the market it will be.
Competitive strategy - is not an arbitrary choice, but the result of a complex effect of external and internal conditions shaping the firm’s competitive profile. The firm’s competitive profile is a set of attributes and properties, which affect the choice of competitive strategy. At the same time it is a characteristic reflecting strategic direction of the firm’s competitive actions. Meanwhile, competitive profile is a recommendation, not a prescription for the firm. The choice of strategy is a result of subjective comprehension of firm’s capacity to benefit from business environment. It's all in the firm’s ability to correctly interpret the parameters of its competitive profile.
The first description of firms’ competitive profiles is given in microeconomic theory, which connects the firm’s behavior with the type of industry market. Sectoral approach states that there is optimal behavioral model for each type of market. Therefore, the best choice for the firm is to follow such behavior [1, 2]. In pure competition market, where many small firms sell interchangeable products, the firms’ efforts should be focused on reducing production costs by optimizing the cost-and effective management. In the market of monopolistic competition, characterized by competition among branded products, a strategic goal of the firm is to dispose it’s product’s "anonymity" by creating additional value for consumers of the product (ease of use, adapting to consumer’s need, warranty) and to use of more effective methods of providing value to customers (quality control, delivery, service). In oligopoly environment, where success depends on the correct building of relationships with competitors, the firm should closely monitor competitor’s behavior by analyzing their goals, strategies used and the means of their realization.
Competitive strategy of monopoly is, on the one hand, to raise transition costs for customers, and on the other hand, to maintain high entry barriers due customer loyalty increase.
According to this approach, the competitive profile of the company is determined not by itself, but by the market, and the success of the chosen strategy depends on knowledge of the features of this market. This means that firms operating in the industry market will implement the same strategy, including a more flexible version of the approach proposed by M. Porter . However, as practice shows, even in the same market firms behave differently, and the level of profitability can vary significantly. But the main omission of this approach is the assumption that firm’s resources are homogeneous. In practice, even working in the same industry firms have resources of different quality at their disposal and face with limited access to them, as many resources have low mobility, and some even can not be bought on the market. These circumstances are the basis for consideration the firm’s characteristics in the choice of competitive strategy.
An example of a firm’s competitive profile, based on the specifics of its internal characteristics, is a biological approach1 based on drawing analogies between the behavior of living organisms and companies, as both actively interact with environment, competing for limited resources. Classification of firm’s strategies (Figure 1) is based on two parameters: the scale of the firm’s activity (local - global) and the nature of its interaction with the environment (adaptive - transforming). The criteria for the classification of competitive profiles are behavioral strategies . Violents are large firms that produce standardized mass products. The scale of their activity is global markets with stable and extensive demand. They have large production facilities and control large market shares, their competitive strategy is aimed at gaining advantages at the expense of economies of scale. Violent type firm may seem "a proud lion", taking leading position in the production, "bull elephant", representing a diversified conglomerate, or "clumsy behemoth", showing a weak controllability.
(1) It is based on the approach to the classification of the behavior of biological organisms, developed by L. Ramenskoye in the 30 years of the twentieth century, but became widely known only in the 50 years through the work of John. P. Prime. The economy of this approach has penetrated through H. Frizevinkelyu that by associating the behavior of firms with animal behavior, has secured the types of competitive strategy corresponding to them "bestial" appearance.
Patient are-usually small and medium-sized firms, focused on niche specialization associated with the service of narrow market segments, appealing to customer groups with special preferences. Patient’s competitive strategy is focused on customers, which are not satisfied with violet’s standard products. Patients are "cunning foxes", who can identify and satisfy specific needs of customers. Their competitive strategy is maximizing the product’s value for customers and improvement of market niche servicing.
Commutator is a firm providing itself an advantage by a flexible response to the needs of customers. Small firms, adapting to specific conditions of local demand, or specializing in providing not large in volume and a non-standard one-time services. Their competitive strategy is purely adaptive and their main competitive advantage is flexibility.
Explerents are firms, whose activity initiates the emergence of new or transformationof existing markets. These firms are pioneers in the markets, which is why they are called "swallows". Their competitive advantage is based on in introducing innovations ahead of their competitors. The advantage of the first move becomes a major factor in the competitive strength of explerents, which for a certain period of time is able to yield monopoly profits.
Typology based on the biological approach is attractive because it offers vast opportunities to characterize behavioral characteristics of competitors. But the main disadvantage of the biological approach is that it can’t serve as a management tool, because it does not help to choose a competitive strategy.
Resource approach proclaims firm’s own capabilities as a base for the choice of competitive strategy. It is based on the heterogeneity of firms, which is related to the uniqueness of the resources at firm’s disposal, at one hand, and to the differences in firm’s ability to manage these resources, on the other hand. The result of such approach is a rigid connection of specific resource to a firm, and ability to maintain long-term control over resource turns emerged excellence tosustainable competitive advantage. This means that firm should focus not only on the industry conditions, but on it’sown potential, when it formatsit’s competitive strategy of the.
An example of a resource approach to definition of firm’s competitive profile is matrix of analysis of the strategic position and action evaluation (SPACE - strategic position and action evaluation matrix) , presented in Figure 2. This matrix allows at the same time with positioning of the company (with respect to competitors too) to determine the type of competitive strategy that best suits the conditions of the industry and the firm's resource parameters. SPACE matrix is divided into four quadrants, which serve as the area of the analysis of the firm’s competitive position and the field of identifications of the most preferable strategy for the firm (including its competitive position). Two quadrants reflect assessment of internal conditions – parameters of the firm, and other two - the state of the external environment –parameters of the industry.
The resource potential of the company is assessed based on two parameters - financial strength (FS - financial strength) and availability of competitive advantage (CA - competitive advantage), and influence of the industry parameters –industry attractiveness (IS - industry strength) and market environment sustainability (ES - environment stability). Estimation of factor "market environment stability" is opposed to estimation of factor "firm’s financial strength ", which determines firm’s ability to withstand environmental variability. Estimation of the firm’s position in the industry is based on values of opposing factors "attractiveness of the industry" and "firm’s competitive advantages", because ability to use presented opportunities is determined by firm’s competitive advantages.
SPACE matrix suggests the possibility of implementation of the four strategies. Defensive strategy is suitable for firm that has limited financial strength, howling and / or weak competitive advantages. And if in a stable market firm can still rely on the ability to defend it’s position due to effective work, in conditions of high volatility it’s removal from the market is only a matter of time. Conservative strategy is typical for firms that have competitive advantages, allowing them to extract stable higher income, and which operate in stable market environment. Competitive strategy is typical for the company, which has prominent competitive advantages and operates in unstable conditions. Firm’s competitive activity will depend on the financial strength. Aggressive strategy is typical for firms with competitive advantages that provide them high financial strength. Their strategy aims to strengthen firm’s position. In a stable market environment this is achieved at the expense of absorption of competitors, and on emerging markets by capturing new market niches thanks to the development of additional benefits.
Determination of the firm’s competitive position and the type of competitive strategy is achieved in several stages (see Table 1). The first stage is determined by a set of variables that are used to estimate each factor. Set of variables may be different, but the wider it is the more accurate is estimation. The main requirement - it should include a set of parameters, which are the most important to determine factor’s value. At the second stage, based on the rating scale value of each variable is determined according to its importance to the assessment factor. The numerical value of the parameters varies:
- For the factor "firms’ financial strength" from 1 (the worst) to 6 (the best);
- For "firm’s competitive advantage" factor from -6 (the worst) to 1 (the best);
- For the factor "attractiveness of the industry" from 1 (the worst) to 6 (the best);
- For " Market environment sustainability " factor from -6 (the worst) to 1 (the best).
The third stage is determined by the numeric value of each factor, which is the arithmetic mean for each parameter group (the sum of the parameter values divided by their quantity). In the fourth stage we summarize the obtained numerical values of combined factors (located on the same axis) factors [(-CA) + (+ IS)], [(+ FS) + (- ES)] obtained values are summarised and comprise the final assessment of the competitive position of the company on each axis
Noting the relevant quadrant on the x and y-axis SPACE matrix with obtained average values of factors and connecting them with each other, as shown in Figure 2, we get the competitive profile of the firm’s position. The resulting profile gives an indication not only of the options to choose the most suitable competitive strategy, but also to compare the firm with its competitors. Analysis ends with connection of perpendiculars of final values of firm’s position, which provides the direction vector indicating the type of competitive strategy, which the firm might follow. By providing a mechanism of choice among alternative strategies, SPACE matrix becomes a management tool.
In Figure 2, the competitive profile of the company is marked by solid dark line, vector which is directed towards the aggressive competitive strategy. This is due to the fact that for an attractive industrial market and a relatively stable environment, this strategy gives good results to the firm, which has a great competitive advantages and high financial strength. The strategy could be aimed at conquering a dominant position through product development, expanding its presence in market segments and implementation of different types of integration or to capture the market by extruding competitors.
Competitive Profile, designated with the gray dotted line, reflects firm’s position, which has a slight competitive advantage and weak financial strength, operating in conditions of high volatility environment and moderate attractiveness of the industry. With this combination of conditions vector points to the need to adhere to a defensive strategy as the only acceptable to the firm, has neither sufficient financial resources to withstand the volatility of the market environment, nor any competitive advantage to counteract opponents. This strategy prepares a gradual withdrawal from the market by reducing the presence and recovery of assets.
The dynamic approach. Each of the aforementioned ways of describing the firm’s competitive profile has its advantages and disadvantages. But they all share a common flaw - no attention to the dynamic aspects of competition . Choosing a strategy, a competitor must clearly understand that each type provides for a specific environmental conditions and different requirements for the firm. At the same time implementation of any strategy results in the transformation of the competitive environment. And not just in form of changes that accompany the process of competition, as well as qualitative changes often unexpected for the firm. Therefore, success in the competition is only the initial part of strategic objectives. The ultimate goal of the strategy is to change the competitive conditions in favor of the firm. The firm must clearly understand how it’s success will look. Only in this case it will be able to protect itself from the risk of negative competitive selection. Choosing a competitive strategy, the firm must anticipate the consequences of it’s choice and be prepared for them.
Dynamic typology of competitive strategies should emphasize the presence of and to identify the nature of the feedback that occurs between competitive strategy and identify its competitive environment. This connection is always present. But the nature of this relationship can be radically different. It is this aspect that dynamic typology of competitive strategies is designed to reflect. The essence of the difference between strategies is contained in the character of feedback between the terms of the selection and the chosen strategy. Based on this criterion, we can distinguish three types of strategies: adaptive, renovative and transformational, the characteristics of which are given in Table 2.
Adaptive competitive strategies are adaptive in nature, and therefore have little impact on the initial conditions of their formation, both external and internal. As a consequence, the quality parameters of competition and its participating contestants remain practically unchanged. The best strategy of behavior in this situation is the subordination of the current market discipline and copying the most successful models of competitors behavior.
Renovative type of competitive strategy - a way to fight that is not beyond the scope of the industry such as competition, but maintained in a modified form and with new methods. The purpose of the strategy is 1) to form such notions of consumer product value (a set of properties, quality, methods of distribution) which would meet the firm’s resource capabilities in a best way, or 2) to occupy market niches which will provide the firm with sustainable advantage over competitors. Strategies of this type are rarely accompanied by a qualitative transformation in the market. Usually they are a consequence of changes which are expressed in quantitative indicators, such as changes in the distribution of market share, revenue and profit among competitors. The success of the strategy depends not only on the ability of the company which uses it, but on the behavior of competitors: how they react to the company's actions - will they follow its example or will they ignore it.
Transformational competitive strategies by their nature are intended to pursue change, denying conditions that led to the choice of strategy. The consequences of their implementation are accompanied by varying degrees of radical changes in technology, product or service market form. But each time they lead to qualitative changes in the competitive environment and the "rules of the competition." Practically, this means a transition to a "game of competition" under new rules. Since emerging tendency to reducing the period of market stability and to the more frequent technological changes, the benefits will be fixed for competitors, which focus on the use of offensive strategies. Since this type of competitive behavior is determining a firm's ability to foresee the future and assess its compliance with the requirements of their capacity, the main problem with the implementation is extremely high degree of risk, that threatens the firm’s existence. In this regard, the company can start by implementing transformational strategies in a milder form, based of a selective approach with limited objectives. In this case, seeming to be renovative type of strategy, in reality it is a preparatory stage for the implementation of full-scale transformational strategy.
The dynamic component is one of the strong points of this typology. The second is an integrated approach to the prediction of type of strategy, which is expressed in multidimensionality of it’s parameters. Thanks to the integrated approach its diversity can be grouped into three types of factors: the scale (level) of competition, market type and the type of firm behavior. Each factor - a form of manifestation of the special conditions that must be taken into account when choosing a competitive strategy. Acting in conjunction, these factors form a three-dimensional matrix of choice of competitive strategy, shown in Figure 3. The space of this matrix - this selection field, where each strategy is a particular combination of matrix factors by which provides a synthesis of the external environment (opportunities provided by the market) and internal conditions (company's competitive potential). Integrated approach is realized in that the choice of competitive strategy - is the result of a combination of the most important binding parameters to "time and place". And, pointing to the complexity of the choice of strategy, the matrix shows the range of alternatives that are available for the firm. Competitive conditions set are not the type of behavior, and a set of suitable alternatives, which can take advantage of a competitor according to the level of its resource potential.
Within the space defined by matrix, firm’s choice is the result of a combination of factors, reflecting, on the one hand, the specific conditions in which it operates or intends to operate, and on the other hand, presentation of the firm on its ability to take advantage of the opportunities or on its ability to create opportunities for themselves. Formally, the base of building competitive strategy can be any combination of factors. But the narrower the list of successful combinations, as between the factors there is a certain correspondence. For example, the struggle for leadership on the local market does not make sense, but in the global market, on the other hand, the company can hardly expect to succeed by acting in a defensive manner. The implementation of the price related competition on an international scale, that is, on different markets, seems very problematic due to the specifics of the national markets, while the use of non-price forms of competition will be more promising. Matrix provides firms with much greater opportunities for choice in comparison with SPACE matrix.
In fact, the matrix shown in Figure 3, provides the same opportunities in a wider range of parameters. The only difference is that we need to support preparation of the matrix, allowing to determine the type of competition (industry parameters) and the type of firm behavior (resource capabilities of the firm) to select a specific strategy. However, it has the undeniable advantage of being able to link the selection strategy with the scale (level) competition, so that we get the opportunity to evaluate the field of effective strategies and their type.
Schematically, such a relationship is shown in Figure 4. In a nutshell, it is expressed as follows:
1. The lower the level of competition, the more stagnant competition is;
2. The higher the level of competition, the greater is its transformative force;
3. The higher the level of competition, the narrower is the range of effective (shaded) strategies for the firm, and vice versa;
4. The higher the competition level, the less effective defensive strategy becomes;
5. The gain from participation in a high level of competition is that it ensures leadership at lower levels of competition.
The overall conclusion is that Schumpeterian competition is intensified with the growth of its scale. Therefore, true innovators are firms operating on a global level of competition, as competitive strategies they implement necessarily cause qualitative changes at lower levels of competition.
As for the individual firm, the main conclusion for it is necessity of continuous development of its own resource potential and gradual transition to a higher level of competition. At the same time firm must be aware that in all circumstances the best option for it would be a competitive strategy, which allows the best use of the firm’s strengths to benefit from the opportunities provided by competitive environment. The difficulty of implementation of the firm’s dynamic approach is related to complexity of the requirements for competitive strategy. Aforementioned difficulty is related to strengthened requirements to the firm’s competitive strategy. In other words, the competitive strategy must tackle the dual goal: create necessary conditions to convert resources into competitive advantages in the short term, and for development of new resources and competencies in the long term.
The "new (information) economy" and hyper competition, which came with it, even further complicated the task of choosing a strategy. In addition to taking into account the dynamic component of the increasingly important role acquires a system component that requires taking into account the interconnections and interaction of local and global elements of competition, the impact on the macro emerging markets. More and more attention has to be given to parameters such as the rate of change and interdependence. Therefore, if before risk insurance has been an essential component of competitive strategy development, the main risk of the "new economy" is not to take risks.
1. Lamben J.-J. Management, oriented to market. Strategic and operational marketing. – SPb. Piter, 2004.
2. Taranukha Yu.V. Competitive strategies. Modern ways to achieve competitive advantage. – M. RUSiens, 2016.
3. Porter M. Competitive strategy. Methods of industry and competitors analysis. – M. Alpinabiznes-buks, 2005.
4. Yudanov A.Yu. Competition: theory and practice. – M. Gnom I D, 2001.
5. Rowe A.J., Mason R.O., Dickel K.E. Strategic Management and Business Policy: A Methodological Approach (2nd Ed.), Reading Massachusetts: Addison-Wesley, Publishing Co.Inc. 1985.
6. Taranukha Yu.V. Competition: system and process. – M.: Delo i Servis, 2012 g.