These external changes have led to a complex and sometimes confusing variety of competitive environments. In some cases, only the largest competitor makes adequate returns. In others, all competitors make low returns and there is little variance from best to worst. In still others, some of the most profitable are the smallest, focused competitors. No simple, monolithic set of rules or strategy imperatives will point automatically to the right course. No planning system guarantees the development of successful strategies. Nor does any technique. The Business Portfolio (the growth/share matrix) made a major contribution to strategic thought. Today it is misused and overexposed. It can be a helpful tool, but it can also be misleading or, worse, a straitjacket.
The strategy requirements of any business are ruled by the competitive environment and the potential for change in that environment. Two factors in particular give one a sense of the nature of that environment. The first is the size of the advantage that can be created over other competitors. The second is the number of unique ways in which that advantage can be created. The combination of these two factors both gives a sense of the long term value of a business and dictates the strategy requirements.
There is a fundamental difference between businesses in which the size of the potential advantage that can be created by a competitor over all other competitors is large and those in which it is small. The reward potential for a successful strategy is only large where the size of the advantage that can be created is also large. The long term value of any business is determined by the size of its advantage versus the marginal, but viable, competitor. When all or most competitors can achieve equal costs without price differentiation, then returns of the whole industry will be depressed to a level sufficient only to fund capacity additions to meet market growth requirements. Whatever reported returns are, cash available to shareholders will be small or negative for all competitors in such industries. Only when real advantage exists can real returns accrue.
There is also a fundamental difference between businesses that offer only one or a few ways to achieve advantage and those that present several ways. When differentiation is costly and not valued by customers, low price and relative cost position determine success. This sort of environment has relatively straightforward strategy requirements. When a variety of approaches is possible, however, then so is a variety of strategies. Competitors can succeed by tuning their offering and costs exactly to meet a specific segment's demand. If advantage can be created by doing this, a small competitor can thrive as an industry specialist. When advantage cannot be created, or is dissipated with increased size, then the industry remains fragmented.
These two factors – the size of the advantage and the number of ways it can be achieved – can be combined into a simple matrix to help guide more creative strategy development. The specific requirements for success are different in each quadrant.
Corporate success requires that most of a company's businesses retain advantaged positions in volume and specialization businesses. Even high market share or relatively low cost position in stalemate and fragmented industries may not be exceptionally valuable. In fact, the value of success in businesses which best fit on the right side of this matrix is always higher than in those that fit best on the left. The market performance of stocks also reflects this reality.
Too many companies have pursued strategies during the 1970s that were inappropriate to their specific competitive environments. Market share, for example, often lacks value in stalemate and fragmented businesses. In specialization businesses, focus and superior brand image may be more rewarding than mere size. This matrix is not a solution to all strategy. Most businesses, of course, present elements of each type of competitive environment. In any case, simple rules and models cannot substitute for creative, well thought through strategies.
Over time, the nature of the competitive environment can change. Businesses that start out as fragmented industries can evolve toward specialization and even on to the volume category. McDonald's did this in away-from-home eating. Businesses that start out as volume businesses can migrate toward stalemate. This has happened to much of the world's paper industry. Others that were clearly volume have moved toward specialization, as both the Japanese auto producers and a few European companies have proved to the large U.S. auto companies. Some have remained volume businesses by going toward world scale economics, as Caterpillar has shown in construction equipment.
The challenge of the 1980s will be for companies to anticipate, or even cause, these major evolutions toward a new basis of competition. Those who are slow to react or fail to see the potential will be bypassed. New leaders will emerge. Returns for those who fail to adapt quickly will erode. The extraordinary performers of the coming decade will be those companies that can develop strategies to transform the basis of competition, to create advantaged positions in the new environment, and to preserve those positions from attack.
In a diversified company, the challenge is immense. A portfolio of businesses that is disadvantaged in specialization and volume businesses and weighed down by assets tied up in stalemate and fragmented industries will mean failure. The successful companies will be those with advantaged positions in volume and specialization businesses. Extraordinary success will accrue to those few strategists willing and able to create sustainable advantage, but especially to those able to change the basis of competition.