Low-cost competition. The area labelled [a] is the realm of price-oriented competition. Since the companies do not offer much uniqueness the only remaining way to compete is to offer the buyers lower prices. Company 1 has been the most successful in achieving a low-cost position. Company 2 and 3 both have a higher cost position (and slightly lower in terms of uniqueness). A higher cost position is often the result of lower economies of scale, but can also be due to other factors (e.g. capacity utilisation, economies of learning, location, better designed value chain).
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| Figure 1. |
Winner-takes-it-all (or almost all). Since Company 1 is able to offer lower prices than all its competitors it will be able to gain a large share of the buyers (as long as its prices are competitive). In fact, it would be possible for Company 1 to price its products so low so that all competitors would be driven out of business. However, most markets today have a moderate to high threat of new entry, so Company 1 would typically price its products so that Company 2 and 4 (and maybe even Company 3) would make some profit. It is in fact good for Company 1 to have less efficient companies remaining in business. The market price will be set by the marginally efficient producer (i.e. Company 2 or maybe even Company 3). When that is the case, Company 1 would generate large profits due to its lower cost.
Company 2 and Company 3 seem hopelessly behind Company 1. This might be a correct assessment if economies of scale are very important in the industry. However, it is possible that Company 2 or Company 3 can capitalise on Company 1 becoming complacent. If Company 1 has been the low-cost leader for 5-10 years it might have become somewhat complacent. Company 2 could gain the lead position by acquiring Company 3 or outsource manufacturing to a low-cost country (e.g. Vietnam).
Over time the majority of profit available in this part of the market will migrate towards Company 1. The remaining companies will either exit or try to achieve Company 1's position.
Stuck in the middle. Company 4 is in an interesting position. It has spent more effort on generating uniqueness. This might be a viable position, but Company 4 is always subject to being undercut on price by Company 1. Company 4 might be tempted to spend even more effort on becoming more unique. This would be a severe mistake as Company 4 would fully enter the stuck-in-the-middle territory. Its cost position would suffer and probably only a small amount of customers would appreciate the new position. It would be preferable for Company 4 to instead move closer to Company 1.
Dynamic effects. Without technical or regulatory change, the best Company 2 and 3 can hope for is to get close to Company 1's position. However, with technical and/or regulatory change, the whole strategy possibility frontier can shift to the right. When this happens there is normally a race to achieve the new lead position. The objective is set (i.e. lower cost) and process innovation follows. In some industries Company 1 is able to defend its position and in other industries Company 1 will lose out to some other company.
During the race, the well positioned companies can achieve superior profits through operational effectiveness. The prices charged to end consumer might not reflect the new lower cost positions. However, these superior profits are likely to be short term as the competitive equilibrium re-establishes itself.
IKEA. A good example of Company 1 is IKEA. Its management is ensuring that the materials used are cost effective and manufacturing takes place in low cost regions of the world (e.g. Poland, Turkey, China). It does not spend much money on advertising in addition to the IKEA catalogue distributed to all households. However, IKEA also employs a number of industrial designers that create new and fashionable designs. In other words IKEA can get a bit of uniqueness without spending much money at all. This is generally beneficial even for a low cost strategy company. Currently, it does not involve much risk for IKEA. However, were IKEA to reach Company 4's position it would be very vulnerable because it has has left a position empty.
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