A NEW CHALLENGE FOR BUSINESS ADMINISTRATION IN THE NEW MILLENNIUM: CONFRONTATIONAL COMPETITION

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1 A NEW CHALLENGE FOR BUSINESS ADMINISTRATION IN THE NEW MILLENNIUM: CONFRONTATIONAL COMPETITION Gökhan ÖZER Assoc. Prof. Dr. Gebze Institute of Advanced Technology Orhan SAVAŞ Lecturer Erciyes University Yozgat Faculty Of Economics And Administrative Sciences Key Words: Survival Triplet, Survival Zone, Confrontational Competition ABSTRACT As more firms convert themselves to lean enterprises, the way they have to compete will change from mass competition to confrontational competition. As far as we are concerned; competition among firms in the new millennium will be determined by the conditions of confrontational competition. What is confrontational competition environment? What are differences from confrontational competition and mass competition? Why do M. Porter s generic strategies not suit in the new competition environment? In this study, the answers are investigated these questions above mentioned. 1. INTRODUCTION 20 th century has experienced two major revolutions that to be realized in production. One of them is mass production and the other is lean production. Because these production systems have spread to other countries and industries more slowly, they could not be seen as major factors determined competition strategies. This situation has caused to be seeked unrelated factors to explain the conditions of changing competition. 1 M. Porter s generic competition strategies are result of mass production 2 and confrontational competition strategies are result of lean production system. Naturally, competition among firms adopted mass production and lean production will be different from each other. But, confrontational competition does not emerge suddenly. Until the number of firms adopted lean production system in an industry has reached to sufficient level, lean enterprises compete as if they were mass producers and earn high profit. When the number of firm is sufficient, confrontational competition which is the new way of competition is appeared clearly. 1 Cooper, Robin; When Lean Enterprises Collide, Harvard Business School Press, Boston Massachusetts, 1994, p Porter, E. Michael; Competitive Strategy: Techniques For Analyzing Industries And Competitors, New York, The Free Press,

2 Related to emerging and spreading of lean production, competition environment will transform from mass competition to lean competition. Before business managers have planned the futures of his firm, they have to understand that lean enterprises do not compete as mass producers. What are the characteristics of confrontational competition environment? Why do not Porter s generic strategies suit in the new competition environment? What are competition strategies to be followed in confrontational environment? The aim of this study, to find answers these questions above mentioned. The generic strategies of competition, managing survival triplet, surviving in the confrontational competition environment are main titles that have been examined our research topic. 2. THE GENERIC STRATEGIES OF COMPETITION Generic strategies related to competition among firms can be classified as cost leadership, differentiation and confrontation strategies. Most of existing literature related to competition strategies based on that firms can gain sustainable competitive advantages related to product and in this way, can avoid from competition. 1 For example, the cost leader is able to offer products that are low in price and functionality by developing a sustainable cost advantage. This ability allows the cost leader to avoid competition by rendering its rivals unprofitable. Differentiators offer products that have higher functionality than the cost leader but, sell at higher prices. Product differentiators avoid from competition by hinting that it is impossible to compete with them. This thinking way above mentioned has based on strategic portfolio planning. 2 In this context, stars are the units of firm that can be differentiated easily. Question marks are the units of firm that have differentiation potential. Dogs are the divisions that can not differentiate themselves. Cash cows are the divisions that have lost its differentiation potentials. The contrary assumption which is that competition is unavoidable leads the emergence of the generic strategies of confrontation. Firms adopted confrontation strategy do not try to be cost leader and product differentiator. Instead, while they try to keep their products ahead of those of their competitors, do not hope sustainable competitive advantage. In contrast, Lean enterprises compete through transitory competitive advantages Survival Triplet And Survival Zone The three product characteristic known as survival triplet have an important role firm success that adopted confrontation strategy. Survival triplet is different from producer perspective and customer perspective. For a customer; While the characteristics of survival triplet are product price, perceived quality and product functionality, for a producer, are product cost, quality and product functionality. Product cost can be independent from its cost 1 Ghemawat, Pankaj; Sustainable Advantage, Harvard Business Review, September-October 1986, pp Heldey, B; Strategy and The Business Portfolio ; Long Range Planning, February,1977, p Cooper, Robin; Ibid., p

3 as transitory. But, in the long term, firms desired to become profitable have to adjust to costprice relationship carefully. Consequently, the characteristics of survival triplet can be determined as cost-price, quality and functionality.(figure 1) functionality quality Figure 1: Survival Triplet In the survival triplet approach, it is accepted that selling prices are determined by market conditions that are highly competitive. Product cost is the value of the resources consumed to get the product into the hand of customer. Cost includes all investment costs such as research and development costs, all production costs and all marketing and selling costs. It is not externally, unlike prices, like quality and functionality has to be managed carefully. Quality is defined as the performance of product specifications. This definition renders an opportunity that quality and functionality can be seen as two different product characteristics. Functionality is the specifications of product. It is not a single dimension but, rather is multidimensional. In this context, firm may want to differentiate between the fundamental functionality of the product and service functionality. Such a differentiation may permit better understanding of competitive conditions that firm face. Each product sold by the firm has different value related to the characteristics of the survival triplet. Only product that its value of survival triplet characteristics accepted by consumer has a chance of being successful. Consequently; for each product, it is useful to define a survival zone identified by the gaps between the feasible and allowable values of three dimensions of survival triplet. (Figure 2) For quality and functionality, minimum allowable level is the lowest value of each characteristic that the customer is willing to accept regardless of the values of the other two characteristics. Few customers are willing to buy a product no matter how low the price or no matter how high the quality. For quality and functionality, maximum feasible level is the highest value can be achieved by the firm without inducing significant penalties in other characteristics. Above a certain functionality level, quality problems related to products will happen and higher price will be demanded to earn sufficient profit. Products which are low in quality and high in price will be desired few customers. Because its maximum allowable level is determined by the customers and minimum feasible level is determined by the firm, price is different from other characteristics of survival triplet. The maximum allowable price is the highest price that customers are willing to pay regardless of the values of the other two characteristics. The minimum feasible price is the lowest price can be accepted by the firm at the allowable 79

4 quality and functionality level of the product. While the critical characteristic is price in customer, for a producer, is cost. The minimum acceptable profit at any price level transforms cost to price. 1 Figure 2: The formation of the survival zone for a product Source: Cooper, Robin; When Lean Enterprises Collide, Ibid, p Product survival zones for mass and lean producers In markets where mass producers are competing, one producer occupies cost leader position and the others occupy differentiator positions.(figure 3) Normally, there is not competition between cost leader and differentiator as long as the quality and price gaps are sufficiently large to support the price gap. Consequently, the cost leader offers products as close to origin as possible. But, these products are inside their survival zones. Because the differentiator sells the products at high quality and functionality than the cost leader at a high price, the differentiator offers products that is as far away from origin as possible. These products are inside their survival zones, too. Emerging of the lean enterprises changes the shape of survival zone. Although lean enterprises increase the level of quality and functionality significantly, they narrow the ranges of survival zone dramatically. (Figure 4) Improvements realized in product functionality are sourced from faster learning ability of lean enterprises. 2 Because their competitors catch up quickly, the differences between product functionality are small. These ideas related to product functionality are also valid for the other two characteristics of survival triplet. It is not possible to remain as a differentiator in the narrow survival zone of lean enterprises. There is not enough customer for a firm to differentiate their products significantly and will sell them at high price to cover increased cost. All lean enterprises offer products at a low cost and with high quality and functionality. In this reason, confrontational competition strategies are applied effectively when all firms occupy same competitive position. Lean enterprises offer equivalent products 1 Slagmulder, Regine; Cooper, Robin; Target Costing And Value Engineering, Productivity Press Portland, Oregon, p Womack, P. James; Jones, D. T.; Lean Thinking, New York; Simon & Schuster,

5 to almost the same customer group. Because the firms are almost matched on all three dimensions of the survival triplet, there is not alternative to compete head on and to adopt confrontational competition strategies. This result is sourced from the narrow survival zone. Figure 3: Survival zones for mass producers Source: Cooper, Robin; Ibid., p. 20. Figure 4: The collapse of the survival zones of mass producers Source: Slagmulder, Regine; Cooper, Robin; Ibid, p

6 3. MANAGING OF THE SURVIVAL TRIPLET CHARHACTERISTICS Firms adopted confrontation strategy should be expert to offer products that have desired functionality by the customers, at low cost and high quality. Cost, quality and functionality expertness required this result should be applied consistent strategy based on offering products at right quality and functionality and at the right price. Confrontational competition approach requires the integration of cost, quality and functionality management systems. The fast reaction of the firm to economic conditions is sourced from the integration of the systems above mentioned. 1 Features concerning the cost, quality and functionality management systems in confrontational environment are explained in the paragraph below Managing the product functionality To shorten the time required to add new features to the product, to change the way of product differentiation and to change the nature of product features are method that may be used competing via product functionality Managing product quality Quality is managed via total quality programs. 2 In most Japanese firm, total quality programs are so successful that additional improvements in quality do not posses any importance for the customers. 3 Consequently, the survival zone in most products is extremely narrow in quality characteristic. From now on, quality is negligible hygiene factor as long as under control Managing the product cost In this frame which is the expertness which to offer the products at high quality and functionality at low price, lean enterprises competing in confrontational competition conditions have to manage the product costs effectively. Cost management techniques that can be classified such as managing new product cost, managing existing product cost and harnessing entrepreneurial spirit of work force are used to control the life-cycle costs of products. While target costing, value engineering and interfirms cost management systems are techniques for managing new product costs, kaizen costing, operational control and product costing systems are techniques for managing existing product costs. Sperating of the firm into real and posedo micro profit centers are techniques for harnessing entrepreneurial spirit of work force. 4 The most important one of the cost management techniques above mentioned is Target costing because effective cost management must focus design phases.(figure 5) 1 Slagmulder, Regine; Cooper, Robin; Ibid, p For the total quality management, Crosby, P. B; Quality is Free, New York: Mc Graw-Hill, 1979.; Hauser,P., Clausing, D; The Hause Of Quality Harvard Business Review, vol.66, May-June pp ; Ishikawa, K; What is Quality Control? The Japanese Way; Englewood Cliffs,Prentice-Hall, 1985 may be examined. 3 Slagmulder, Regine; Cooper, Robin; Ibid, p Monden, Yasuhino; Hamoda, Kazuki; Target costing and Kaizen Costing In Japanese Automobile Companies (A); Journal of Cost Management Accounting Research, Vol. 3, p

7 Figure 5: Life-cycle Costs and Cost Committ,ment Source: Lorino, P Target Costing- Part 1: Target Costing-Practice and Implementation. Articles of Merit 1995 Competetion: FMAC Article Award for Distinguished Contribution to Management Accounting. In addition, Target costing offers a lot of advantages as follows: first, it reinforces topto-bottom commitment to process and produce innovation to achieve some competitive advantages. Second, it helps to create a company s future with market-driven management for designing and manufacturing products that meet the prices required for market success. Third, it uses management control systems to support and reinforces manufacturing strategies; and to identify market opportunities that can be converted into real savings to achieve the best value rather than simply the lowest cost Managing the Survival Triplet Characteristics Simultaneously While competing in confrontational competition environment, it will be wrong to give same importance to the survival triplet characteristics. Fundamental subject is to identify the degree of improvements related to each survival triplet characteristics. For example, the most important characteristic for product that customers want functionality improvements continuously and are willing to pay its price is functionality. In competitive conditions that prices are determined by the market, cost will be the most important survival triplet characteristic. While to be very good at one of the survival triplet characteristics, not to give sufficiently importance to the other characteristics will cause to be moved out of the survival zone. 1 One of the subject must not be forgotten that being too good at survival characteristics is usually as bad as being not good enough. Second is that the most important characteristic of the survival triplet may change continuously. 1 The Five Deadly Sins of Japan s Expanding High Tech Syndrome, Tokyo Business Today, May 1992, pp

8 4. SAME IMPORTANT ASPECTS OF TRANSITION PERIOD TO CONFRONTATIONAL COMPETITION ENVIRONMENT It is uncertain that whether all firms in the transition period survive or not. All firms in the transition period should determine, firstly, that their weaknesses and strengths and evaluate the success chance of transition efforts. Instead of delaying withdraw time by attempting with insufficient resources, it may be useful to be withdraw from the market. Firms that have decided their resources strong enough to realize the systems which are total quality management, product development management and cost management, organizational context and culture must be in harmony for successful adaptation of the confrontation strategy. Firms which have understood that the cost leadership and differentiation strategies can not be applied in confrontational environment must examine competitive conditions which consist of detailed analysis of competitive environment, product life-cycle and technologic maturity when they are ready for entering to the confrontational competitive environment. It may be useful for some firms to delay adopting the confrontation strategies to spend the transition period to get ready for the hard conditions of confrontational competition environment. Once the firms in an industry have adopted the way of lean competition, The way of competition does not change suddenly. Indeed, it changes gradually from mass competition to confrontational competition. 1 As the cost leader generates extra profit by allowing the differentiators to create price umbrella, in the early days, lean enterprises generate extra profit by allowing the mass producers to create the shape of product survival zone. As lean enterprises increase in an industry, they change the nature of competition by changing the shape of product survival zone. In this situation, as the confrontational strategies are dominant factor, mass producers which are the remainder of the transition experience that their profits and ability based on the survival triplet characteristics required to create sustainable competitive advantage have lost. This contention is supported by the results of a survey conducted in process and assembly companies by Tani, Okano, Shimuzo, İwabuchi, Fududa and Cooray. 2 Firms in this position should avoid to make a mistake like protecting existing competitive advantage or spending sources to create new competitive advantage because there is not sustainable competitive advantages, from now on. 5. SURVIVING THE CONFRONTATIONAL COMPETITION ENVIRONMENT Surviving the lean competition environment (Confrontational) is based on creating endless and temporary advantages by managing survival triplet characteristics effectively. All products produced by a firm should be inside their survival zone. Factors determining the shape of product survival zone are the changes of customer preferences, the management way of the survival triplet characteristics of competitors and firm s distinctive competencies. Because they help determine which characteristics dominate to the survival zone, the changes of customer preferences is important. The firms can change the customer preferences and the shape of product survival zone by offering the products that have different features in each survival triplet characteristics while the customer preferences change the shape of product survival zone. For example, in 1 Slagmulder, Regine; Cooper, Robin; Ibid., p Tani, T., Okano, N., Shimuzu, Y, Iwabuchi, J, Fududa and Cooray, S, Target Cost Management In Japaneese Companies: Current State of The Art; Management Accountig Research N. 5, pp

9 situation that the product functionality have determined the shape of product survival zone, the functionality expertness of the firm will change the customer preferences and the other firms in industry have to catch up this firm which has functionality expertness. The critical point in confrontational markets is to change the customer preferences. 1 On the other hand, firm s distinctive competencies can be used to differentiate their products or services and can change the customer preferences for a temporary period Some Features of the lean leadership It is possible to become lean leader in markets where dominated lean enterprises if they manage the characteristics of survival triplet better than the competitors do. One of the methods to become lean leader is to change the shape of survival zone radically. The product survival zone is reshaped via radical changes. The competitors either have to catch up the leader or have to withdraw from the market. Second method of becoming lean leader is to achieve more improvements continuously in the management of survival triplet characteristics than their competitors do. As all competitors in market try to achieve the same position, it will be difficult to obtain the leadership position. Firms that is lean leader and can sustain their leadership position realize the sustainable competitive advantage as possible as in the confrontational markets. These firms obtain either above average profits or market share by creating continuous competitive advantage. But, these advantages are temporary. Although the sustainable competitive advantage expresses a static position, the transitory competitive advantage suggests a dynamic position. The firms avoided competition try to protect existing competitive position. Thus these firms attempt rarely to try the efforts which will require the confrontational competition. When the competitive advantages are temporary, there is not a position which will not be changed. In this reason, Firms in the lean competition environment have to find the ways continuously to beat their competitors. The lean competition environment is the environment where competitor s competitive advantages are beated continuously and own competitive advantages which are changed in the short time are replaced Strategic Alternatives Can Be Followed By The Lean Leaders A lean leader which want to use the advantages of its leadership position and to earn high profits can follow, first, the strategy which is to accelerate the rate at which survival zones shift. The lean leader with this strategy attempts to leave its competitors behind so that their products fall outside their survival zones. This strategy is suitable both to increase the amount of profit and the market share. The second strategic alternative can be followed by the lean leader is to allow the other firms in industry to dictate the rate at which the acceptable values of each survival triplet characteristics shift. Under this strategy, firm manage the survival triplet characteristics better than their competitors do. This strategy do not suit to increase the firm s market share although it is suitable to increase profit enhancement. Although a number of factors determine which of two strategies that the lean leader will adopt, the primary one is the relative technological capability of the firm in comparison to its competitors. If the lean leader has the most advanced products that is, the lean leader s first mover advantage is strong, the first strategic alternative will be suitable. The risk of this strategy is to give a change to the competitors such as to find out from the most advanced products. The lean 1 Hamel, Gary; Prahald, C. K.; Competition For The Future; Harvard Business Scool Press Boston, Massachusetts 1994, pp

10 leader that produce at the limit of firm ability continuously can be beated their competitors which have found out its products. If the lean leader s first mover advantage is small, it should be thinked about adopting the second strategy. The extra profits generated by the firm s superior ability to manage the survival triplet characteristics reflect the firm s superior efficiency relative to its competitors. 1 The strategic alternatives can be followed by the lean leader change the competitive objectives. While the first strategy is suitable for the profit maximizing objective, the second strategy is suitable for the maximizing market share. Firms that are not leader but, want to become leader can be leader easily in the future. This ability reflects to the dynamic nature of the confrontational competition. Firms that do not desire the leadership position can follow to third strategy by following the leader. In doing this, the firm does little of the fundamental research and development required to introduce new product and use some techniques to catch up to their competitors quickly. 2 If customers compose of trendsetters and copycats essentially, the strategy of following the leader works well. The trendsetters buy the product as soon as they are available. The copycats buy the products after the trendsetters have bought. If the delay between the trendsetters buying and the copycats buying is less than the time it takes the follow the leader firm to introduce its products, first mover advantages are small and the follow the leader strategy may be successful. If the delay between the trendsetters buying and the copycats buying is more than the time it takes the follow the leader firm to introduce new products and the trendsetters are more numerous than the copycats, the strategy of following the leader will not be successful because first mover advantages are strong. 6. CONCLUSION The conclusion of this study which explains the features of the confrontational competition can be summarized as follows. 1. As firms become lean, it will be seen that to achieve the sustainable competitive advantages will get difficult, cost leadership and differentiation strategies (Mass competition strategies) will get inefficient and the profit margins will get small. 2. As more firms convert themselves to the lean enterprises in an industry, interfirms competition will change from mass competition to the confrontational competition. In this new competition environment, The competitive advantages are not sustainable but, are transitory. The cost leadership and differentiation strategies do not suit but, only confrontation competition strategies suit in the new competition environment. Finally, small profit margins will be real 3. Firm s success in the confrontational competition environment bases on the effective management of the survival triplet characteristics known as the cost-price, quality and functionality. This result determined as the firm s success requires the organizational context and culture which will obtain the integration of the systems which are the cost, quality and product development management. 4. The strategic alternatives can be followed by the lean leader in the confrontational competition environment are to accelerate at which the survival zones shift and to allow the other firm to dictate the rate at which the acceptable values of each survival triplet characteristics. Firms that do not desire to become the leader may follow the strategy of following the leader. 1 Hamel, Gary; Prahald, C. K.; Ibid., pp Value Engineering and Reverse Engineering (Tear-down Analysis) are techniques used for this aim. 86

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