The Three Vertexes of Competitive Strategy

By Esteban R. Brenes and Mauricio Mena G.

In this article we are establishing a conceptual framework called the three vertexes of
competitive strategy to facilitate understanding and validating a companys competitive
strategy. We will study the three groups of decisions that must be addressed when
defining a strategy, in order to help managers and businesspeople to determine whether
or not their organizations have really effective strategies.

A. The concept of strategy

Strategy must always be understood within a competitive context. Thence, the first
foundation for our approach combines the concepts of strategy and competitive
strategy, understanding both as:
A conscious search for an action plan allowing an organization to position itself
at an industrial sector to attain sustainable competitive advantage and higher
returns in the long term.
In the first place, every company can be said to have a strategy. However, not every
company has consciously engaged in the task of defining it. The failure to do so means
that the strategy can be found only in the mind of the firms owner or manager. This might
have a negative impact on the firms performance in the form of inconsistencies,
omissions, or other problems resulting from a strategy not shared or understood by
everyone in the organization.
Second, the strategy must aim at giving the firm a unique positioning, hard to imitate in
the industry where the firm will compete. By positioning we mean the firms being able to
establish itself in the industry differently from all others, featuring its own innovative,
unique attributes. As we shall see later, to reach a unique positioning the firm must choose
where and how to compete.
Third, the goal of strategy must be giving the firm a competitive advantage that is
sustainable in the long term. Competitive advantage is attained by developing abilities
and taking a number of specific actions aligned to the strategic positioning chosen. This
will allow the firm to develop a hard-to-duplicate competitive advantage making it more
sustainable over the years.
Finally, the ultimate goal of strategy is attaining returns on equity (ROE) above the
average of its industry. In addition to serving as an excellent long-term indicator of
financial health, the ROE is the source of prosperity for all of the firms stakeholders, i.e.,
stockholders, employees, business partners, and the society as a whole.

B. The Three Vertexes of Competitive Strategy

Although an understanding of the concept of strategy is key, it is only the first step in
developing successful strategies. The next step is formulating the strategy itself. In our

experience, the decisions regarding the definition of competitive strategy fall within three
large categories requiring choice by the firm and total commitment to the choices made:
1- Where should I compete?
2- How should I compete?
3- How should I implement these decisions?
If we visualize competitive strategy as the triangle in Figure 1, the vertexes in the figure
stand for the responses to these three questions. Together, the first two vertexes define
the firms strategic positioning, while the third deals with the way it must be implemented.

Figure 1
The Three Vertexes of Competitive Strategy

Competitive Field = Where should I compete?

Strategy: How should I compete?

Cost or high-perceived value leadership

Strategic action and abilities to be
developed

Industrial sector
Market segments
Geographic scope
Products and services
Vertical/horizontal scope

COMPETITIVE
STRATEGY

Implementation: How should I implement these decisions?

Organization and structure

Policies, systems, and processes
Strategic investment and/or disinvestment
People, Culture, Leadership

Vertex I: Where should I compete?

This first question entails defining the firms competitive field by clearly responding what
industry the firm wants to compete in. This definition is the basis for the industrial analysis
allowing us to clearly understand, among other things, key success factors, potential
customers, competitors, and the industrys specific structure and major competitive forces.
The carbonated soft drink and beer companies, for instance, are faced with an interesting
dilemma. In developed countries such as the United States, these two industries are not
intertwined, chiefly for legal reasons. However, in less developed countries they tend to
intertwine, and currently companies in both industries unite to compete by developing
significant synergies, mainly in distribution. Obviously, a clear definition of the relevant
industry in each case is very important, since it can go from just carbonated soft drinks or
beer to a much wider definition, such as massive distribution of drinks.
Other choices related to the competitive field include markets or market segments to be
served; the firms geographical scope, product line and services, and the degree of vertical
or horizontal integration.

The choice of markets and market segment to be served is particularly painstaking. Even
though, by defining the industry, all potential market segments are defined, within its
strategy a company must consciously choose the markets/market segments it wishes to
serve or finds convenient to deal with. Many a time this decision can imply defining what
groups of customers must not be served, which, of course, challenges conventional
corporate behavior.
For years, a leading Latin American home appliance group had engaged in retail
marketing and, more recently, it had begun importing on a direct fashion. Then it identified
an opportunity to establish a wholesale operation selling to its own retail chain and to third
parties. A separate analysis of the two businesses showed that, even though both were
within home appliance marketing, they belonged in different market segments, namely,
retail and wholesale selling. Each operation faced not only different competitors, but also it
dealt with customers showing different behaviors, characteristics, and goals. The group
determined that the abilities to successfully deal with each market were different and,
consequently, a specific strategy for each business was defined.
Another competitive field aspect closely related to market/market segment choice is the
firms geographical scope, i.e., the territories to be served, and the choice of what is to be
sold to the chosen segments, that is, the product/service line to be offered. In this latter
point, the firm must focus on the chosen market segments current or potential demand,
quite independently from its current supply of products and services. Finally, the firm must
evaluate and decide regarding its vertical or horizontal integration scope in its industry.
By late 2003, the U.S. airline Southwest Airlines (SAL) had attained the highest ROE in
the airline industry for over 30 years in a row. Since its onset, Southwest Airlines defined
its competitive field as short hauls between relatively close cities in the Southwestern
United States, using secondary, usually less-crowded airports. Also, it offered no-frills,
low-price service to its customers. Thus, no seats are assigned and no in-flight food
service is provided. No-frills service entails reservations only with the airline, more tickets
sold directly at the airports and, as of late, the use of ticket-selling machines, which avoids
paying travel agency fees. Southwest Airlines makes no baggage transfers or connections
to other airlines. This allows it to offer more frequent, reliable departures, a major
satisfaction factor in its target segments, to wit, frequent and business travelers.
Vertex II: How should I compete?
The second vertex in competitive strategy is both choosing a strategy and developing
abilities and taking actions leading to successfully implementing it at the chosen
competitive field. On the one hand, this strategy must correspond to a general approach to
addressing and designing all of the firms critical actions and activities. On the other, a
large number of actions will make hard to duplicate the firms established strategy.
There are two types of generic strategies. 1

Cost leadership, and

In our experience this conceptual framework, originally developed by Professor Michael Porter, is
tremendously valuable and sheds a lot of light on the way to decide about a complex issue such as this.

High perceived value.

Cost leadership
Cost leadership implies arranging a business firms activities to ensure the firms delivery
of a product or service at the lowest possible cost in its competitive field. Of course, this
entails identifying critical activities from a cost viewpoint, and developing the most
expertise in the industry in relation to those activities, or else delegating them to whoever
can deal with them that way.
Southwest Airlines choice of its competitive field was supplemented by a cost-leadership
strategy for frequent and business travelers who overwhelmingly used land
transportation. With this, Southwest Airlines completed its strategic positioning to
successfully compete not only with other airlines but also with land transportation. How
can Southwest Airlines offer such low prices and still be profitable? Simple. It has attained
a unique combination between its competitive field, its strategy, and its chosen abilities
and actions. For instance, Southwest Airlines has standardized its airplane fleet, which
has had a tremendous impact on its pilots learning curve, as well as on that of its
maintenance and spare-part handling staff. The high productivity rate of Southwest
Airlines personnel results from investments in recruiting, training, motivation, stock
options, and flexible union contracts, among others. In the final analysis, Southwest
Airlines product only makes sense in short hauls but, being specifically designed for that
purpose, it allows the firm to make good its promise of being the low-rate airline.

High perceived value leadership

On the other hand, we have a strategy committed to creating additional customer value
which, of course, must be recognized and appreciated by customers to make them willing
to pay more than the actual cost of developing the product or service.
The Central American firm Caf Britt Coffee Corporation (CBCC) pioneered as the first
gourmet coffee firm with local processing. By the mid 80s, it made an excellent product
available both to local consumers and the growing tourism industry. This way, it not only
created a new market segment but also thoroughly changed the consumers and the local
industrys habits. Even though a key success factor was coffee high-quality and good
taste, the firm had to take a large number of actions, including packaging able to keep
undiminished the products taste and aroma, top-quality industrial processing, fully
bilingual personnel showing significant business skills, a customized distribution system,
and a mail-order system (first through phone calls and then through the Internet) covering
the entire world. These abilities and actions combine to position the firm as a consumer
market leader, at both local and international level, with customers happy to pay
significantly higher prices for the firms products.
Even though cost and high-perceived value strategies can share some abilities and
actions, a firm must commit itself to one of them and make all subsequent decisions on the
basis of that choice. For this reason a firm cannot pursue both generic strategies
simultaneously, as it will find implementation inconsistencies that will make it hard to attain
sustainable competitive advantage in the long term.

Vertex III: How should I implement these decisions?

Although strategic positioning is attained by clearly defining the two previous vertexes,
competitive advantage is only achieved through effective implementation of all the
strategic actions defined. These actions are very specific to each firm and their
implementation, as shown in the third vertex of Figure 1, has to do with at least four major
management areas.
1. Organization and structure. This action must be taken at two different levels. First, a
business organization level to determine whether businesses will be managed within a
single business unit, whether two or more separately-managed firms will take charge of
them, or if corporate organization is appropriate. The second level is that of the internal
organizational structure of resulting firms. In other words, the definition of functions,
responsibilities, and interrelationships required in each firm to deal with all the implications
of the selected strategic positioning.
The most important thing is ensuring top performance in key success functions, according
to the chosen positioning, determining which of them must be definitely reinforced. For
instance, and Ecuadorean firm engaged in the business of office supplies and book sales
at a retail level through bookstores and wholesale paper marketing recognized the need to
reinforce its organization differently, depending on each business activity. In the case of
bookstores, it chose to reinforce abilities such as store location, point-of-sale development,
employee training in serving customers, management of a wide product line, advertising,
and promotion. For wholesale paper marketing it chose to strengthen two different areas,
to wit, purchase management, through a manager with experience in the international
market for the products raw material, and its marketing department, through specialized
salespeople with extensive knowledge on a per-customer basis.
2. Policies, processes, and systems. The company must reformulate its strategic
policies, such as leverage level, profit retention, sources of funding, executive rewards,
and other human resources policies, to ensure all of them are aligned as much as
possible to its strategic positioning. In the first three items mentioned, the economic effort
of the organization must be backed by the Board of Directors in order to take all actions
required to consolidate the firms competitive position.
One more key thing is to ensure attaining higher expertise and standing than competitors
in processes identified as critical to the chosen strategic positioning. Process redesign
efforts make sense when focused chiefly on key success factors. Activity and process
outsourcing must be evaluated in this context. For instance, it is not uncommon
outsourcing non-central processes. However, in other instances alliances with experts can
be designed to provide improved performance in key processes and simultaneously to
provide unique access to know-how and experience so that real competitive barriers are
created.

One more group of actions that must be aligned to the firms strategic positioning is the
development of the firms key systems. These include technology and information
systems, market intelligence, warehousing and distribution systems, personnel recruitment
and selection, rewards as a function of results, and a large number of other items that
can/cannot be key success factors for a firm, depending on the strategic decisions it has
made in the two previous vertexes.

3. Strategic investment/disinvestment. Strategy must also serve as a filter to determine

what tangible and intangible assets must be controlled by the firm. On the other hand, it
must serve to determine which assets are no longer central because they do no longer
add value to the firm or take it away from the focus of its strategic positioning. These
definitions imply decisions on growth or consolidation and the time period allocated to
these activities. In the case of growth, this might entail independent or joint investments,
acquisitions, mergers, and strategic alliances to ensure control of critical resources. In
other cases, these definitions can lead to generally difficult consolidation decisions, such
as selling assets, whole divisions, related companies, or other resources that are no
longer critical or have very limited chances for success both under current and future
circumstances.
Anticipating a higher degree of international competition on cement, a Latin American
cement production firm competing for cost leadership decided for vertical forward
integration by acquiring a concrete products company. The firm recognized that, in the
near future, it could lose market share and profitability since cement is a generic good
linked to significant economies of scale enjoyed by its potential competitors. Thus the
original company became a corporation with two independent business units. One of them
competed on cement through cost leadership. The other competed on concrete products,
pursuing a high perceived value strategy. This way the company had better chances to
maintain its profitability levels, together with growth and lower potential risk.
On the other hand, a Central American meat corporation decided that one of its divisions,
even taking into consideration different strategic alternatives, had very few chances to
attain competitive advantage and that it was making it depart from its major focus, thus
wasting critical resources. The firm decided to eliminate the division, fire a full one third of
the entire corporation employees, and sell its physical assets to a former competitor.
Something similar occurred in a foodservice company. Although this started its business at
retail level, it recently decided to focus its efforts on the institutional segment of hotels and
restaurants. Since store location was not relevant for this segment, the company chose to
shut most of its stores and, instead, build a warehouse and distribution center.
4. People, culture, and leadership. Other significant components of strategy
implementation are (1) human resources; personnel and talent types the firm must
attract/retain, (2) culture, principles and values to be developed, and (3) the type of
leadership required to lead them. These actions are not aligned to management fashions
or immediate needs. Rather, they are aligned to the requirements for abilities and skills
required by the strategic positioning chosen by the firm.
Here we can remember the example of CBCC incorporating bilingual personnel in every
position under the premise (proven by experience) that they reinforce an international
culture, highly important in the tourism sector and at a business with a global vision.
Southwest Airlines has developed a passion for productivity and punctuality. On the other
hand, the appliance firm leading on costs promotes an austere culture of control. In
addition, these companies feature a clear leadership oriented toward motivating in the
right direction for the strategic choices made. It is hard to imagine CBCC without a creative
leadership that challenges the industrys and the companys paradigms. Likewise, it is
hard to promote an austerity culture without a leader living it, as do Southwest Airlines and
the appliance firm mentioned above.

Finally, two significant corollaries. First, the strategy is defined for the long term. It does
not change year after year since, as we have seen, competitive advantage is built through
actions that can take long to consolidate. However, since strategy corresponds to
assumptions or realities adopted in its formulation, significant changes in those
assumptions can require changes in strategic positioning (e.g., development of new
technologies or trends leading to structural change of the industrial sector where the firm
competes.) In our experience, this does not take place often. Rather, generally a response
through adjustments to well-defined strategic actions is enough. Second, competitive
advantage erodes over time. It is neither permanent nor ultimate. Even if the assumptions
underlying it have not changed, competitors tend to imitate. Even though advantage is
reached over the long term, firms must be attentive to the analysis of their environment,
industry, and competitors, to determine the need to take new strategic action making their
strategic positioning sustainable for longer.