Once in a great while companies can effectively reshape an entire industry. American Airlines has done it, for example, in air transportation. After deregulation, air travel was a pretty unattractive business. It was easy to get into -- all you needed was a couple of planes, which could be heavily financed. Buyers had a lot of bargaining power because they viewed airline seats as commodities. And the rivalry was cutthroat. Airlines had high fixed costs and would do anything to fill their empty seats. So there were massive price wars, and the industry as a whole lost money.
American effectively changed the industry's structure. The company introduced a computer reservations system that cost more than $1 billion. Pretty soon anyone who wanted to be a serious competitor needed such a system -- and suddenly an upstart airline with a few planes could not play the game the same way anymore. American also aggressively pursued the hub-and-spoke concept, meaning that it had dozens of flights going in and out of one city. Now would-be competitors needed 10 or 20 flights going to a city, not just 2 or 3. And American set up the first frequent-flyer program. Even though it was quickly imitated, the program created brand loyalty, giving customers a big incentive to stick with the airline they flew on most. Taken together, those moves fundamentally changed the airline business. Except during the Gulf crisis and its aftermath, the industry's profitability has soared, and American has done better than most.
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Positioning Strategically
Most small companies, of course, cannot change an industry's structure. What they can do, however, is establish a good position in the industry -- a position based on sustainable competitive advantage.
What constitutes a competitive advantage? Well, advantage comes in only two basic varieties. You can have consistently lower costs than your rivals. As long as your product maintains an acceptable quality level, that will lead to higher margins. Alternatively, you can differentiate your product or service from your competitors', in effect making yourself unique at delivering something your customers think is important. That allows you to command a premium price. And provided you keep your costs under control, the premium price will translate into a superior return.
There is one other crucial variable in strategic positioning: what I call competitive scope. Some companies seek advantage in what might be called a broad scope: they serve more or less all types of customers in an industry, offering a wide product line and operating in many geographic areas. Companies with a narrow scope, alternatively, focus on a narrow range of customers or product varieties, or in one geographic region, and dedicate all their efforts to that one small niche or market segment.
These crucial choices in strategy lead to some different combinations, depending on the breadth of the target and the type of advantage sought. In cars, for example, Toyota is the broad, low-cost competitor, BMW and Mercedes-Benz the differentiators in the premium segment, and Hyundai the low-cost player in the price-sensitive segment.
There is room for several successful strategies, as long as each company makes a different choice from its rivals'. The worst error, however, is not to choose, to try a little bit of everything and therefore not have any advantage at all. That is what I call "stuck in the middle." It does not work, because all good strategies involve trade-offs. You cannot be both low cost and differentiated at the same time, because being unique at quality or service usually involves higher costs. A sustainable competitive advantage comes from choosing an appropriate strategy and appropriate scope. For small companies, the operable choice is normally what is known as focus: narrowing the strategic target and dedicating every action to serving that target. Take the hotel business as an example. Nationally, it is dominated by big, full-service chains -- Marriott, Hilton, and so on. Each of them seems to offer everything a traveler could want: Comfortable accommodations. Bars, restaurants, room service. Meeting rooms, suites, health clubs, game rooms for the kids. You might think an upstart company would have no chance of finding, let alone defending, a profitable niche in the industry.
How, then, to explain the success of La Quinta Motor Inns, a company that grew from $61.8 million in 1980 revenues to $226.5 million in 1990?
La Quinta's success lies in strategy: in narrowing its target to the regular, middle-level business customer, the kind of traveler who visits a city over and over, and who does not have an unlimited expense account at his or her disposal.
What do those particular customers want? Mostly, a nice, comfortable room to sleep in. They do not want suites -- they cannot afford them. They do not want a lounge -- if they are going to drink, they know the city and have a car; they will go out. They do not even need a restaurant. La Quintas are always built next door to a Denny's or a Howard Johnson's, something open 24 hours a day, so guests can go get breakfast anytime.
The list goes on. Meeting rooms? No need. Room service? Too expensive. Recreation facilities? No time. Transportation? Already have it.
