The three generic strategies are alternative, viable approaches to dealing with the competitive forces. The converse of the previous discussion is that the firm failing to develop its strategy in at least one of the three directions—a firm that is “stuck in the middle”—is in an extremely poor strategic situation. This firm lacks the market share, capital investment, and resolve to play the low-cost game, the industrywide differentiation necessary to obviate the need for a low- cost position, or the focus to create differentiation or a low-cost po-sition in a more limited sphere.
The firm stuck in the middle is almost guaranteed low profita-bility. It either loses the high-volume customers who demand low prices or must bid away its profits to get this business away from low-cost firms. Yet it also loses high-margin businesses—the cream—to the firms who are focused on high-margin targets or have achieved differentiation overall. The firm stuck in the middle also probably suffers from a blurred corporate culture and a conflicting set of organizational arrangements and motivation system.
Clark Equipment may well be stuck in the middle in the lift truck industry in which it has the leading overall U.S. and worldwide market share. Two Japanese producers, Toyota and Komatsu, have adopted strategies of serving only the high-volume segments, mini-mized production costs, and rock-bottom prices, also taking advan-tage of lower Japanese steel prices, which more than offset transpor-tation costs. Clark’s greater worldwide share (18 percent; 33 percent in the United States) does not give it clear cost leadership given its very wide product line and lack of low-cost orientation. Yet with its wide line and lack of full emphasis to technology Clark has been un-able to achieve the technological reputation and product differenti-ation of Hyster, which has focused on larger lift trucks and spent aggressively on R&D. As a result, Clark’s returns appear to be sig-nificantly lower than Hyster’s, and Clark has been losing ground.2
The firm stuck in the middle must make a fundamental strategic decision. Either it must take the steps necessary to achieve cost lead-ership or at least cost parity, which usually involve aggressive invest-ments to modernize and perhaps the necessity to buy market share, or it must orient itself to a particular target (focus) or achieve some uniqueness (differentiation). The latter two options may well involve shrinking in market share and even in absolute sales. The choice among these options is necessarily based on the firm‘s capabilities and limitations. Successfully executing each generic strategy involves different resources, strengths, organizational arrangements, and managerial style, as has been discussed. Rarely is a firm suited for all three.
Once stuck in the middle, it usually takes time and sustained ef-fort to extricate the firm from this unenviable position. Yet there seems to be a tendency for firms in difficulty to flip back and forth over time among the generic strategies. Given the potential inconsist-encies involved in pursuing these three strategies, such an approach is almost always doomed to failure.
These concepts suggest a number of possible relationships be-tween market share and profitability. In some industries, the prob-lern of getting caught in the middle may mean that the smaller (fo-cused or differentiated) firms and the largest (cost leadership) firms are the most profitable, and the medium-sized firms are the least profitable. This implies a U-shaped relationship between profitabil-ity and market share, as shown in Figure 2-2. The relationship in Figure 2-2 appears to hold in the U.S. fractional horsepower electric motor business. There GE and Emerson have large market shares and strong cost positions, GE also having a strong technological rep-utation. Both are believed to earn high returns in motors. Baldor and Gould (Century) have adopted focused strategies, Baldor oriented toward the distributor channel and Gould toward particular cus-tomer segments. The profitability of both is also believed to be good. Franklin is in an intermediate position, with neither low cost nor fo-cus. Its performance in motors is believed to follow accordingly. Such a U-shaped relationship probably also roughly holds in the au-tomobile industry when viewed on a global basis, with firms like GM (low cost) and Mercedes (differentiate) the profit leaders. Chrysler, British Leyland, and Fiat lack cost position, differentiation, or fo-cus—they are stuck in the middle.
However, the U-shaped relationship in Figure 2-2 does not hold in every industry. In some industries, there are no opportunities for focus or differentiation—it‘s solely a cost game—and this is true in a number of bulk commodities. In other industries, cost is relatively unimportant because of buyer and product characteristics. In these kinds of industries there is often an inverse relationship between market share and profitability. In still other industries, competition is so intense that the only way to achieve an above-average return is
through focus or differentiation—which seems to be true in the U.S. steel industry. Finally, low overall cost position may not be incom-patible with differentiation or focus, or low cost may be achievable without high share. For an example of the complex combinations that can result, Hyster is number two in lift trucks but is more profit-able than several of the smaller producers in the industry (Allis- Chalmers, Eaton) who do not have the share to achieve either low costs or enough product differentiation to offset their cost position.
There is no single relationship between profitability and market share, unless one conveniently defines the market so that focused or differentiated firms are assigned high market shares in some narrow-ly defined industries and the industry definitions of cost leadership firms are allowed to stay broad (they must because cost leaders often do not have the largest share in every submarket). Even shifting in-dustry definition cannot explain the high returns of firms who have achieved differentiation industrywide and hold market shares below that of the industry leader.
Most importantly, however, shifting the way the industry is de-fined from firm to firm begs the question of deciding which of the three generic strategies is appropriate for the firm. This choice rests on picking the strategy best suited to the firm‘s strengths and one least replicable by competitors. The principles of structural analysis should illuminate the choice, as well as allow the analyst to explain or predict the relationship between share and profitability in any particular industry. I will discuss this issue further in Chapter 7, where structural analysis is extended to consider the differing posi-tions of firms within a particular industry.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.