Strategy models compared: Porter, Treacy/Wiersema, Hax

Michael E. Porter describes two basic types of competitive advantage: cost leadership and differentiation. Combined with the question of whether a company serves the overall market or a niche, this results in four positions: cost leadership, differentiation, cost focus and differentiation focus.

The focus is on the competitor. The goal is a sustainable lead through a suitable position within the industry value chain. The activities of the internal value chain contribute to the relative cost position and can create a basis for differentiation. The guiding question is: how can I secure a sustainable lead over the competition?

Michael Treacy and Fred Wiersema start from customer benefit. According to their observation, customer expectations can be grouped into three basic clusters: the best or most innovative product, the tailored customer solution and the best value for money over the product life cycle. This results in three value strategies: product leadership, customer intimacy and operational excellence.

The goal is to be “best in class” in the chosen strategy. Each value strategy puts different core processes at the centre and provides essential decision premises for day-to-day business. If the strategy is not unambiguous, this leads to considerable friction losses because the organisation constantly has to deal with contradictions.

Arnoldo C. Hax goes one step further. In his view, product and competitive orientation lead to commoditisation. In the Delta Model, customer bonding therefore moves to the centre, viewed beyond the company as an “extended enterprise” with customers, suppliers and complementors.

The way forward is to move away from product orientation towards the total customer solution. This makes it possible to avoid commoditisation and increase customer bonding, where possible through switching and entry barriers (system lock-in). To do this, a company must be able to offer equally competitive solutions for different and contradictory customer needs. The guiding question is: how can I bind the customer through an attractive and individual package of services?

The three concepts are not mutually exclusive; they set different priorities. Porter looks at the competitor, Treacy/Wiersema at customer benefit, Hax at customers and the extended enterprise. Goal, guiding question and solution paradigm shift accordingly: from a sustainable lead through “best in class” in a value strategy to customer bonding through individual packages of services.

For strategy development, the comparison is useful because it makes the assumptions behind a positioning visible. Anyone who competes on price and product, for example, even though customers expect a complete solution, loses customer bonding without noticing.

From the three concepts, transformis derives five basic strategies, ordered by their potential for customer bonding. Cost leadership aims to be the cheapest supplier on the market in an undifferentiated product category. Product leadership develops products that exceed existing performance limits and justify a premium price. The price-value strategy (operational excellence) offers the best value for money over the entire period of use. Customer intimacy offers individual customers the best, individually tailored complete solution. Finally, system lock-in creates high switching costs through exclusive distribution channels, dominant marketplaces or protected standards.

The potential for customer bonding is lowest with cost leadership and highest with system lock-in. Different customer segments may require different basic strategies.

Each basic strategy follows its own economic logic. The cost leader achieves margins on the basis of the lowest costs and promises the lowest price; its core process is production and logistics. The product leader achieves high product margins through uniqueness and promises the best product, first on the market; its core process is innovation and marketing. The price-value strategy achieves margins through an attractive service mix based on internal standardisation and promises the best total cost over the life cycle. Customer intimacy relies on profitable growth through customer integration and promises the best individual complete solution; its core process is customer management.

This results in different requirements for processes: highly efficient, standardised and constantly optimised processes for cost leadership and the price-value strategy, rapid selection of ideas and well-timed market launches for product leadership, and solution development from identifying needs to managing results for customer intimacy.

The basic strategy also shapes which people, structures and rules of the game a company needs. Cost leadership and the price-value strategy require reliable employees, clear standards, centralised functional areas and a culture in which waste is frowned upon and efficiency is rewarded. Product leadership thrives on creative, talented employees, little bureaucracy and a management that makes decisions under great risk; mistakes made while experimenting are not punished. Customer intimacy needs employees with an exceptional feel for customer needs, entrepreneurially minded customer teams with delegated decision-making authority and a culture that invests in lasting, trusting customer relationships.

This is precisely where it becomes clear why a strategy must be unambiguous: the requirements of the basic strategies partly contradict each other. A company that wants to be everything at once creates friction in organisation and culture.

Each basic strategy has its own risks. Cost leadership leads to standardised offerings and intense rivalry, with constant price wars; only one company in an industry can be the cost leader, and it only pays off with genuine commodities. Product leaders are imitated as soon as a differentiated product is on the market and must repeatedly make the leap to new market fields and technologies. With the price-value strategy, variety increases total costs; overemphasising individual differentiating features undermines the standardisability of processes. With customer intimacy, the customer acquires the supplier’s knowledge, so the supplier must constantly track down new, untapped potential at the customer. It requires staying power and a genuine paradigm shift towards solutions.