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Home arrow Management arrow Strategic Management in the 21st Century. Corporate Strategy

COMPETITIVE EVOLUTION AND THE INTERACTION OF STRATEGIC MODES

Over the course of history, businesses in most industry sectors have tended to evolve through the three strategic market orientations in a predictable pattern. Agricultural endeavors have typically been the first to venture aggressively into a VO strategy, employing animals, slaves, and eventually machines in order to exploit economies of scale and drive down costs while increasing output. The production and marketing of agricultural products using a volume orientation goes back thousands of years and represents one of the most noteworthy advances in the evolution of economies. At later points in the development of most economies, the manufacturing and service sectors typically follow this path toward a volume orientation.

Prior to the late 19th century, most businesses in the United States (with the exception of those in agriculture) utilized a margin orientation, largely because technologies did not exist to exploit scale in either production or marketing. Although craftsmen had acquired sufficient skills to produce highly sophisticated and precise objects (such as elaborate clocks, optics, and firearms), machine tools had not yet been developed that could be used to efficiently produce large quantities of identical parts. As Hounshell notes, even the most proficient of early large-scale producers such as the Singer Manufacturing Company (of Singer sewing machine fame) had tremendous difficulty in surmounting this critical aspect of mass production.5 As a result, true mass production was delayed. On the marketing side, inefficiencies in transportation (and to some extent communication) precluded mass-marketing efforts until railroad networks had blanketed the majority of the United States, allowing rapid and reliable distribution of merchandise. Furthermore, large, middle-class societies with significant purchasing power did not typically exist; thus a volume orientation in production would have been met with inadequate demand.

With advances in production, transportation, and communication technologies in the late 19th century, the volume orientation in the United States evolved rapidly as a coherent and compelling strategy within many goods-based manufacturing and retail industries. Thanks to pioneers such as Samuel Colt, Isaac Singer, Adolphus Busch, Henry Ford, and Henry Leland in production, and Aaron Montgomery Ward and Richard Sears in retailing, the volume orientation rapidly demonstrated its competitive advantage in many industrial sectors. Somewhat later, the volume orientation was effectively adapted to the services sector by innovators such as the McDonald brothers. Because of its inherent efficiency, the volume orientation also quickly and profoundly altered the overall U.S. economy. Simply stated, the VO approach solved the problem that had previously dominated economic history: an inadequate supply of affordable goods and services relative to ever-expanding demand. As a secondary effect, the volume orientation has been largely responsible for the creation of an economic middle class in those countries in which it has been vigorously applied.

The Breakdown in Profitability

As the competitive benefits of a volume orientation became increasingly apparent in the United States in the early 20th century, growth-oriented firms in a wide range of industries quickly adapted it to meet their unique circumstances. Due to the competitive advantage that was often gained by rivals embracing the volume orientation, firms in many industries hastily adopted the approach out of concern that they would be at a competitive disadvantage and would be unable to retain a viable share of the market. Yet, as competitors in various industries began to compete aggressively for sales volume, the weakness of the VO approach was quickly revealed.

As noted earlier, the success of a volume orientation relies upon high levels of operational leverage. As more and more firms within an industry adopt a VO strategy, this leverage forces them to compete for sales volume at almost any cost. Price competition begins to develop as efforts to utilize high levels of capacity generate pressure to liquidate the large volume of output.6 As a result, prices and thus profit margins quickly erode, leading to suppressed industry returns.7 Firms embroiled in this battle typically seek relief by attempting to secure market share through mergers with, or the acquisition of, rivals, but this remedy has limitations in that it neither expands demand nor reduces excess capacity. Eventually, strategic solutions emerge that focus on regaining pricing power and stimulating organic market growth, and lead to the adoption of an MVD approach to competition.

VO competitors that are experiencing cutthroat competition and suppressed profitability eventually realize that when feasible, pricing power is most effectively derived from the judicious use of product differentiation.8 Adoption of an MVD strategy represents a natural progression from a VO strategy, since production methods remain largely unchanged. However, marketing methods underlying an MVD strategy represent a shift away from mass marketing toward market segmentation and product differentiation.

 
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