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The points above should not be taken to imply that in any given industry there is one ideal strategic position toward which all firms should strive. More than anything else, a firm’s ability to outperform its competitors arises from its ability to create and deliver a distinctive bundle of economic value. In markets in which consumers differ in their maximum willingness to pay or differ in how expensive it is for firms to access and serve them, a variety of powerful strategic positions can flourish at the same time. The U.S. mass-merchandising industry exhibits this point: Wal-Mart has thrived as the cost leader, while Target has successfully pursued a strategy of benefit leadership built on trendy merchandise and a bright, user-friendly shopping environment. In this and other industries, there is almost never one ideal strategic position.
“Stuck in the Middle”
Michael Porter coined the phrase stuck in the middle to describe a firm that pursues elements of cost leadership and benefit leadership at the same time and in the process achieves neither.18 According to Porter, a firm that does not clearly choose between an emphasis on building a cost advantage or building a benefit advantage will typically be much less profitable than competitors that have clearly pursued a generic strategy of cost leadership or benefit leadership.
Firms end up stuck in the middle because they fail to make choices about how to compete, and as a result, their strategies lack clarity and coherence. Clear choices
EXAMPLE 9.6 STRATEGIC POSITIONING IN THE AIRLINE INDUSTRY: FOUR
DECADES OF CHANGE
As we have discussed, the profitability of a firm’s strategic position depends on underlying economic conditions. When these conditions change, a strategic position that, at one time, led to competitive advantage may no longer do so. The strategy followed by the “Big Three” U.S. airlines—American, United, and Delta— is an excellent illustration of this point.
For all the talk of upheaval in the airline industry, one remarkable fact is that all but one of the largest domestic carriers—American, Continental, United, USAir, Delta and Northwest— have been flying since the 1960s, either in their present incarnations or under an older name. (The one “new” carrier is Southwest Airlines.) Prior to deregulation of the airline industry in 1978, each of these trunk carriers was given a protected route corridor by the U.S. Civil Aeronautics Board (CAB). For example, United had protected transcontinental routes across the northern third of the nation, while American had protected routes across the southern east–west corridor. In exchange for obtaining
monopoly power over their routes, the airlines ceded pricing authority to the CAB.
The CAB kept prices very high, and while the airlines did engage in some forms of nonprice competition on the routes served by more than one airline (most notably, competition over scheduling frequency and amenities), the airlines prospered under CAB regulation. The key threat to profitability came from powerful unions, which extracted handsome salary and work rule concessions in exchange for labor peace. This was not unusual—many protected monopolies “share the spoils” with strong unions. Even after deregulation, these costly labor agreements continued to bind, embedding costs into an airline’s cost structure that were extremely difficult to reduce.
In a deregulated environment, an existing airline could no longer depend on protected monopoly status to assure profits. Carriers responded by adopting a strategy built around large hub-and-spoke systems. Delta had actually begun to build such a system with a hub
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in Atlanta prior to deregulation, while American and United quickly built systems based on multiple hub airports (Chicago and Dallas for American and Chicago and Denver for United).
Organizing a schedule around a hub-and- spoke system had clear advantages for a large airline. As described in Example 2.1, the hub- and-spoke model allowed a carrier to fill planes flying from feeder airports into a hub and refill them by flying from the hubs to destination cities. Full planes meant lower operating costs per revenue passenger mile, and protected incumbents from direct competition from new entrants (e.g., Peoples Express) with a point- to-point route structure. This advantage was especially strong in the battle for lucrative transcontinental traffic because point-to-point entrants typically lacked the jumbo jets required for nonstop transcontinental flights and did not have the hubs to facilitate one-stop flights.
Of course, hub-and-spoke operations involve significant trade-offs. A hub-and-spoke carrier requires a diverse fleet so that it can fly full airplanes over both short and long hauls between big and small cities. A diverse fleet means higher maintenance costs and less flexibility in utilizing airport gates. Flying through hubs also can result in lost baggage, delays that can cascade throughout the system, and missed connections. These disadvantages came on top of the already high labor costs that were a legacy of CAB regulation. Still, a large airline could shoulder these disadvantages as long as it kept its planes full. This was the strategic position of American, United, and Delta (and to a lesser extent, Continental, Northwest, and USAir as well). It made sense for a long time.
Southwest was the first airline to have great success using the point-to-point model. Owing to its legacy as an unregulated airline, Southwest enjoyed lower labor costs than the major carriers. With a fleet consisting entirely of Boeing 737s, it also enjoyed lower maintenance costs. It achieved consistent on-time performance by avoiding congested hub airports. And it carefully selected the markets it entered, restricting itself to city pairs that were
underserved by the major carriers (thus avoiding destructive head-to-head competition with them), while at the same time having sufficient demand to fill its planes.
Over time, the advantages offered by the hub-and-spoke model over the point-to-point model have almost fully eroded, while the disadvantages continue to be significant. Simple population growth makes more city pairs large enough to support point-to-point flights. This takes money directly out of the big carriers’ pockets and also makes it harder for them to keep flights full with traffic from the remaining spokes. “Fringe” airframe manufacturers Bombardier and Embraer have introduced small planes capable of nonstop transcontinental flight, removing yet another source of the major carriers’ positioning advantage.
Given their inherent cost disadvantages, the hub-and-spoke carriers have learned that business as usual is not acceptable, and they have taken similar steps to respond to the changes that have undermined the economic power of their traditional competitive position. American, United, and Delta increasingly rely on international service, effectively exploiting the same benefits of hub-and-spoke operations that used to provide scale-based advantages in domestic service. In addition, they are working with their unions to eliminate cost and operational disadvantages. Even with all of these changes, the future of the major hub-and-spoke carriers in domestic air travel appears bleak. Every year, more and more passengers fly point to point via low-cost airlines built on the Southwest model. Unless one of the “points” is a hub, the hub-and- spoke carriers have no advantage serving that market.
Unable to secure competitive advantage, the major carriers are hoping to improve industry economics. Mergers and capacity reductions are contributing to steady fare increases. Increases in fuel costs have, for the moment, offset any resulting economic gains. But a smaller, less competitive marketplace may be just the ticket for this beleaguered industry.
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about how to compete are critical because economically powerful strategic positions usually require trade-offs.19 In the department store business, for example, shoppers at Neiman-Marcus expect fashionable, superior-quality merchandise, along with an upscale shopping experience. To satisfy this expectation, Neiman-Marcus must incur levels of merchandising, labor, and location rental costs that other department store retailers are not prepared to incur. At the other end of the spectrum, furniture retailer Ikea has made the conscious choice to sacrifice some elements of customer service (e.g., customers pick up, deliver, and assemble Ikea furniture themselves) in order to keep its costs low.
Despite Porter’s admonition against being stuck in the middle, research suggests that firms can outperform their competitors even when pursuing both benefit leadership and cost leadership at the same time. For example, Danny Miller and Peter Friesen found that in consumer durables industries, firms that appeared to have achieved benefit advantages in their industries also tended to operate newer plants, had significantly better-than-average capacity utilization, and had direct costs per unit that were significantly lower than the industry average.20 Firms that appeared to have achieved cost advantages also scored high on measures related to benefit superiority, such as product quality, and advertising and promotion expenses.
From a theoretical perspective, several factors might help firms to avoid the supposed trade-off between benefit and cost positions:
•A firm that offers high-quality products increases its market share, which then reduces average cost because of economies of scale or the experience curve. As a result, a firm might achieve both a high-quality and a low-cost position in the industry. Charles River Breeding Labs typified this situation in the 1970s with its germ-free technology for raising laboratory animals. The first to adopt germ-free barrier breeding technologies, Charles River Breeders became the quality leader, moved down the experience curve, and established a superior cost position relative to its nearest competitors.
•The rate at which accumulated experience reduces costs is often greater for higher-quality products than for lower-quality products. The reason is that production workers must exercise more care to produce a higher-quality product, which often leads to the discovery of bugs and defects that might be overlooked in a lower-quality product.
•Inefficiencies muddy the relationship between cost position and benefit position. The argument that high quality is correlated with high costs ignores the possibility that firms may be producing inefficiently—that is, that their C is higher than it needs to be given their B. If so, then at any point in time, in most industries one might observe firms that create less B and have higher C than their more efficient counterparts.
Despite these reservations, Porter’s admonition to avoid being stuck in the middle is extremely important. It reminds us that trade-offs are fundamental in business decisions and that firms can rarely be excellent at everything. A belief that excellence can be attained on all dimensions can often lead to unfocused decision making and the pursuit of inconsistent actions that either have a limited impact in terms of lowering C or increasing B or cancel each other out entirely. It can also lead to uninspired imitation of rival firms’ “best practices.” Such a posture, at best, leads to competitive parity and, at worst, intensifies competition among a group of firms that end up looking alike. Kmart is a telling example of these points. Over the past two decades, Kmart has careened back