Here is an excerpt from an article written by Roger L. Martin for Harvard Business Review and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.

Photo Credit: Andrew Nguyen

* * *

Back in the early 1960s, the great Boston Consulting Group founder and strategy theorist Bruce Henderson asserted that there was only one way to successfully compete: gain a relative market share advantage over all competitors so as to have lower costs than all of them. The payoff is that it puts the firm in a position to drive those relative costs even lower as competition unfolds due to the learning curve advantage.

One then became two in 1980, when Michael Porter pointed out that there is another way to compete: differentiation. His view of the generic strategies for advantage gained considerable traction both in classrooms and boardrooms.

To someone like me, a micro-economist by training and at heart, the idea that all competition can be classified in terms of these two generic strategies corresponds well to the fundamental demand dynamics that companies face.

Theoretical Appeal

In the world of business generally, there are only two demand conditions a firm can face with respect to an offering: a flat demand curve or a downward sloping one. (Yes, one might argue that for some luxury goods in some situations, demand can rise as price rises, but it is the exception that proves the rule.)

In the former case, customers see the value to them of the firm’s offering as indistinguishable from those of other competitors and hence the firm is simply a price taker, at whatever level the market sets. In such a market there was, is, and always will be only one generic way to gain competitive advantage and that is to have the low-cost position among those making offers to customers in that market. Of course, there are myriad ways to put oneself at the bottom of the delivered cash cost curve in such a market, but they all deliver the same competitive advantage: low cost.

The other situation is one in which the firm faces a downward sloping demand curve — by which if the firm charges a higher price, the demand for its offering is lower and if it charges a lower price, the demand is higher.

Why does it have that characteristic? It is because customers think to varying degrees that there is something about the firm’s offering that is distinct from other offerings; to them, it is not “the same” as those of competitors. In making a purchase decision, therefore, they make a trade-off between the perceived value of the distinctiveness and the price. Those who value the distinctiveness more are prepared to pay a higher price.

This situation can give rise to a successful differentiation strategy if the firm is able keep more or less the same costs as less differentiated competitors and can convince customers that it is meaningfully different from the competition. As with cost leadership, there are myriad ways to achieve differentiation advantage. However, in such a market, there was, is, and will always be one fundamental kind of competitive advantage.

So the idea that there are just two ways of competing is theoretically compelling based on the underlying microeconomics. But has anything changed since 1980 to fundamentally alter the implication of those economics?

* * *

Martin then examines the main features that distinguish competition today from previous decades. To read the complete article, please click here.

Roger L. Martin (www.rogerlmartin.com) is the Premier’s Chair in Productivity and Competitiveness and Academic Director of the Martin Prosperity Institute at the Rotman School of Management at the University of Toronto in Canada. He is the co-author of Playing to Win: How Strategy Really Works and of the Playing to Win Strategy Toolkit. For more information, including events with Roger, click here.