Competitive scope can have a powerful effect on competitive advantage, because it shapes the configuration and economics of the value chain. There are four dimensions of scope that affect the value chain:
1. Segment Scope is the product varieties produced and buyer types served. For example, in the personal computer industry there are two primary types of users – home and business. Home users have a lower need for performance but a much greater need for training, service and user-friendliness. If the big dog on the block serves both, you might be able to gain an advantage by focusing on a single user type. By doing so, you might be able to satisfy the needs of the target customer better than the generalist.
2. Degree of Integration is the extent to which activities are performed in-house instead of by independent firms. For example, you may deliver your products using your own trucks and employees, or you may use a contract carrier such as UPS. Your choice may have a great impact to the cost and quality of your product or service. A firm might use one or the other as a strategic means to differentiate itself from a competitor.
3. Geographic Scope is the range of communities, regions, or countries in which a firm competes with a coordinated strategy. Geographic interrelationships can enhance competitive advantage if sharing or coordinating value activities lowers costs or enhances differentiation. For example, a bookstore might differentiate itself by researching and stocking foreign titles, winning sales locally as well as across a larger geographic area.
4. Industry Scope is the range of related industries in which the firm competes with a coordinated strategy. Similar in concept to geographic interrelationships, synergies can be derived from integrating value activities across industries. For example, a landscape company may operate a retail nursery and an installation company, which increases total volume and increases inventory turnover and utilization of the storage and greenhouse assets. Another example might be Starbucks selling coffee but also selling music CDs, or Disney extending from animated movies to theme parks and retail stores.
Having a broad scope can allow a firm to exploit the benefits of performing more activities internally. It may also allow the firm to exploit interrelationships between the value chains that serve different segments, geographic areas or related industries. But sharing and integration have costs that may outweigh the benefits.
Having a narrow scope can allow the tailoring of the chain to serve a particular target segment, geographic area or industry, to achieve lower cost or to serve the target in a unique way. A narrow scope in integration may also improve the competitive advantage by enabling a firm to purchase or perform better or cheaper.
It is important to note that a firm can pursue the benefits of a broader scope independently, or enter into coalitions with independent firms to achieve some or all of the same benefits. Examples of coalitions include technology licenses, supply agreements, marketing agreements and joint ventures.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2014.
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