Scarcity >>> Choices >>> Opportunities

Scarcity >>> Choices >>> Opportunities

For those who are not familiar with the study of economics, the statement above might be cryptic. However, for those who understand the basic principles of economics, the statement is the basic reasoning of differentiation in competitive strategy.

If you take a long-term view, and I mean really, really long view, everything in the universe is finite, which means everything is limited. For the purpose of explaining the relationship between economics and competitive strategy / strategy management, I will stay within the boundary of capital (fund and land resources) and human resources.

The concept of scarcity applies to strategy management because each company only has limited resources. Out of those resources, a company needs to maximize profit (note that I chose the word “profit” instead of “revenue”) since basically that is how a company is measured whether or not it uses its fund efficiently. To maximize profit, a company needs to be efficient. To be efficient, a company has to choose among a myriad of business strategies on how to create profit, more specifically, economic profit. For example, Southwest could have chosen from many strategies on how to provide air transportation services. However, because of the intense competition of the airline industry, Southwest had to choose one strategy and aligned all of its operating activities to ensure its activities work toward one goal, which is supporting the business strategy. In this case, Southwest had determined to be a low cost provider of air travel. To be a low cost provider, Southwest has to minimize cost, which was achieved by only having one kind of airplane, thereby Southwest needed only to stock spare parts for only one kind of airplane. The company’s mechanics also only need training for one type of airplane, which lowers the training costs. To further minimize cost, Southwest eliminated in-flight food, aside from soft drinks and snacks.

So far I have only discussed the relationship between scarcity and choices. So how does opportunity fit into the equation? From the example above, we can see that Southwest has chosen to offer bare bones services. This fact represents opportunities because by focusing to do one thing, Southwest cannot do other things. An example would be if you had $5 and you can choose among pizza, burger, or spaghetti, where each item costs $5. If you choose to use $5 to buy pizza, then you cannot have a burger or spaghetti. Now substitute pizza with low cost airline, burger with high-class airline, and spaghetti with cargo airline. By choosing one, you forgo other choices, and these other choices can be taken by other companies as a way to differentiate themselves.

Of course, Southwest can go into high class airline provider, however, doing that force them to add different kind of airplanes, thus increasing the total cost of providing services. This misalignment of operating activities eventually will make Southwest’s competitive strategy unfocused, which might enable other companies to take over as the leader of low cost provider, hence destroying the competitive advantage that Southwest had in the first place and lowering the profits.

In conclusion, nowadays, for a company to be profitable, it needs to specifically focus on which segment of customers is the company trying to serve. By focusing on a distinct type of customers, the market becomes fragmented, which opens up opportunities for other companies by trying to satisfy the needs of customers who are in different market segment. Hence, the opportunity.