This chapter is concerned with how successful firms choose markets to make the most of their distinctive capabilities. It answers the question, What is the core business?', which has been a central strategic issue for many firms in the last decade.
I begin with the important distinctions between markets, industries, and strategic groups. Markets are bounded by the ability of consumers to substitute one product for another. Industries are determined by the way in which production is organized. Strategic groups are defined by the way in which firms compete against each other. So there may be--and often is--a global industry within which production is sourced on an international basis but many different local markets and several distinct strategic groups. The key issue for the firm is its choice of markets--in both product and geographic dimensions--and its membership of industry and strategic group follow from that.
A distinctive capability applied in a relevant market becomes a competitive advantage. For each distinctive capability there is a market, or group of markets, in which the firm which holds it may enjoy a competitive advantage. For some distinctive capabilities--as with those which are based on reputation or on some kinds of architecture--it is the nature of demand for the product which identifies the appropriate market. For other distinctive capabilities--as with most innovations--it is the technical characteristics of the product which define the markets in which they yield competitive advantage. Similar issues influence the choice of product position with a given market.
A distinctive capability, or a strategic asset, becomes a competitive advantage only when it is applied in a market or markets. Competitive advantage is intrinsically relative. A firm can enjoy a competitive advantage only by reference to other suppliers to the same market, other firms in the same industry, or other competitors in the same strategic group. Matching