Competitive Advantage  Author: Michael Porter  Instructor: Wesley Shu      All Right Reserved by Wesley Shu   1
How a firm can actually create  and sustain a competitive  advantage in its industry         All Right Reserved by Wesley ...
Two Basic Types• Cost leadership• Differentiation             All Right Reserved by Wesley Shu   3
Value Chain• Identify which activities contributing to  cost leadership and differentiation• Analyze the source of competi...
Value ChainAll Right Reserved by Wesley Shu   5
Primary Activities• Inbound Logistics  Receiving, storing, and disseminating inputs.  E.g., warehousing, inventory control...
Primary Activities• Outbound Logistics  Collecting, storing and distributing the  product to buyers• Marketing and Sales  ...
Primary Activity Focus by IndustryIndustry      Inbound      Operations      Outbound          Marketing   Service        ...
Support Activities• Procurement  Function of purchasing inputs used in the  value chain• Technology Development           ...
Support Activities• Human Resource Management• Firm Infrastructure  planning, finance, accounting, legal,  etc.           ...
Competitive Scope• Four scopes may affect value chain• Ex. The value chain serves  minicomputer requires extensive  sales ...
Competitive Scope• Segment Scope  Differences required to serve different  product or buyer segment• Vertical Scope  Divis...
Competitive Scope• Geographic Scope  Different geographic areas• Industry Scope  Interrelationships among business units  ...
“Generic” Competitive Advantage• Cost Leadership• Differentiation• Focus            All Right Reserved by Wesley Shu   14
Competitive Strategies                             Competitive Advantage                           Lower Cost Differentiat...
Cost Leadership StrategySteps to achieve cost leadership• Make cost assignment• Identify cost drivers• Understand cost dyn...
Operating Cost Assignment      All Right Reserved by Wesley Shu   17
Asset Assignment  All Right Reserved by Wesley Shu   18
Why cost assignment• Understand the firm’s cost structure• Find cost drivers of each cost segment• Match cost structure to...
Cost Leadership – Cost DriversFactors affect costs.              All Right Reserved by Wesley Shu   20
Cost Leadership – Cost Drivers• Economies or diseconomies of scale• Learning and spillover• Pattern of capacity utilizatio...
Cost Leadership – Cost Drivers• Interrelationships  With other business units within a firm• Integration  Vertical integra...
Cost Leadership – Cost Drivers• Discretionary policies  Policies that reflect a firm’s strategy• Location• Institutional f...
Identify Cost Drivers    All Right Reserved by Wesley Shu   24
Cost Dynamics• What cause the change of cost drivers             All Right Reserved by Wesley Shu   25
Cost Dynamics•   Industry real growth•   Differential scale sensitivity•   Different learning rates•   Differential techno...
How to Achieve Cost Advantage         All Right Reserved by Wesley Shu   27
Analyze Cost Advantage      All Right Reserved by Wesley Shu   28
Control Cost Drivers• E.g., control scale – gain the  appropriate firm size              All Right Reserved by Wesley Shu ...
Reconfigure the Value Chain• Reconfiguration of the value chain  presents the opportunity to fundamentally  restructure a ...
Steps in Strategic Cost Analysis1. Identify the appropriate value chain and   assign costs and assets to it.2. Diagnose th...
Cost FocusA firm dedicates its efforts to a well-chosen segment of an industry can oftenlower its costs significantly.    ...
Differentiation• Emphasize on a unique source of  differentiation in the Value Chain, rather  than on products or markets ...
All Right Reserved by Wesley Shu   34
Identify Sources of Differentiation           All Right Reserved by Wesley Shu   35
Drivers of Uniqueness• Policy Choices• Linkages  – Linkages within the value chain  – Supplier linkages  – Channel linkage...
Drivers of Uniqueness• Interrelationship   Sharing a value activity with sister business units.   E.g., sharing a sales fo...
Why buyers purchase?Purchasing Criteria• User criteria – firms to meet them by  lowering cost or raising buyer  performanc...
Differentiation for creatingBuyer Value by• Lowering buyer cost• Raising buyer performance• Signaling the valueThrough• Li...
Steps in Differentiation1. Determine who the real buyer is2. Identify the buyer’s value chain and   the firm’s impact on i...
Steps in Differentiation5. Identify the cost of existing and potential   sources of differentiation6. Choose the configura...
Discussion:Red Ocean to Blue Ocean      All Right Reserved by Wesley Shu   42
Other Discussion• Creative Industries• Supply Chain Management• What is “Buyer’s Value Chain”?             All Right Reser...
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Portr's modl comptve advntge

  1. 1. Competitive Advantage Author: Michael Porter Instructor: Wesley Shu All Right Reserved by Wesley Shu 1
  2. 2. How a firm can actually create and sustain a competitive advantage in its industry All Right Reserved by Wesley Shu 2
  3. 3. Two Basic Types• Cost leadership• Differentiation All Right Reserved by Wesley Shu 3
  4. 4. Value Chain• Identify which activities contributing to cost leadership and differentiation• Analyze the source of competitive advantage All Right Reserved by Wesley Shu 4
  5. 5. Value ChainAll Right Reserved by Wesley Shu 5
  6. 6. Primary Activities• Inbound Logistics Receiving, storing, and disseminating inputs. E.g., warehousing, inventory control• Operations Transforming inputs into the final product form All Right Reserved by Wesley Shu 6
  7. 7. Primary Activities• Outbound Logistics Collecting, storing and distributing the product to buyers• Marketing and Sales Providing a means and incentive which allow buyers to purchase the product• Service Providing service to enhance or maintain the value of the product All Right Reserved by Wesley Shu 7
  8. 8. Primary Activity Focus by IndustryIndustry Inbound Operations Outbound Marketing Service Logistics Logistics & SalesDistributor X XRestaurant X NACorporate XLendingXerox X All Right Reserved by Wesley Shu 8
  9. 9. Support Activities• Procurement Function of purchasing inputs used in the value chain• Technology Development All Right Reserved by Wesley Shu 9
  10. 10. Support Activities• Human Resource Management• Firm Infrastructure planning, finance, accounting, legal, etc. All Right Reserved by Wesley Shu 10
  11. 11. Competitive Scope• Four scopes may affect value chain• Ex. The value chain serves minicomputer requires extensive sales assistance, less hardware performance – different from what serves small business All Right Reserved by Wesley Shu 11
  12. 12. Competitive Scope• Segment Scope Differences required to serve different product or buyer segment• Vertical Scope Division of activities between a firm and its suppliers, channels, and buyers All Right Reserved by Wesley Shu 12
  13. 13. Competitive Scope• Geographic Scope Different geographic areas• Industry Scope Interrelationships among business units All Right Reserved by Wesley Shu 13
  14. 14. “Generic” Competitive Advantage• Cost Leadership• Differentiation• Focus All Right Reserved by Wesley Shu 14
  15. 15. Competitive Strategies Competitive Advantage Lower Cost Differentiation Broad Cost DifferentiationCompetitive Scope Target Leadership Narrow Cost Focus Differentiation Target Focus All Right Reserved by Wesley Shu 15
  16. 16. Cost Leadership StrategySteps to achieve cost leadership• Make cost assignment• Identify cost drivers• Understand cost dynamics• Control cost drivers• Reconfigure the value chain All Right Reserved by Wesley Shu 16
  17. 17. Operating Cost Assignment All Right Reserved by Wesley Shu 17
  18. 18. Asset Assignment All Right Reserved by Wesley Shu 18
  19. 19. Why cost assignment• Understand the firm’s cost structure• Find cost drivers of each cost segment• Match cost structure to buyer’s value chain• Configure and reconfigure the cost structure All Right Reserved by Wesley Shu 19
  20. 20. Cost Leadership – Cost DriversFactors affect costs. All Right Reserved by Wesley Shu 20
  21. 21. Cost Leadership – Cost Drivers• Economies or diseconomies of scale• Learning and spillover• Pattern of capacity utilization – When fixed cost high, capacity utilization is important• Linkages How other activities are performed – Linkages within the Value Chain – Vertical Linkages All Right Reserved by Wesley Shu 21
  22. 22. Cost Leadership – Cost Drivers• Interrelationships With other business units within a firm• Integration Vertical integration in a value activity• Timing All Right Reserved by Wesley Shu 22
  23. 23. Cost Leadership – Cost Drivers• Discretionary policies Policies that reflect a firm’s strategy• Location• Institutional factors e.g., government regulations, financial incentives, unionization, etc. All Right Reserved by Wesley Shu 23
  24. 24. Identify Cost Drivers All Right Reserved by Wesley Shu 24
  25. 25. Cost Dynamics• What cause the change of cost drivers All Right Reserved by Wesley Shu 25
  26. 26. Cost Dynamics• Industry real growth• Differential scale sensitivity• Different learning rates• Differential technological change• Relative inflation of costs• Aging• Market adjustment All Right Reserved by Wesley Shu 26
  27. 27. How to Achieve Cost Advantage All Right Reserved by Wesley Shu 27
  28. 28. Analyze Cost Advantage All Right Reserved by Wesley Shu 28
  29. 29. Control Cost Drivers• E.g., control scale – gain the appropriate firm size All Right Reserved by Wesley Shu 29
  30. 30. Reconfigure the Value Chain• Reconfiguration of the value chain presents the opportunity to fundamentally restructure a firm’s cost, compared to settling for incremental improvements.• By altering the basis of competition in a way that favors a firm’s strengths, it may change the important cost drivers in a way that favors a firm. All Right Reserved by Wesley Shu 30
  31. 31. Steps in Strategic Cost Analysis1. Identify the appropriate value chain and assign costs and assets to it.2. Diagnose the cost drivers of each value activity and how they interact.3. Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences.4. Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain and/or downstream value. All Right Reserved by Wesley Shu 31
  32. 32. Cost FocusA firm dedicates its efforts to a well-chosen segment of an industry can oftenlower its costs significantly. All Right Reserved by Wesley Shu 32
  33. 33. Differentiation• Emphasize on a unique source of differentiation in the Value Chain, rather than on products or markets only• Differentiation base on buyers’ value, not only difference that buyers do not value• Should consider the cost of differentiation All Right Reserved by Wesley Shu 33
  34. 34. All Right Reserved by Wesley Shu 34
  35. 35. Identify Sources of Differentiation All Right Reserved by Wesley Shu 35
  36. 36. Drivers of Uniqueness• Policy Choices• Linkages – Linkages within the value chain – Supplier linkages – Channel linkages• Timing Be the first• Location All Right Reserved by Wesley Shu 36
  37. 37. Drivers of Uniqueness• Interrelationship Sharing a value activity with sister business units. E.g., sharing a sales force for both insurance and other financial products• Proprietary learning• Integration – e.g., integrating online systems to current ordering systems• Scale• Institutional factors – e.g., “Madame’s route” All Right Reserved by Wesley Shu 37
  38. 38. Why buyers purchase?Purchasing Criteria• User criteria – firms to meet them by lowering cost or raising buyer performance• Signaling criteria – telling buyers what benefits to get All Right Reserved by Wesley Shu 38
  39. 39. Differentiation for creatingBuyer Value by• Lowering buyer cost• Raising buyer performance• Signaling the valueThrough• Linking the firm’s value chain to the buyer’s value chain All Right Reserved by Wesley Shu 39
  40. 40. Steps in Differentiation1. Determine who the real buyer is2. Identify the buyer’s value chain and the firm’s impact on it3. Determine ranked buyer purchasing criteria4. Assess the existing and potential sources of uniqueness in a firm’s value chain All Right Reserved by Wesley Shu 40
  41. 41. Steps in Differentiation5. Identify the cost of existing and potential sources of differentiation6. Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating7. Test the chosen differentiation strategy for sustainability8. Reduce cost in activities that do not affect the chosen forms of differentiation All Right Reserved by Wesley Shu 41
  42. 42. Discussion:Red Ocean to Blue Ocean All Right Reserved by Wesley Shu 42
  43. 43. Other Discussion• Creative Industries• Supply Chain Management• What is “Buyer’s Value Chain”? All Right Reserved by Wesley Shu 43
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