Strategy for sustainable competitive advantagePresentation Transcript
STRATEGY FOR SUSTAINABLE COMPETITIVE ADVANTAGE (SCA)
Objectives of SCA Strategy
Sustainable Competitive Advantage (SCA) is the key to a successful strategy.
Strategy related to SCA is focused on the two major objectives:
Creating SCAs for the firm
Neutralizing SCAs of competitors
Broad Approaches to Achieve SCA STRATEGIC VISION VS. STRATEGIC OPPORTUNISM
There are two approaches for the development of SCA:
Strategic vision and Strategic opportunism.
There are also two strategic risks associated with the two approaches:
Strategic stubbornness and Strategic drifts.
Approach: Strategic Vision
Strategic vision provides a firm a sense of purpose.
It is taking a long-term perspective and focusing into the future.
Management of the strategic vision requires four basic elements:
A Clear Future Strategy: A core driving idea with a focus on the competitive arena supported by functional area strategies and competitive advantages.
Belief in the Vision: The organization as a whole should have a strong belief in the correctness of the vision and strong commitment to achieve the vision.
Assets, Competencies, and Resources to implement the vision.
Patience: Willingness to stick to the vision in the face of competitive threats and short-term opportunities.
ebay eBay pioneers communities built on commerce, sustained by trust, and inspired by opportunity. eBay brings together millions of people every day on a local, national and international basis through an array of websites that focus on commerce, payments and communications
Google Google’s aim is to organize the world’s information and make it universally accessible and useful
Amazon.com Our vision is to be earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online .
Dell Dell listens to customers and delivers innovative technology and services they trust and value .
Risk in Strategic Vision: Strategic Stubbornness
It suggests that the strategic vision may be faulty and its pursuits may be wasteful exercise.
The vision may never be realized due to three major factors:
Implementation Barriers: environmental barriers may emerge that prevents effective implementation of the vision.
Faulty Assumption of the Future: e.g.: E-commerce and dotcom companies
A Paradigm Shift: Changes in technology, management styles etc may change over time and make the vision redundant.
Approach: Strategic Opportunism
Strategic opportunism believes that the environmental forces are so dynamic and uncertain that it is very difficult to focuses on the future.
Strategy should focus on the present and take advantages of emerging business opportunities.
Risk in Strategic Opportunism: Strategic Drift
The firm may drift into short-term business opportunities that can not be financed or effectively managed.
New Approach: Vision Plus Opportunism
Many firms today follow a combined approach of strategic vision and strategic opportunism.
Strategic vision guides the firm in the core business and the strategic opportunism in managing the diversification into new business areas.
This SCA strategy is difficult to manage.
An alternative SCA strategy is to adopt a dynamic vision where the vision is changed in relation to the paradigm shift.
There are two paths relevant to the dynamic vision approach: strategic intent and strategic flexibility.
Strategic Intent: It is a sustained obsession of winning at all levels of the organization – the intention to excel in all departments and obtain global leadership.
Strategic Flexibility: In order to tackle the strategic uncertainties firms adopt a new vision in the face of new threats (challenges) and opportunities.
Issues of SCA
SCA strategy involves four key issues:
How to Compete?
What are the Bases of Competition?
Where to Compete?
With Whom to Compete?
Characteristics of SCAs
Substantial : The SCA strategy should be substantial enough to make a difference. Marginal difference or superiority may not be noticed or valued adequately by the market.
Sustainable : The SCA must be sustainable or enduring. The SCA factors should be such that its importance does not evaporate or fade away with time, or it cannot be easily copied by competitors.
Leveraged : Link an SCA with the positioning of a business.
Strategic Thrusts- Routes to an SCA
A strategy thrust (also known as generic business strategy, strategic theme or strategic orientation) is an umbrella concept that explains broad business approaches of a firm targeted at obtaining an SCA in the group of business with a common strategic theme.
Strategic Thrusts- Routes to an SCA
Three of the most important strategic thrusts are explained by Michael Porter in terms of:
Low Cost Advantage
Two more factors have been added in strategic marketing
Porter’s Generic Strategies
STRATEGIC THRUSTS FOR SCA STRATEGIC THRUSTS FOR OBTAINING SUSTAINABLE COMPETITIVE ADVANTAGE DIFFERENTIATION & POSITIONING Product Attributes Service Benefits Personnel Image Image User & Usage LOW COST No frills product Product design Production/Operations Scale Economies Experience curve FOCUS Product Segment Geographic Area SYNERGY Enhance Customer Value Reduce Operation Costs Reduce Investment PREEMPTIVE MOVE Product Production System Customer Distribution & Service
Differentiation factors are competitive advantages a firm is able to exercise in a market in relation to its competitors.
Differentiation strategy creates values for customers for which the customers are willing to pay.
Characteristics of Differentiation Strategy
Successful differentiation strategies have three characteristics:
Generate Customer Value: The strategy must add value for the customer. The differentiation strategy should be designed from the customer’s perspective rather than the firm’s perspective. Market research plays important role in understanding the customers’ perspectives.
Provide Perceived Value: The added value must be communicated to the customers and they should effectively perceive it. Creating brand value is the most effective method for communicating the differentiating features of a product, service or a company.
Sustainable: The differentiation factors projected by the firm should not be easy to copy by the competitors. The synergy and the preemptive move generate strong sustainability of the differentiation strategy.
Common Differentiation Factors
Differentiation strategy is targeted at creating superior values for the customers.
Superior values can be created through differentiation strategy implemented over the product, services, personnel, and image.
Product Differentiation: Features, Styles, Design, Performance etc.
Service Differentiation: Product Delivery, Installations, Customer Training, Customer Counseling, Free Servicing, Warranty, Credit Facility etc.
Personnel Differentiation: Expertise, Experience, Responsiveness, Courteousness etc.
Image Differentiation: High Quality, Modern Technology, Industry Leadership, Social Responsiveness etc.
Approaches to Differentiation
There are two major approaches for developing sustainable differentiation strategy:
Quality option approach
Building strong brands
The Quality Option Approach
The quality option approach is one of the strong and sustainable differentiation strategies.
This approach focuses on developing a reputation for good quality and promise to deliver superior quality products or services to customers.
Under this approach, the firm should project its brand as the premium brand associated with enhanced customer benefits, premium price, and ownership values.
Quality perception of a product is dynamic and is liable to change due to competitors’ actions, introduction of superior technology, change in customers’ taste and preferences, and many other market forces.
Focus of Quality Option Approach
This approach is implemented with two major focuses:
1. Total Quality Management: The TQM calls for quality-focused management systems where the whole process, people and systems within the firm have one objective – produce and deliver superior quality products and services to the customers.
2. The Customer Focus: It requires the grooming of an organization culture and programs directed at developing long-term and sustainable relationship with the customers. The top management should have personal contact with the customers; a system where employee performance are to be judged by creating and retaining satisfied customers; and developing an in-depth understanding of customers’ motivations, choice and satisfaction.
Building Strong Brand Approach
This approach to sustainable differentiation focuses on building brand equity.
Brand equity generates value to customers and provides the firm a space to adopt premium pricing and develop enhanced brand loyalty.
Familiarity and recall value of a brand name is an indicator of brand awareness.
This is a strategic asset for the firm in a competitive market where it provides a sustainable competitive difference.
Association of the brand name with a competitive advantage factor is an enduring asset to a firm.
The brand name can be linked to the firm’s other businesses and products.
Product-attributes and customer-benefits are the two commonly associated factors that can be developed as brand equity.
Customers’ perception of the brand in terms of its quality supported by its attributes, benefits, and utility is a major factor that contributes to the brand equity.
The perceived quality is also linked with stock prices, market share, and ROI.
The most enduring and sustainable asset of a firm is brand loyalty.
Brand loyalty is the resistance to brand switching by customers.
Brand loyalty reduces marketing costs, presents high entry barriers to competitors, enhances brand image, provides for launching related products under the same brand name, and provides ample time to respond to competitors’ attacking moves.
Positioning refers to the strategic decisions and actions intended to create and maintain the firm’s product or service concept in customer’s mind.
In positioning the firm selects some of the key differentiation factors on which it has competitive advantage and establishes the image so that customers view the product or service as different.
In positioning, the projected image is crucial and what the firm does to the mind of customer is more important than what the firm does to the product.
Types of Positioning
Attribute Positioning: Based on product characteristics. Quality, taste, durability, price etc.
Benefit Positioning: Based on end-benefits of the product. Health, beauty, timesaving, etc.
Image Positioning: Based on the company’s image as innovator, market leader, or strategic alliances.
Usage Occasion Positioning: Based on use of the product on a particular occasion for a particular purpose.
User Positioning: Based on ‘the most suitable” for a target group of customers.
Strategic position refers to the firm’s aspirations as how the market perceives its product or services relative to competitors’ products and services.
Strategic position guides most of the strategic initiatives and communication strategy of the firm.
It is very important for a firm to have the correct positioning strategy.
Characteristics of Strategic Positioning
Strategic: Positioning should be strategic not tactical. It should be guided by a desire to have long-term advantage over the competitors and their products.
Under the Control of the Firm: The firm should have full control on the strategic position. It should not be left in the hand of customers. The positioning strategy should reflect the business strategy.
Different from Competitors: The strategic position should amply and critically differentiate the firm and its product from the competitors and their products.
Meaningful to Customers: The strategic position should be able to create important value to the customers and should reflect to their key motivations.
LOW COST STRATEGY
The low cost is a popular strategy that not only provides important value (low price) to customers but also builds high entry barriers.
The low cost strategy is implemented through a multiple approaches.
Approaches to Low Cost Strategy
No-frills Product or Service: The low cost may be achieved by introduced by removing all frills or extra benefits from the product or service. Eg. The Southwest Airlines.
Product Design: Use of cheaper materials, production processes, and technology can bring down the cost.
Operations: Having operations in low cost countries, access to low margin distribution network, use of low cost capital can bring down the cost.
Economies of Scale: Large size operation can provide opportunity to effectively share the fixed costs over the units produced and bring down the costs.
The Experience Curve: As a firm gains experience in building a product its costs in real terms will decline in a predictable rate.
The lowering of costs in relations to the experience is attributable to the process of:
Learning: people tend to do their tasks faster and more efficiently and repeatedly through the learning process.
Technological Improvement: Experience provides opportunity to improve the firm’s production and operations through installation of more efficient machinery, human resources and operations in full capacity.
Product Redesign: Experience helps a firm to redesign their product make it more simple and inexpensive.
The focus strategy concentrates on one part of the market or product line.
The focus strategy has several advantages.
Merits of Focus Strategy
Avoids dilution or distraction: The focus strategy has a specific target (product or market) set for which all functional strategies are designed. The implementation can be more effective that can generate more SCA.
Compete with limited resources: It can generate more impact with fewer resources as the target is more focused and the firm will be able to compete more effectively.
Bypass competitors’ assets and competencies: When the product-market is more focused the firm may be able to bypass strong competitors through niche marketing.
Provide position strategy: A firm with narrow product line and small market segment can develop and implement effective positioning strategy.
Reduce competitive pressures: Small market segments attract very few competitors as it has lower level of profit potential. Moreover, focus strategy also help build high entry barriers.
Implementation of Focus Strategy
The focus strategy is implemented through three approaches:
Focus on the Product Line: This can help develop the firm a technical expertise and achieve superiority over its competitors. The firm can also develop innovative ideas in the product line and be the leader in innovations.
Targeting a Segment: This can help the firm to design appropriate marketing strategy perfectly tailored to the target market segment.
Limit to a Geographical Area: Limiting the operation to a geographical area and developing local brands can provide effective SCA to the firm in terms of cost-effectiveness. However, this approach may be risky when a superior national brand is introduced to the target geographical area.
The preemptive move is a strategic move directed at obtaining the first mover advantage, which the competitors are unable to duplicate or counter.
Only a technologically and financially superior firm can implement this strategy.
Preemptive moves can be directed at products, production systems, customers, distribution and service systems.
A firm can implement preemptive move by introducing a new product to the market.
The firm can enjoy a desirable market position.
Microsoft in software and Intel in the computer processor have always enjoyed the leadership position through their product innovation.
Introduction of a cost-effective or high-productivity production systems can generate substantial SCA for the firm.
The Japanese have always enjoyed competitive advantage in this form of preemption in the fields of electronics and robotics.
The preemptive move can be focused on a customer group and obtain their loyalty, which is a strong SCA factor.
Distribution and Service Systems
The preemptive move can be focused on a new distribution system and reach more effectively the target customers than its competitors.
The firm can use its distribution network to provide customer services that generate an effective SCA factor.
Implementing the Preemptive Move
The preemptive move is fully based on innovation.
Copying and duplicating competitors does not result in any preemption.
Even improvement and modification does not generate any SCA through preemption.
Every preemptive move requires substantial investments in R&D.
Preemption also entails a high degree of risk. Nevertheless, the profit potential from preemption is also very high.
Preemption also creates very high entry barriers and prevents competitors from copying and duplicating actions of the first-mover.
Synergy means that the whole is more than the sum of its parts.
It means that two SBUs operating together will be superior to the same two SBUs operating independently.
As a result of synergy, the combined SBUs will have one or more of the following:
Increased customer value and thus increased sales
Lower operating costs
Synergy between SBUs can provide a truly sustainable SCA since it is based on the unique characteristics of a firm.
Synergies keeps away competitors from copying the assets and competencies of the firm and challenging the firm in the marketplace.
Methods of Obtaining Synergistic Advantages
Alliances: Synergy can be obtained through strategic alliances – forming partnerships with other firms in production, distribution, and promotion of products and services.
Core Assets and Competencies: A firm's core asset or competency can be used for obtaining synergistic advantage. The advantage must be in the core product, technology, management skills that are sustainable.
Capabilities-Based Competition: Strategy development must identify the most important business process within the organization, such as shorter product development process, dynamic product innovations and so on.
Synergistic effects are obtained when the firm competes in the key process of the organization, and obtains the competitive advantage in that aspect where the firm is capable.