Mmi strategy 4

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  • There are three major sources of structural advantage: Economies of scale occur when the cost decreases as output increases, conferring an advantage to larger players Vertical market failure occurs when costs and risks of transaction between players across the value chain and/or frequency of transactions and assets specifically are high. When buyers and sellers need to deal with each other only once or occasionally, vertical integration is usually not necessary. This is easy to understand when asset specificity is low because markets can operate effectively using standard contracts such as leases and credit sale agreements. It is, however, also true when asset specificity is high and a post-investment bilateral monopoly is likely Limited access to privileged assets is also a source of structural advantage. Privileged assets can be brand (e.g. Coca Cola), relationships, technology (e.g. Microsoft), patents, location, etc
  • Exceptional execution can be a source of competitive advantage. It allows a company to differentiate its performance at critical parts of the business system, such as customer service, delivery efficiency and effectiveness, and low product/service cost.
  • Insight/foresight is the ability to generate superior knowledge through creative, technical, or scientific insight. Companies that possess insight/foresight capabilities can look at the same data competitors have and draw out unconventional insights and foresights about an industry’s future and the opportunities that will be created. In addition, they deal with uncertainty – and minimize risk – by thinking creatively about options that will help them shape leadership positions or adapt quickly as the future unfolds. They stay tuned into what customers value and develop differentiated products and services accordingly. They are highly aware of the strengths and weaknesses of their organization relative to competitors and factor that into their strategies and implementation.
  • Strategic cost analysis requires several important steps: The starting point is to define firm’s value chain and to assign operating costs and assets to value activities. For purposes of cost analysis, the generic value chain is split into individual value activities and should reflect 3 principles: (1)the size and growth of cost represented by activity,(2) the cost behavior of activity, (3) competitor differences in performing the activity. After identifying its value chain, firm must assign operating costs and assets to value activities. Assigning costs and assets does not require the precision needed for financial reporting purposes. Estimates are more than sufficient to highlight strategic cost issues. Second step in cost analysis is cost drivers diagnose. Cost drivers are structural causes of the cost of an activity and can be more or less under firm’s control. Drivers often interact to determine the cost behavior of a particular activity and include: economies of scale – arise from the ability to perform activities differently and more efficiently at larger volume, or from the ability to amortize the cost of intangibles such as advertising and R&D over a greater volume of sales. Learning – can lower costs over time by different mechanisms: layout changes, improved scheduling, product design modification, etc The pattern of capacity utilization – seasonality, cyclicality of production, demand of supply fluctuation, etc. Changes in the level of capacity utilization will involve costs of expanding and contracting, so that a firm that changes its utilization will have higher costs than a firm that keeps its utilization constant, though they both have the same average utilization Linkages – cost of a value activity is affected by how other activities are performed Interrelationships – sharing a value activity with a sister unit, sharing know-how between separate but similar value activities can significantly low costs Integration can for example avoid the costs such as transportation if the firm has its own car park. Timing – for example a firm may gain firs-mover advantages from being among the first to take a particular action Discretionary policies: product configuration, performance, delivery time, spending rate on marketing and technology development, wages paid, hiring policies, training, scheduling, etc Locations – differ in the prevailing costs of labor, management, energy, taxes, etc Institutional factors – governmental regulation, tax holidays, financial incentives, tariffs levels, CNA regulation, brand identification and reservation (OSIM), etc 3. Identify competitor value chains (difficult), and determine the relative cost of competitors and the sources of cost differences.
  • 4. Develop strategy to lower relative cost position and gain cost advantage through: Controlling cost drivers and/or Reconfiguring the value chain (different and more efficient way of design, produce, distribute or market the product) 5. Ensure that cost reduction efforts do not erode differentiation (another source of competitive advantage), or make a choice to maintain differentiation competitive advantage 6. Test the cost reduction strategy for sustainability. Cost advantage will result following the described strategy only if the firm can sustain it. Improving relative cost position in unsustainable ways may allow firm to maintain cost parity or proximity but a firm attempting to achieve cost leadership strategy must also develop sustainable sources of cost advantage. Cost advantage is sustainable if there are entry or mobility barriers that prevent competitors from imitating its sources: Scale – is a key barrier, and the cost of replicating scale is high because competitors must buy share Interrelationships – with sister business units can force a competitor to diversify in order to match a cost advantage. If there are entry barriers into related industries, the sustainability can be high. Linkages – are often difficult to detect and require coordination across organizational lines or with independent suppliers and channels. Proprietary learning –it can be hard for competitors to catch up if learning can be kept proprietary Policy choices to create proprietary product or process technology. Replicating product innovations often poses great difficulties for competitors if innovation is protected by patents or secrecy.
  • A firm uniqueness in a value activity is determined by a series of basic drivers, analogue to the cost drivers: Policy choices (product features and performance offered, services provided, content, technology employed, quality of inputs, personnel procedures, skill and experience level of personnel employed, training, etc) Linkages within the value chain and also linkages with suppliers, customers, competitors, etc Timing – uniqueness may result from when a firm began performing an activity Location – convenient sale points positions Interrelationships – sharing with sister unit may increase the quality of services Learning – only proprietary learning leads to sustainable differentiation Integration – may provide more activities to be source of differentiation Scale – large scale allow an activity to be performed in a unique way that is not possible at smaller volume. In some cases, however, scale can work against the uniqueness (may reduce for example flexibility or fashion-related firms to buyer needs) Institutional Factors – unique job definitions for employees
  • A firm can enhance its differentiation in two basic ways: Become more unique in performing its existing value activities. Sources of uniqueness: Proliferate the sources of differentiation in the value chain Make actual product use consistent intended use (understand buyers’ needs and modify product accordingly) Employ signals of value to reinforce differentiation on use criteria (advertising) Exploit all sources of differentiation that are not costly (a firm may be able to differentiate itself simply by coordinating better internally or with suppliers or channels) Reduce cost in activities that do not affect buyer value Shift the decision maker to make a firm’s uniqueness more valuable (deploying a new type a sales person, changing advertising media and content, changing selling materials, etc) 2.Reconfigure its value chain in some way that enhances its uniqueness (new distribution channel or selling approach, new process technology, etc)
  • A firm differentiates itself from its competitors if it an be unique at something that is valuable to buyers, beyond simply offering a low price. Firm differentiation with respect to other competitors implies several steps: Determine who the real buyer is . Is important to analyze your direct consumer and define their behavior relative to firms product. A number of differentiating factors at this level can result from broad competitive scope: Ability to serve buyer needs anywhere Simplified maintenance for buyer is spare parts and design are common for a wide line Single point at which the buyer can purchase Single point for customer service Superior compatibility among products, etc 2. Identify the buyer’s value chain and firm’s impact on it. Uniqueness does not lead to differentiation unless it is valuable to the buyer. There are two mechanisms to do so: by lowering buyer cost (by lower delivery, financing cost, lower required rate of usage, lower direct and indirect cost, lower the buyer cost, lower risk of product failure, etc) and by raising buyer performance (better satisfying needs) . This mechanisms are implemented through the impact of firm’s value chain on buyer value chain. Every impact of a firm on its value buyer’s value chain, including every link between firm and buyer activities, represents a possible opportunity for differentiation. 3. Determine ranked buyer purchasing criteria. Buyer purchasing criteria can be divided in two types: Use criteria (the way in which a supplier affects actual buyer value through lowering buyer cost or raising buyer performance; include product quality, features, delivery time, etc) and Signaling criteria (advertising, attractiveness of facilities, reputation). Example in slide 67.
  • 4.Assess the existing and potential sources of uniqueness in a firm’s value chain. Differentiation can steam from uniqueness throughout firm’s value chain. The firm must determine which value activities impact each purchase criteria (example slide 68). Then, it must identify its existing sources of uniqueness relative to competitors. 5.Identify cost of existing and potential sources of differentiation. The cost of differentiation is a function of the cost drivers of the activities that lead to it. The firm deliberately spends more in some activities to be unique. the cost of differentiation will vary by value activity and the firm should choose those activities where the contribution to buyer value is greatest relative to the cost. This may imply pursuing low cost sources of uniqueness as well as high cost ones that have high buyer value. 6.Choose the configuration of activities that creates the most valuable differentiation for the buyer relative to cost of differentiation. Differentiation strategy aims to create the largest gap between the buyer value created (and hence the resulting premium) and the cost of uniqueness in the firm’s value chain. 7.Test the differentiation strategy for sustainability. Differentiation will not lead to superior performance unless it is sustainable against erosion and imitation. Differentiation will be more sustainable under the following conditions: The firm’s sources of uniqueness involve barriers The firm has a cost advantage in differentiation The sources of differentiation are multiple The firms creates switching costs at the same time it differentiates (switching costs are fixed costs incurred by the buyer when it changes suppliers, which allow a firm to sustain a price premium even if its product is equal to that of competitors)
  • Buyer purchasing criteria can be divided in two types: Use criteria (the way in which a supplier affects actual buyer value through lowering buyer cost or raising buyer performance; include product quality, features, delivery time, etc) and Signaling criteria (advertising, attractiveness of facilities, reputation). The above example illustrates purchase criteria for a particular newspaper.
  • The above figure illustrates how purchase criteria can be arrayed against value activities to help a firm identify the activities important to differentiation.
  • If one of the answers to the three question is “NO”, then your strategy does not follow the rules of effectiveness in a competitive environment.
  • The above figure displays Dell’s Internal Activities configured in order to establish advantages with respect to other competitors. Te figure demonstrates Dell’s Activities internal consistency, all the parts of the strategy fitting together to form a whole.
  • Mmi strategy 4

    1. 1. Sustaining Competitive Advantage Chapter IV
    2. 2. Competitive Advantage <ul><li>Generating a new source of competitive advantage is the ultimate act of creativity in business </li></ul><ul><li>Creating advantage is an art, not a science </li></ul><ul><ul><li>But not a black art </li></ul></ul><ul><li>As in all arts, the process matters a great deal </li></ul><ul><ul><li>Respond to and act on the outside world </li></ul></ul><ul><ul><li>Build in internal consistency from the start </li></ul></ul><ul><li>Personal traits and habits also matter </li></ul><ul><ul><li>Balance between creativity and analysis </li></ul></ul><ul><ul><li>Courage to do something different </li></ul></ul>
    3. 3. Sources of Competitive Advantage Structural Advantage Frontline Execution Insight / Foresight Cost Advantage Differentiation Porter’s Sources of Competitive Advantage
    4. 4. Structural Advantage <ul><ul><li>Output increases and average costs fall </li></ul></ul><ul><ul><li>Company size increases and risk is diversified </li></ul></ul><ul><ul><li>Transaction costs and risks are very high </li></ul></ul><ul><ul><li>Frequency of transactions is recurrent and asset specificity is high </li></ul></ul><ul><ul><li>Limited access to: </li></ul></ul><ul><ul><ul><li>Privileged locations </li></ul></ul></ul><ul><ul><ul><li>Intellectual property </li></ul></ul></ul><ul><ul><ul><li>Regulatory rights </li></ul></ul></ul><ul><ul><ul><li>Distribution networks </li></ul></ul></ul><ul><ul><ul><li>Brands and reputations </li></ul></ul></ul><ul><ul><ul><li>Customer information </li></ul></ul></ul>Economies of scale Vertical Market Failure Privileged Assets
    5. 5. Frontline Execution <ul><li>Product/service Characteristics </li></ul><ul><li>Range </li></ul><ul><li>Complexity </li></ul><ul><li>Life cycle </li></ul><ul><li>Process Requirements </li></ul><ul><li>Product/service development </li></ul><ul><li>Logistics </li></ul><ul><li>Sales/marketing requirements </li></ul><ul><li>Environmental Requirements </li></ul><ul><li>Seasonality </li></ul><ul><li>Service expectations </li></ul><ul><li>Market share stability </li></ul><ul><ul><li>Complex order management and scheduling systems </li></ul></ul><ul><ul><li>Skilled management of inbound flows </li></ul></ul><ul><ul><li>Flexible operations and supply chain/service factory design </li></ul></ul><ul><ul><li>Unique skills and expertise requirements for service operations </li></ul></ul><ul><ul><li>Skilled project management </li></ul></ul><ul><ul><li>Flexible capacity utilization </li></ul></ul><ul><ul><li>Customer satisfaction measurement and feedback mechanisms </li></ul></ul><ul><ul><li>Sales force coverage, talent and training requirements </li></ul></ul><ul><ul><li>Information systems to assess profitability of segment customers </li></ul></ul><ul><ul><li>Build-in-advance requirements </li></ul></ul><ul><ul><li>Delivery and inventory requirements </li></ul></ul><ul><ul><li>Distribution configuration </li></ul></ul><ul><ul><li>Capacity planning and utilization </li></ul></ul>
    6. 6. Insight/Foresight High degree of uncertainty Large value placed on innovation Difficult/impossible to develop or sustain structural or executional advantage <ul><li>Allows business units to identify ways to eliminate, reduce or manage the uncertainty company faces, e.g., high tech, telecommunications, electric utilities </li></ul><ul><li>Helps companies understand the real drivers of value for customers, which allows them to identify and launch successful new products and services, e.g., software, new technologies, fashion </li></ul><ul><li>helps to understand relationships among different variables and draw out key implications, e.g., industries which make complex marketing and pricing decisions </li></ul><ul><li>In today’s faster-moving environments, these elements are less and less to be relied on </li></ul>Significant advantage to see new relationships among sets of variables
    7. 7. Cost Advantage Analysis (1) <ul><li>Identify the appropriate value chain and assign costs and assets to it </li></ul><ul><li>Diagnose the cost drivers of each value activity and how they interact </li></ul><ul><li>Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences </li></ul>
    8. 8. Cost Advantage Analysis (2) <ul><li>Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain </li></ul><ul><li>Ensure that cost reduction efforts do not erode differentiation </li></ul><ul><li>Test the cost reduction strategy for sustainability </li></ul>Gain cost advantage by: Controlling cost drivers Reconfiguring the value chain
    9. 9. Distribution of Operating Costs OPERATING COSTS HR Management (2%) Procurement (1%) Firm Infrastructure (9%) Technology Development (9%) 1% Inbound logistics (3%) Operations (67%) Outbound logistics (1%) Marketing & Sales (6%) Service (1%) Margin (5%) Purchased operating inputs Human Resource costs 27% 40%
    10. 10. Distribution Assets ASSETS Firm Infrastructure HR Management (1%) (16%) (2%) Inbound logistics (8%) Operations (46%) Outbound logistics (20%) Marketing & Sales (6%) Service (2%) Liquid Assets Fixed Assets (38%) Technology Development (2%) Procurement (1%) (8%) (6%) (15%) (5%)
    11. 11. Differentiation – Drivers of Uniqueness <ul><li>Policy choices </li></ul><ul><li>Linkages within value chain, with suppliers, customers, competitors, etc </li></ul><ul><li>Timing </li></ul><ul><li>Location </li></ul><ul><li>Interrelationships </li></ul><ul><li>Learning </li></ul><ul><li>Integration </li></ul><ul><li>Scale </li></ul><ul><li>Institutional Factors </li></ul>
    12. 12. Routes of Differentiation <ul><li>Proliferate the sources of differentiation in the value chain </li></ul><ul><li>Make actual product use consistent intended use (understand buyers’ needs and modify product accordingly) </li></ul><ul><li>Employ signals of value to reinforce differentiation on use criteria (advertising) </li></ul><ul><li>Exploit all sources of differentiation that are not costly </li></ul><ul><li>Reduce cost in activities that do not affect buyer value </li></ul><ul><li>Shift the decision maker to make a firm’s uniqueness more valuable, etc </li></ul>
    13. 13. Steps in Differentiation (1) <ul><li>Determine who the real buyer is </li></ul><ul><li>Identify the buyer’s value chain and firm’s impact on it </li></ul><ul><li>Determine ranked buyer purchasing criteria </li></ul>
    14. 14. Steps in Differentiation (2) <ul><li>Assess the existing and potential sources of uniqueness in a firm’s value chain </li></ul><ul><li>Identify cost of existing and potential sources of differentiation </li></ul><ul><li>Choose the configuration of activities that creates the most valuable differentiation for the buyer relative to cost of differentiation </li></ul><ul><li>Test the differentiation strategy for sustainability </li></ul>
    15. 15. Ranked Buyer Purchase Criteria - Example Content Format Layout Price Subscription Frequency Advertising Distribution Market position Display in stores Availability Speed of distribution Online version Promotional support Reliability Audience Sales per issue Online community Signaling Criteria Use Criteria End User Channels
    16. 16. Activities that Influence Buyer purchase criteria Inbound Logistics USER CRITERIA SIGNALING CRITERIA Operations Outbound Criteria Marketing & Sales Service Procurement Technology Development HR Management Firm infrastructure Conformance to specifications Delivery time Features Sales force quality Sales aids Attractiveness of facilities x x x x x x x x x x x x x x x x x x x
    17. 17. Sustaining Competitive Advantage <ul><li>Micro level: Analyzing and anticipating individual players, especially competitors </li></ul><ul><li>Macro level: Understanding and responding to generic threats to advantage </li></ul><ul><li>Overarching: Designing strategy for robustness and organization for ability to learn and to make tradeoffs </li></ul>Slack Imitation Holdup Substitution
    18. 18. Hints to Sustaining Competitive Advantage <ul><li>Attacked competitors indirectly, placed them on the horns of a dilemma </li></ul><ul><li>Vision the future and the industry shape </li></ul><ul><li>“ Fly below the radar screen until will be too late for competitors” </li></ul><ul><li>Made clear tradeoffs (it will make your strategy sustainable against imitation) </li></ul><ul><li>Be always a second faster than your competition </li></ul><ul><li>Be unique </li></ul><ul><li>Learn from your and competitors success and failure </li></ul>
    19. 19. Key tests to Effective Competitive Strategies <ul><li>External consistency: Does the strategy tap the opportunities and neutralize the threats posed by the outside world in a unique manner? </li></ul><ul><ul><li>Driven by outside opportunities and threats </li></ul></ul><ul><ul><li>Systemic change possible </li></ul></ul><ul><ul><li>Explicit recognition of what company is not doing </li></ul></ul><ul><li>Internal consistency: Do the parts of the strategy fit together to form a whole that is greater than the sum of the parts? </li></ul><ul><li>Dynamic consistency: Does the strategy call on the company to do today what is necessary to succeed tomorrow? </li></ul><ul><ul><li>Responsive to discontinuous changes in outside world </li></ul></ul>
    20. 20. Example – Internal Consistency at Dell

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