The Nature and Sources of Competitive Advantage
The emergence of competitive advantage
Sustaining competitive advantage
Competitive advantage in different market settings
Types of competitive advantage: cost and differentiation
The Emergence of Competitive Advantage How does competitive advantage emerge?
External sources of
Changing customer demand
Internal sources of change Resource heterogeneity among firms means differential impact Some firms faster and more effective in exploiting change Some firms have greater creative and innovative capability
Competitive Advantage from Internally-Generated Change: Strategic Innovation
Characteristics of innovatory strategies:
Associated with new entrants to an industry (e.g. Nucor in steel, IKEA in furniture, Home Depot in DIY , Dell in PCs, American Apparel in casual clothing )
Reconcile conflicting performance goals (e.g. Toyota’s lean production system combines low cost, high quality, and flexibility. Retailers Primark and Target combine low cost with stylishness.)
Reconfiguring the value chain e.g.---
Nike’s system for manufacturing and distributing shoes totally different from traditional shoe manufacturer
Southwest Airlines simplification of the normal airline value chain
Zara’s system of design, manufacture, and distribution
Sustaining Competitive Advantage Against Imitation REQUIREMENT FOR IMITATION Identification - Obscure superior performance - Deterrence --signal aggressive Incentives for imitation intentions to imitators - Pre-emption --exploit all available investment opportunities - Rely upon multiple sources of Diagnosis competitive advantage to create “ causal ambiguity” - Base competitive advantage upon Resource acquisition resources and capabilities that are immobile and difficult to replicate ISOLATING MECHANISM
Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets TRADING MARKETS
None (efficient markets)
Systematic behavioral trends
None Insider trading Cost minimization Superior diagnosis (e.g. chart analysis) Contrarianism PRODUCTION MARKETS
Barriers to imitation
Barriers to innovation
Identify potential barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, etc.) & base strategy upon them. Difficult to influence or exploit. MARKET TYPE SOURCE OF IMPERFECTION OF COMPETITION OPPORTUNITY FOR COMPETITIVE ADVANTAGE
Sources of Competitive Advantage COST ADVANTAGE DIFFERENTIATION ADVANTAGE COMPETITIVE ADVANTAGE Similar product at lower cost Price premium from unique product
Porter’s Generic Strategies SOURCE OF COMPETITIVE ADVANTAGE Low cost Differentiation Industry-wide COST DIFFERENTIATION COMPETITIVE LEADERSHIP SCOPE Single Segment F O C U S
Features of Cost Leadership and Differentiation Strategies
Generic strategy Key strategy elements Resource & organizational
COST Scale-efficient plants. Access to capital. Process
LEADERSHIP Design for manufacture. engineering skills. Frequent
Control of overheads & reports. Tight cost control.
R&D. Avoidance of Specialization of jobs and
marginal customer functions. Incentives for
accounts. quantitative targets.
DIFFERENTIATION Emphasis on branding Marketing. Product
and brand advertising, engineering. Creativity.
design, service, and Product R&D
quality. Qualitative measurement and incentives. Strong cross-functional coordination.