Competitive Advantage Author: Michael Porter Instructor: Wesley Shu

How a firm can actually create and sustain a competitive advantage in its industry

Two Basic Types Cost leadership Differentiation

Cost leadership

Differentiation

Value Chain Identify which activities contributing to cost leadership and differentiation Analyze the source of competitive advantage

Identify which activities contributing to cost leadership and differentiation

Analyze the source of competitive advantage

Value Chain

Primary Activities Inbound Logistics Receiving, storing, and disseminating inputs. E.g., warehousing, inventory control Operations Transforming inputs into the final product form

Inbound Logistics

Receiving, storing, and disseminating inputs. E.g., warehousing, inventory control

Operations

Transforming inputs into the final product form

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

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

Primary Activity Focus by Industry X Marketing & Sales X Xerox Corporate Lending NA X Restaurant X X Distributor Service Outbound Logistics Operations Inbound Logistics Industry

Support Activities Procurement Function of purchasing inputs used in the value chain Technology Development

Procurement

Function of purchasing inputs used in the value chain

Technology Development

Support Activities Human Resource Management Firm Infrastructure planning, finance, accounting, legal, etc.

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 assistance, less hardware performance – different from what serves small business

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

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

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

Competitive Scope Geographic Scope Different geographic areas Industry Scope Interrelationships among business units

Geographic Scope

Different geographic areas

Industry Scope

Interrelationships among business units

“ Generic” Competitive Advantage Cost Leadership Differentiation Focus

Cost Leadership

Differentiation

Focus

Competitive Strategies Differentiation Focus Cost Focus Narrow Target Differentiation Cost Leadership Broad Target Competitive Scope Differentiation Lower Cost Competitive Advantage

Cost Leadership Strategy Steps to achieve cost leadership Make cost assignment Identify cost drivers Understand cost dynamics Control cost drivers Reconfigure the value chain

Steps to achieve cost leadership

Make cost assignment

Identify cost drivers

Understand cost dynamics

Control cost drivers

Reconfigure the value chain

Operating Cost Assignment

Asset Assignment

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

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

Cost Leadership – Cost Drivers Factors affect costs.

Factors affect costs.

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

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

Cost Leadership – Cost Drivers Interrelationships With other business units within a firm Integration Vertical integration in a value activity Timing

Interrelationships

With other business units within a firm

Integration

Vertical integration in a value activity

Timing

Cost Leadership – Cost Drivers Discretionary policies Policies that reflect a firm’s strategy Location Institutional factors e.g., government regulations, financial incentives, unionization, etc.

Discretionary policies

Policies that reflect a firm’s strategy

Location

Institutional factors

e.g., government regulations, financial incentives, unionization, etc.

Identify Cost Drivers

Cost Dynamics What cause the change of cost drivers

What cause the change of cost drivers

Cost Dynamics Industry real growth Differential scale sensitivity Different learning rates Differential technological change Relative inflation of costs Aging Market adjustment

Industry real growth

Differential scale sensitivity

Different learning rates

Differential technological change

Relative inflation of costs

Aging

Market adjustment

How to Achieve Cost Advantage

Analyze Cost Advantage

Control Cost Drivers E.g., control scale – gain the appropriate firm size

E.g., control scale – gain the appropriate firm size

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.

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.

Steps in Strategic Cost Analysis Identify the appropriate value chain and assign costs and assets to it. Diagnose the cost drivers of each value activity and how they interact. Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences. Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain and/or downstream value.

Identify the appropriate value chain and assign costs and assets to it.

Diagnose the cost drivers of each value activity and how they interact.

Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences.

Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain and/or downstream value.

Cost Focus A firm dedicates its efforts to a well-chosen segment of an industry can often lower its costs significantly.

A firm dedicates its efforts to a well-chosen segment of an industry can often lower its costs significantly.

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

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

Identify Sources of Differentiation

Drivers of Uniqueness Policy Choices Linkages Linkages within the value chain Supplier linkages Channel linkages Timing Be the first Location

Policy Choices

Linkages

Linkages within the value chain

Supplier linkages

Channel linkages

Timing

Be the first

Location

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”

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”

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

Purchasing Criteria

User criteria – firms to meet them by lowering cost or raising buyer performance

Signaling criteria – telling buyers what benefits to get

Differentiation for creating Buyer Value by Lowering buyer cost Raising buyer performance Signaling the value Linking the firm’s value chain to the buyer’s value chain Through

Lowering buyer cost

Raising buyer performance

Signaling the value

Linking the firm’s value chain to the buyer’s value chain

Steps in Differentiation Determine who the real buyer is Identify the buyer’s value chain and the firm’s impact on it Determine ranked buyer purchasing criteria Assess the existing and potential sources of uniqueness in a firm’s value chain

Determine who the real buyer is

Identify the buyer’s value chain and the firm’s impact on it

Determine ranked buyer purchasing criteria

Assess the existing and potential sources of uniqueness in a firm’s value chain

Steps in Differentiation Identify the cost of existing and potential sources of differentiation Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating Test the chosen differentiation strategy for sustainability Reduce cost in activities that do not affect the chosen forms of differentiation

Identify the cost of existing and potential sources of differentiation

Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating

Test the chosen differentiation strategy for sustainability

Reduce cost in activities that do not affect the chosen forms of differentiation

Discussion: Red Ocean to Blue Ocean

Other Discussion Creative Industries Supply Chain Management What is “Buyer’s Value Chain”?

Creative Industries

Supply Chain Management

What is “Buyer’s Value Chain”?