Michael Porter's Competitive Advantage
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  • 1. Competitive Advantage Author: Michael Porter Instructor: Wesley Shu
  • 2. How a firm can actually create and sustain a competitive advantage in its industry
  • 3. Two Basic Types
    • Cost leadership
    • Differentiation
  • 4. Value Chain
    • Identify which activities contributing to cost leadership and differentiation
    • Analyze the source of competitive advantage
  • 5. Value Chain
  • 6. Primary Activities
    • Inbound Logistics
      • Receiving, storing, and disseminating inputs. E.g., warehousing, inventory control
    • Operations
      • Transforming inputs into the final product form
  • 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
  • 8. 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
  • 9. Support Activities
    • Procurement
      • Function of purchasing inputs used in the value chain
    • Technology Development
  • 10. Support Activities
    • Human Resource Management
    • Firm Infrastructure
    • planning, finance, accounting, legal, etc.
  • 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
  • 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
  • 13. Competitive Scope
    • Geographic Scope
      • Different geographic areas
    • Industry Scope
      • Interrelationships among business units
  • 14. “ Generic” Competitive Advantage
    • Cost Leadership
    • Differentiation
    • Focus
  • 15. Competitive Strategies Differentiation Focus Cost Focus Narrow Target Differentiation Cost Leadership Broad Target Competitive Scope Differentiation Lower Cost Competitive Advantage
  • 16. Cost Leadership Strategy
    • Steps to achieve cost leadership
    • Make cost assignment
    • Identify cost drivers
    • Understand cost dynamics
    • Control cost drivers
    • Reconfigure the value chain
  • 17. Operating Cost Assignment
  • 18. Asset Assignment
  • 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
  • 20. Cost Leadership – Cost Drivers
    • Factors affect costs.
  • 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
  • 22. Cost Leadership – Cost Drivers
    • Interrelationships
      • With other business units within a firm
    • Integration
      • Vertical integration in a value activity
    • Timing
  • 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.
  • 24. Identify Cost Drivers
  • 25. Cost Dynamics
    • What cause the change of cost drivers
  • 26. Cost Dynamics
    • Industry real growth
    • Differential scale sensitivity
    • Different learning rates
    • Differential technological change
    • Relative inflation of costs
    • Aging
    • Market adjustment
  • 27. How to Achieve Cost Advantage
  • 28. Analyze Cost Advantage
  • 29. Control Cost Drivers
    • E.g., control scale – gain the appropriate firm size
  • 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.
  • 31. 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.
  • 32. Cost Focus
    • A firm dedicates its efforts to a well-chosen segment of an industry can often lower its costs significantly.
  • 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
  • 34.  
  • 35. Identify Sources of Differentiation
  • 36. Drivers of Uniqueness
    • Policy Choices
    • Linkages
      • Linkages within the value chain
      • Supplier linkages
      • Channel linkages
    • Timing
      • Be the first
    • Location
  • 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”
  • 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
  • 39. 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
  • 40. 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
  • 41. 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
  • 42. Discussion: Red Ocean to Blue Ocean
  • 43. Other Discussion
    • Creative Industries
    • Supply Chain Management
    • What is “Buyer’s Value Chain”?