Michael Porter's Competitive Advantage

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

Value Chain
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

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

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

Support Activities
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

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

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

“ Generic” Competitive Advantage
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

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

Cost Leadership – Cost Drivers
Factors affect costs.

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

Interrelationships
With other business units within a firm
Integration
Vertical integration in a value activity
Timing

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

Cost Dynamics
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

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.

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.

Cost Focus
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

Identify Sources of Differentiation

Drivers of Uniqueness
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”

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

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

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

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

Discussion: Red Ocean to Blue Ocean

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

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Michael Porter's Competitive Advantage

by Wesley Shu

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