What is Competitive advantage? … a basis for the firm’s long term success? … a basis for value creation?Do we really know where it resides?Can it be sustainable?
What is Competitive advantage? “When two or more firms competewithin the same market, one firmspossesses a competitive advantage over itsrivals when it earns a persistently higherrate of profit (or has the potential to earn apersistently higher rate of profit)” R. M. Grant, 2000
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Competitive strategies by Porter Types of competitive advantage Low cost Differentiation Industry-wide Cost leadershipDifferentiationMarket Niche Focus with Focus with low cost differentiation
Cost Leadership StrategyAn integrated set of actions designed toproduce or deliver goods or services at thelowest cost, relative tocompetitors with features that are acceptableto customers ◦ relatively standardized products ◦ features acceptable to many customers ◦ lowest competitive price
Cost Leadership StrategyCost saving actions required by this strategy: ◦ building efficient scale facilities ◦ tightly controlling production costs and overhead ◦ minimizing costs of sales, R&D and service ◦ building efficient manufacturing facilities ◦ monitoring costs of activities provided by outsiders ◦ simplifying production processes
How to Obtain a Cost Advantage Determine and Reconfigure, if control needed Cost Drivers Value Chain• Alter production process • New raw material• Change in automation • Forward integration• New distribution channel • Backward integration• New advertising media • Change location• Direct sales in place relative to suppliers of indirect sales or buyers
Factors That Drive CostsEconomies of scale Product featuresAsset utilization PerformanceCapacity utilization Mix & variety ofpattern products • Seasonal, cyclical Service levelsInterrelationships Small vs. large buyersOrder processing Process technologyand distribution Wage levelsValue chain linkages Product features • Advertising & sales Hiring, training, • Logistics & motivation operations
Major Risks of Cost LeadershipStrategyDramatic technological change could take away your cost advantageCompetitors may learn how to imitate value chainFocus on efficiency could cause cost leader to overlook changes in customer preferences
Differentiation StrategyAn integrated set of actions designed by afirm to produce or deliver goods or services(at an acceptable cost) that customersperceive as being different or unique inways that are important to them. ◦ price for product can exceed what the firm’s target customers are willing to pay ◦ Non standardized products ◦ customers value differentiated features more than they value low cost
Differentiation StrategyA product differentiation strategy must meet the VRIO criteria… Is it Valuable? Is it Rare? Is it costly to Imitate? Is the firm Organized to exploit it? …if it is to create competitive advantage.
Factors That Drive Differentiation Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional design skill Prestige and exclusivity
Differentiation StrategyDifferentiation actions required by thisstrategy:◦ Analysis of the value chain identifies in what parts of the chain and through which links superior products can be created and customer perception may be changed◦ Shaping perceptions through advertising◦ Focus on quality – customer loyalty.◦ Capability in R&D.
Differentiation Strategy and PriceElasticity of Demand•Differentiation strategy, properly used, can:reduce price elasticity of demand for theparticular product.•This leads to the ability to charge higherprices than competitors, without reducingsales volume.•Leads to above average profits comparedto sales.
Major Risks of DifferentiationStrategy Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large The “me-too” danger. Product features and characteristics can be easily copied. The company needs to be one step ahead of the curve and invest in improving and perfecting the product, otherwise it will quickly become obsolete. The “demanding consumer” danger. Products have shorter life cycles and consumers gravitate towards what’s new. In order to remain competitive firms need to keep up with the latest trends and technologies, or their target audience will switch to competitive offerings.
Focused Business-Level Strategies A focus strategy must exploit a narrow target’s differences from the balance of the industry by: ◦ isolating a particular buyer group ◦ isolating a unique segment of a product line ◦ concentrating on a particular geographic market.
Factors That May Drive FocusedStrategies Large firms may overlook small niches Firm may lack resources to compete in the broader market May be able to serve a narrow market segment more effectively than can larger industry-wide competitors Focus strategy may allow the firm to direct resources to certain value chain activities to build competitive advantage.
Major Risks of Focused Strategies Firm may be “outfocused” by competitors Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market
Integrated or Hybrid StrategyA firm that successfully uses an integratedcost leadership/differentiation strategy shouldbe in a better position to:◦ adapt quickly to environmental changes◦ learn new skills and technologies more quickly◦ effectively leverage its core competencies while competing against its rivals by providing differentiated products at low costs.
Benefits of Integrated Strategy Successful firms using this strategy have above-average returns Firm offers two types of values to customers ◦ some differentiated features (but less than a true differentiated firm) ◦ relatively low cost (but not as low as the cost leader’s price)
Major Risks of Integrated Strategy An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy
Sustainable competitive advantageWhat is meant by sustainable competitive advantage? ◦ Durable ◦ Valuable to the firm Exploiting weaknesses and neutralizing threats ◦ Unique ◦ Difficult for competitors to imitate ◦ Not easily substitutable
Examples of SCAFor many years, Singapore Airlines were riding on its SCA of having the best in-flight serviceAs more airlines improved their service and narrowed the gap, SIA sought other competitive advantages among which are ◦ The most modern fleet ◦ Outstanding Service on the Ground ◦ A super entertainment system in its cabins ◦ Comfort in its First Class cabins at an unparallel level
Warren BuffetsInvestment CriteriaWarren Buffet was once askedwhat is the most importantthing he looks for whenevaluating a company to invest in. Without hesitation,he replied, "Sustainablecompetitive advantage."
STRATEGIES FOR ◦ Market Leaders ◦ Challengers ◦ Followers, and ◦ Nichers
MARKET LEADER`SSTRATEGY: Defense Strategy A market leader should generally adopt a defense strategy 5 commonly used defense strategies ◦ Position Defense ◦ Flanking Defense ◦ Contraction Defense ◦ Pre-emptive Defense ◦ Counter-Offensive Defense
Defense Strategy (cont’d)Position DefenseUse ones existing good position as defence.One of the most successful of the defense strategiese.g. High end car manufacturers like Mercedes, Lamborghini, Ferrari use a position defense strategy given their
Defense Strategy (cont’d)Flanking Defense:◦ Secondary markets (flanks) are the weaker areas and prone to being attacked◦ Pay attention to the flanks
Defense Strategy (cont’d)Contraction DefenseWithdraw from the most vulnerable segments and redirect resources to those that are more defendableBy planned contraction or strategic withdrawale.g. India’s TATA Group sold its soaps and detergents business units to Unilever in 1993
Defense Strategy (cont’d)Pre-emptive DefenseDetect potential attacks and attack the enemies firstLet it be known how it will retaliateProduct or brand proliferation is a form of pre-emptive defense e.g. Seiko has over 2,000 models
Defense Strategy (cont’d) Counter-Offensive Defense Responding to competitors’ head-on attack by identifying the attacker’s weakness and then launch a counter attack e.g. Toyota launched the Lexus to respond to Mercedes attack
Market Challenger Strategies The market challengers’ strategic objective is to gain market share and to become the leader eventually How? By attacking the market leader By attacking other firms of the same size By attacking smaller firms
Frontal AttackSeldom work unless ◦ The challenger has sufficient fire-power (a 3:1 advantage) and staying power, and ◦ The challenger has clear distinctive advantage(s)e.g.Japanese and Korean car manufacturers launched frontal attacks in various ASPAC countries through quality, price and low cost
Flank attackAttack the enemy at its weak points or blind spots i.e. its flanksIdeal for challenger who does not have sufficient resourcese.g. In the 1990s, Yaohan attacked Mitsukoshi and Seibu’s flanks by opening numerous stores in overseas markets
Encirclement attack Attack the enemy at many fronts at the same time Ideal for challenger having superior resources e.g. Seiko attacked on fashion, features, user preferences and anything that might interest the consumer
Bypass attackBy diversifying into unrelated products or markets neglected by the leaderCould overtake the leader by using new technologiese.g. Pepsi use a bypass attack strategy against Coke in China by locating its bottling plants in the interior provinces
Guerrilla attackBy launching small, intermittent hit-and-run attacks to harass and destabilize the leaderUsually use to precede a stronger attacke.g. airlines use short promotions to attack the national carriers especially when passenger loads in certain routes are low
Market-Follower StrategiesTheodore Levitt in his article, “Innovative Imitation” argued that a product imitation strategy might be just as profitable as a product innovation strategy e.g. Product innovation--Sony Product-imitation--Panasonic
Market-Follower Strategies (cont’d)Each follower tries to bring distinctive advantages to its target market--location, services, financingFour broad follower strategies: ◦ Counterfeiter (which is illegal) ◦ Cloner e.g. the IBM PC clones ◦ Imitator e.g. car manufacturers imitate the style of one another ◦ Adapter e.g. many Japanese firms are excellent adapters initially before developing into challengers and eventually leaders
Market-Nicher StrategiesSmaller firms can avoid larger firms by targeting smaller markets or niches that are of little or no interest to the larger firms e.g. Logitech--mouse Microbrewers--special beers
Market-Nicher Strategies (cont’d)Nichers must create niches, expand the niches and protect them ◦ e.g. Nike constantly created new niches--cycling, walking, hiking, cheerleading, etcWhat is the major risk faced by nichers? ◦ Market niche may be attacked by larger firms once they notice the niches are successful
Multiple Niching“A firm should `stick to its niching’ but not necessarily to its niche. That is why multiple niching is preferable to single niching. By developing strength in two or more niches the company increases its chances for survival.” Philip Kotler