BUSINESS  POLICY &  STRATEGY MODULE – 2 COMPETITIVE  ADVANTAGE Dr. MARAMRAJU PADMAKAR RAO
REFERENCES: <ul><li>“ STRATEGIC MANAGEMENT” </li></ul><ul><li>----Charles W. L. Hill </li></ul><ul><li>Gareth R. Jones </l...
STRATEGIC PLANNING PROCESS MISSION & GOALS SWOT  STRAT.  CHOICE EXTERNAL OPP & THREATS INTERNAL STRENGTHS WEAKNESS FUNCTIO...
EXTERNAL ENVIRONMENT <ul><li>INDUSTRY :   Group of companies offering product or services that are close substitutes for e...
INDUSTRY COMPETITIVE ANALYSIS <ul><li>Porter’s Five Forces Model </li></ul><ul><li>Strategic Group Analysis </li></ul><ul>...
PORTER’S FIVE FORCES MODEL RISK OF ENTRY BY POTENTIAL COMPETITORS INTENSITY OF RIVALRY AMONG FIRMS BARGAINING POWER OF  SU...
<ul><li>RISK OF ENTRY: </li></ul><ul><li>a)  BRAND LOYALTY   –  by continuous ads, patent protection, product innovation, ...
PORTER’S FIVE FORCES MODEL  …contd <ul><li>d)  Customer switching cost- -- high switching charges locks the customer, high...
PORTER’S FIVE FORCES MODEL  …contd <ul><li>INDUSTRY COMPETITIVE STRUCTURE </li></ul><ul><li>a) Fragmented Industry:  Large...
<ul><li>EXIT BARRIERS: </li></ul><ul><li>INVESTMENTS IN ASSETS LIKE SPECIAL MACHINES </li></ul><ul><li>HIGH FIXED COST OF ...
PORTER’S FIVE FORCES MODEL  …contd <ul><li>3.  BARGAINING POWER OF BUYERS: </li></ul><ul><li>Buyers are Powerful when </li...
PORTER’S FIVE FORCES MODEL  …contd <ul><li>4.BARGAINING POWER OF SUPPLIERS: </li></ul><ul><li>Suppliers are powerful when ...
PORTER’S FIVE FORCES MODEL  …contd <ul><li>5. SUBSTITUTE PRODUCTS: </li></ul><ul><li>--- Companies in coffee industry will...
INDUSTRY COMPETITIVE ANALYSIS <ul><li>Porter’s Five Forces Model </li></ul><ul><li>Strategic Group Analysis </li></ul><ul>...
Strategic Groups within Industry <ul><li>HIGH </li></ul><ul><li>PRICES  </li></ul><ul><li>CHARGED </li></ul><ul><li>LOW </...
IMPLICATIONS OF THE STRATEGIC GROUPS <ul><li>DIRECT SUBSTITUTES FOR EACH OTHER INSIDE THE GROUP </li></ul><ul><li>RIVELVRY...
INDUSTRY COMPETITIVE ANALYSIS <ul><li>Porter’s Five Forces Model </li></ul><ul><li>Strategic Group Analysis </li></ul><ul>...
INDUSTRY LIFE CYCLE ANALYSIS *---Competitive Changes During Industry Evolution <ul><li>EMBRYONIC INDUSTRIES </li></ul><ul>...
Industry Life Cycle Demand Time Embryonic Growth Maturity Decline Shake out
1.EMBRYONIC INDUSTRIES <ul><li>Slow growth due to buyers unfamiliarity </li></ul><ul><li>High prices due to low scale of e...
2.GROWTH INDUSTRIES <ul><li>Demand increasing rapidly </li></ul><ul><li>Customers are becoming familiar with the Product <...
3.INDUSTRY SHAKEOUT <ul><li>The rate of growth slows down </li></ul><ul><li>Demand approaches saturation </li></ul><ul><li...
4.MATURE INDUSTRIES <ul><li>Barriers to entry increases </li></ul><ul><li>Threat of entry decreases </li></ul><ul><li>Comp...
5. DECLINING INDUSTRIES <ul><li>Growth becomes negative due to technological, social changes, demographics and internation...
THE MACRO ENVIRONMENT* <ul><li>ECONOMIC FORCES </li></ul><ul><li>TECHNOLOGICAL FORCES </li></ul><ul><li>DEMOGRAPHIC FORCES...
<ul><li>ECONOMIC FORCES </li></ul><ul><li>DEMO-  SOCIAL </li></ul><ul><li>GRAPHIC  FORCES </li></ul><ul><li>FORCES </li></...
1. ECONOMIC  FORCES <ul><li>Growth Rate of economy—increased customer expenditure, low competitive pressures, expansion& m...
2. TECHNOLOGICAL  FORCES <ul><li>Both Creative & destructive — opportunity & threat </li></ul><ul><li>Lowers the barriers ...
3. DEMOGRAPHIC  FORCES: <ul><li>No of women work force has increased from 44 to 60% --problems of equal pay, harassment of...
4. SOCIAL FORCES <ul><li>Changing social moves and values --- creates both opportunity and threat </li></ul><ul><li>Ex: He...
5. POLITICAL & LEGAL FORCES <ul><li>Political processes shape a society’s laws </li></ul><ul><li>Deregulation lowers the e...
GLOBALIZATION OF INDUSTRY STRUCTURE <ul><li>Surge in value and volume of Intl trade </li></ul><ul><li>Globalization of pro...
IMPLICATIONS OF GLOBALIZATION <ul><li>Industry boundaries do not stop at national borders </li></ul><ul><li>Shift from nat...
NATIONAL COMPETITIVE    ADVANTAGE* Attributes: <ul><li>Factor Endowments </li></ul><ul><li>Demand Conditions </li></ul><ul...
NATIONAL COMPETITIVE ADVANTAGE* NATIONAL COMPETITIVE ADVANTAGE FACTOR CONDITIONS INTENSITY OF RIVALRY LOCAL DEMAND CONDITI...
1. Factor Endowments : <ul><li>BASIC FACTORS:   Land, Labor, capital and Raw Materials </li></ul><ul><li>ADVANCED FACTORS ...
2.Local Demand Conditions: <ul><li>Companies are more sensitive to the needs of the closest customers </li></ul><ul><li>Cr...
3.COMPETITIVENESS OF RELATED AND SUPPORTING INDUSTRIES: <ul><li>Benefits of investments in advanced factors of production ...
4. INTENSITY OF RIVALRY: <ul><li>German & Japan predominantly top management team consists of engineers  emphasis on impro...
STRATEGIC PLANNING PROCESS MISSION & GOALS SWOT  STRAT.  CHOICE EXTERNAL OPP & THREATS INTERNAL STRENGTHS WEAKNESS FUNCTIO...
INTERNAL ANALYSIS <ul><li>We should understand   ----- </li></ul><ul><li>How the value is created and profit generated? </...
CRITICAL ISSUES IN  INTERNAL ANALYSIS <ul><li>What factors influence the durability of competitive advantage? </li></ul><u...
GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE* <ul><li>EFFICIENCY </li></ul><ul><li>QUALITY AND RELIABILITY </li></ul><...
GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE Superior Quality Comp. Adv *Low Cost . *Differentiation Superior Efficien...
1.EFFICIENCY: <ul><li>EFFICIENCY HELPS A COMPANY ATTAIN A COMPETITIVE ADVANTAGE THROUGH LOWER COST STRUCTURE </li></ul><ul...
2. QUALITY & RELIABILITY : <ul><li>IF CUSTOMERS PERCEIVE GREATER VALUE IN THE ATTRIBUTES OF A SPECIFIC PRODUCT AS COMPARED...
3. INNOVATION  : <ul><li>PRODUCT INNOVATION   –Development of products that are new or have superior attributes to existin...
4. RESPONSIVENESS TO CUSTOMERS : <ul><li>Identifying and satisfying customer needs better than the rivals </li></ul><ul><l...
DISTINCTIVE COMPETENCIES <ul><li>ARE FIRM SPECIFIC STRENGTHS THAT ALLOW A COMPANY TO DIFFERENCIATE ITS PRODUCTS AND ACHIEV...
STRATEGY, RESOURCES, CAPABILITIES AND COMPETENCIES RESOURCES DISTINCTIVE COMPETEN- -CIES CAPABILITIES STRATEGIES COMPETITI...
RESOURCES: <ul><li>CAPITAL OR FINANCIAL, PHYSICAL, SOCIAL OR HUMAN, TECHNOLOGICAL AND ORGANIZATIONAL FACTOR ENDOWMENTS </l...
CAPABILITIES: <ul><li>FIRM’S SKILLS AT COORDINATING ITS RESOURCES AND PUTTING THEM FOR PRODUCTIVE USE </li></ul><ul><li>PA...
COMPETITIVE ADVANTAGE AND VALUE CREATION <ul><li>PROFITABILITY OF THE COMPANY DEPENDS ON: </li></ul><ul><li>THE AMOUNT OF ...
VALUE CREATION:   <ul><li>V  V –Value to consumer </li></ul><ul><li>P --Price </li></ul><ul><li>P  C –Cost of Production <...
ROOTS OF COMPETITIVE ADVANTAGE RESOURCES DISTINCTIVE COMPETEN- -CIES CAPABILITIES SUPERIOR FACTORS VALUE CREATION SUPERIOR...
THE DURABILITY OF COMPETITIVE ADVANTAGE* <ul><li>BARRIERS TO IMITATION </li></ul><ul><li>CAPABILITY OF THE COMPETITORS </l...
BARRIERS TO IMITATION:  ARE FACTORS THAT MAKE IT DIFFICULT FOR A COMPETITOR TO COPY A COMPANY’S DISTINCTIVE COMPETENCIES <...
CAPABILITY OF COMPETITORS : <ul><li>STRATEGIC COMMITMENT: </li></ul><ul><li>IMITATION BECOMES DIFFICULT DUE TO STRATEGIC C...
INDUSTRY DYNAMISM: <ul><li>THE MOST DYNAMIC INDUSTRIES HAVING HIGH RATE OF PRODUCT INNOVATION </li></ul><ul><li>RAPID RATE...
AVOIDING FAILURE & SUSTAINING COMPETITIVE ADVANTAGE <ul><li>INERTIA:   Companies find it difficult to change their strateg...
Rising and Falling Companies <ul><li>CRAFTSMAN:  Texas Instruments &  Digital Equipment corporation Engineering Excellence...
STEPS TO AVOID FAILURE <ul><li>FOCUS ON THE BUILDING BLOCKS OF COMPETITIVE ADVANTAGE </li></ul><ul><li>INSTITUTE CONTINUOU...
Assignment on Module -2   --To be submitted by 17 th  Jan 2011 <ul><li>Taking the example of any company/ organization des...
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  1. 1. BUSINESS POLICY & STRATEGY MODULE – 2 COMPETITIVE ADVANTAGE Dr. MARAMRAJU PADMAKAR RAO
  2. 2. REFERENCES: <ul><li>“ STRATEGIC MANAGEMENT” </li></ul><ul><li>----Charles W. L. Hill </li></ul><ul><li>Gareth R. Jones </li></ul>
  3. 3. STRATEGIC PLANNING PROCESS MISSION & GOALS SWOT STRAT. CHOICE EXTERNAL OPP & THREATS INTERNAL STRENGTHS WEAKNESS FUNCTIONAL BUSINESS GLOBAL CORPORATE STRATEGIES CORP. PERFORM- -ANCE IMPL. IN FIRM IMPL.IN INDUSTRY FEEDBACK
  4. 4. EXTERNAL ENVIRONMENT <ul><li>INDUSTRY : Group of companies offering product or services that are close substitutes for each other i.e. product/service that satisfy the same basic customer need </li></ul><ul><li>INDUSTRY BOUNDARY : Basic customer needs that are served by a market define the industry boundary. </li></ul><ul><li>SECTOR : A group of closely related industries </li></ul><ul><li>EX:1. COMPUTER SECTOR -------------Computer component industry </li></ul><ul><li>-------------Computer hardware industry </li></ul><ul><li>-------------Computer software industry </li></ul><ul><li>2. TELECOMMUNICATIONS: --Telecommunication Equipment Ind. </li></ul><ul><li>SECTOR -- Telecommunication Services Ind. </li></ul>
  5. 5. INDUSTRY COMPETITIVE ANALYSIS <ul><li>Porter’s Five Forces Model </li></ul><ul><li>Strategic Group Analysis </li></ul><ul><li>Industry Life Cycle Analysis </li></ul>
  6. 6. PORTER’S FIVE FORCES MODEL RISK OF ENTRY BY POTENTIAL COMPETITORS INTENSITY OF RIVALRY AMONG FIRMS BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS THREAT OF SUBSTITUTES
  7. 7. <ul><li>RISK OF ENTRY: </li></ul><ul><li>a) BRAND LOYALTY – by continuous ads, patent protection, product innovation, high product quality </li></ul><ul><li>b) ABSOLUTE COST ADVANTAGE – superior production operations, control of inputs like labor, material, equipment, skills, access to cheaper funds. </li></ul><ul><li>c) ECONOMICS OF SCALE – cost reduction thro mass production, discounts on bulk purchase of raw materials, spreading fixed production costs, cost savings through spreading marketing & advertising over a large volume. </li></ul>PORTER’S FIVE FORCES MODEL
  8. 8. PORTER’S FIVE FORCES MODEL …contd <ul><li>d) Customer switching cost- -- high switching charges locks the customer, higher barrier to exit </li></ul><ul><li>Ex: switching from one Operating system to another </li></ul><ul><li>e) Government Regulations --- lowers the barrier to new entrants Ex: Telecom, Transport airlines </li></ul><ul><li>2) RIVERLRY AMONG THE ESTABLISHED FIRMS: Competitive struggle to gain market share </li></ul><ul><li>PRICE, PRODUCT DESIGN, ADVERTISING, PROMOTION SPENDING, DIRECT SELLING EFFORTS, AFTER SALES SERVICE AND SUPPORT </li></ul>
  9. 9. PORTER’S FIVE FORCES MODEL …contd <ul><li>INDUSTRY COMPETITIVE STRUCTURE </li></ul><ul><li>a) Fragmented Industry: Large no of small/ medium size companies & none can determine industry price. Boom and bust cycles repeat, profits rise & fall, large no of new entrants </li></ul><ul><li>Ex: Agriculture, Health clubs </li></ul><ul><li>Strategy : minimize cost </li></ul><ul><li>b) Consolidated Industry: A small no of large cos </li></ul><ul><li>(OLIGOPOLY), one company competitive actions will lead to competitive reaction .May lead to competitive spiral. Ex: Airlines, Automobiles, Aerospace, Pharma </li></ul><ul><li>Strategy : prices should be set by watching, interpreting, anticipating and responding to each other behavior </li></ul><ul><li>INDUSTRY DEMAND: High demand reduces competition </li></ul><ul><li>Declining demand increased the rivalry </li></ul>
  10. 10. <ul><li>EXIT BARRIERS: </li></ul><ul><li>INVESTMENTS IN ASSETS LIKE SPECIAL MACHINES </li></ul><ul><li>HIGH FIXED COST OF EXIT </li></ul><ul><li>EMOTIONAL ATTATCHMENT </li></ul><ul><li>ECONOMIC DEPENDENCE ON THE INDUSTRY </li></ul><ul><li>THE NEED TO MAINTAIN EXPENSIVE COLLECTION OF ASSETS </li></ul>PORTER’S FIVE FORCES MODEL …contd
  11. 11. PORTER’S FIVE FORCES MODEL …contd <ul><li>3. BARGAINING POWER OF BUYERS: </li></ul><ul><li>Buyers are Powerful when </li></ul><ul><li>a) If industry composed of large small companies and buyers are large and few </li></ul><ul><li>b) If buyers purchase large quantities </li></ul><ul><li>c) When supply industry depends on buyers for a large quantity of its total orders </li></ul><ul><li>d) When switching costs are low </li></ul><ul><li>e) When it is economically feasible for buyers to purchase an input from several companies </li></ul><ul><li>f) When buyers can threaten to enter the industry and produce the product themselves </li></ul><ul><li>Ex: Suppliers of auto components for GM, Ford, </li></ul><ul><li>Daimler Chrysler </li></ul>
  12. 12. PORTER’S FIVE FORCES MODEL …contd <ul><li>4.BARGAINING POWER OF SUPPLIERS: </li></ul><ul><li>Suppliers are powerful when </li></ul><ul><li>The product has few substitutes and is vital to the company. </li></ul><ul><li>When the industry is not an important customer to the supplier. </li></ul><ul><li>If the product of the supplier is unique or different. </li></ul><ul><li>Suppliers can threaten to enter customer’s industry to produce products that would compete with those of the industry. </li></ul><ul><li>Firms in the industry can not threaten to enter their suppliers industry and make their own inputs. </li></ul><ul><li>Ex: PC manufacture: Intel CPU chips 85% of the chips needed for PC </li></ul><ul><li>The competitors can not match Intel’s price & scale </li></ul>
  13. 13. PORTER’S FIVE FORCES MODEL …contd <ul><li>5. SUBSTITUTE PRODUCTS: </li></ul><ul><li>--- Companies in coffee industry will have substitute products in tea or soft drinks. </li></ul><ul><li>Existence of close substitutes will give strong competition and the threat limits the price </li></ul><ul><li>In case of no substitutes the companies can increase the price and make profits </li></ul><ul><li>COMPLIMENTORS: </li></ul><ul><li>Products that add value to the products of the companies in an industry. </li></ul><ul><li>Ex: Application software and the PC for better service to the customer. </li></ul>
  14. 14. INDUSTRY COMPETITIVE ANALYSIS <ul><li>Porter’s Five Forces Model </li></ul><ul><li>Strategic Group Analysis </li></ul><ul><li>Industry Life Cycle Analysis </li></ul>
  15. 15. Strategic Groups within Industry <ul><li>HIGH </li></ul><ul><li>PRICES </li></ul><ul><li>CHARGED </li></ul><ul><li>LOW </li></ul><ul><li>LOW R & D SPENDING HIGH </li></ul>PROPRIETARY GROUP MERCK PFIZER Eli Lilly GENERIC GROUP FOREST LABS CARTER ICN
  16. 16. IMPLICATIONS OF THE STRATEGIC GROUPS <ul><li>DIRECT SUBSTITUTES FOR EACH OTHER INSIDE THE GROUP </li></ul><ul><li>RIVELVRY WITHIN ITS OWN STRATEGIC GROUP </li></ul><ul><li>EACH STRATEGIC GROUP FACE DIFFERENT SET OF OPPORTUNITIES AND THREATS </li></ul><ul><li>THE FIRMS IN THE PROPRIETARY GROUP CAN CHARGE HIGHER PRICES DUE TO THE PATENTS </li></ul><ul><li>THE FIRMS IN GENERIC GROUP ARE IN WEAKER POSITION DUE TO NUMBER OF COMPETITORS </li></ul><ul><li>MOBILITY BARRIERS DUE TO HIGH R&D COST, PRICE STRUCTURE etc. </li></ul>
  17. 17. INDUSTRY COMPETITIVE ANALYSIS <ul><li>Porter’s Five Forces Model </li></ul><ul><li>Strategic Group Analysis </li></ul><ul><li>Industry Life Cycle Analysis </li></ul>
  18. 18. INDUSTRY LIFE CYCLE ANALYSIS *---Competitive Changes During Industry Evolution <ul><li>EMBRYONIC INDUSTRIES </li></ul><ul><li>GROWTH INDUSTRIES </li></ul><ul><li>INDUSTRY SHAKEOUT </li></ul><ul><li>MATURE INDUSTRIES </li></ul><ul><li>DECLINING INDUSTRIES </li></ul>
  19. 19. Industry Life Cycle Demand Time Embryonic Growth Maturity Decline Shake out
  20. 20. 1.EMBRYONIC INDUSTRIES <ul><li>Slow growth due to buyers unfamiliarity </li></ul><ul><li>High prices due to low scale of economics </li></ul><ul><li>Poorly developed distribution channels </li></ul><ul><li>Barrier to entry due to access to technology </li></ul><ul><li>Based on the innovative efforts of the company </li></ul><ul><li>Rivalry on: </li></ul><ul><li>Educating customers </li></ul><ul><li>Opening of the distribution channels </li></ul><ul><li>Perfecting the design of the product </li></ul><ul><li>Not on the price </li></ul><ul><li>EX: Personal Computers (APPLE) </li></ul><ul><li>Vacuum Cleaners (HOOVER) </li></ul><ul><li>Photo Copiers (XEROX) </li></ul>
  21. 21. 2.GROWTH INDUSTRIES <ul><li>Demand increasing rapidly </li></ul><ul><li>Customers are becoming familiar with the Product </li></ul><ul><li>Prices fall due to the attainment of the scale of economics </li></ul><ul><li>Developing Distribution Channels </li></ul><ul><li>Threat from Potential Competitors is the highest </li></ul><ul><li>Intensity of rivalry relatively low due to the expanding Industry </li></ul><ul><li>Enables the Companies to expand their revenues and profits without affecting the market share of their competitors </li></ul>
  22. 22. 3.INDUSTRY SHAKEOUT <ul><li>The rate of growth slows down </li></ul><ul><li>Demand approaches saturation </li></ul><ul><li>Rivalry Intensifies between companies </li></ul><ul><li>Emergence of excess production capacity </li></ul><ul><li>Results in price war and price reduction </li></ul><ul><li>Drives most inefficient companies into bankruptcy </li></ul><ul><li>Deters new entry </li></ul>
  23. 23. 4.MATURE INDUSTRIES <ul><li>Barriers to entry increases </li></ul><ul><li>Threat of entry decreases </li></ul><ul><li>Competition for market share increases </li></ul><ul><li>Price war and prices decrease </li></ul><ul><li>Companies focus on cost reduction and develop on brand loyalty </li></ul>
  24. 24. 5. DECLINING INDUSTRIES <ul><li>Growth becomes negative due to technological, social changes, demographics and international competition </li></ul><ul><li>Degree of rivalry increases </li></ul><ul><li>Excess capacity is created </li></ul><ul><li>Prices decrease </li></ul><ul><li>Exit barriers play greater role in adjusting excess capacity </li></ul>
  25. 25. THE MACRO ENVIRONMENT* <ul><li>ECONOMIC FORCES </li></ul><ul><li>TECHNOLOGICAL FORCES </li></ul><ul><li>DEMOGRAPHIC FORCES </li></ul><ul><li>SOCIAL FORCES </li></ul><ul><li>POLITICAL AND LEGAL FORCES </li></ul>
  26. 26. <ul><li>ECONOMIC FORCES </li></ul><ul><li>DEMO- SOCIAL </li></ul><ul><li>GRAPHIC FORCES </li></ul><ul><li>FORCES </li></ul><ul><li>TECHNOLOGICAL FORCES </li></ul>RISK OF ENTRY BY POTENTIAL COMPETITORS INTENSITY OF RIVALRY AMONG FIRMS BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS THREAT OF SUBSTITUTES
  27. 27. 1. ECONOMIC FORCES <ul><li>Growth Rate of economy—increased customer expenditure, low competitive pressures, expansion& more profits </li></ul><ul><li>Interest rates—directly affects demand, cost of capital </li></ul><ul><li>Currency Exchange rates—affects the competitiveness in the global market </li></ul><ul><li>Inflation Rates--- investment planning difficult, affects the real future value of returns </li></ul>
  28. 28. 2. TECHNOLOGICAL FORCES <ul><li>Both Creative & destructive — opportunity & threat </li></ul><ul><li>Lowers the barriers of entry, prices and profits, Increases the intensity of rivalry </li></ul><ul><li>Ex: Effect of Internet on advertising </li></ul><ul><li>Effect of biotechnology companies on </li></ul><ul><li>established pharmaceutical companies </li></ul>
  29. 29. 3. DEMOGRAPHIC FORCES: <ul><li>No of women work force has increased from 44 to 60% --problems of equal pay, harassment of women at work place </li></ul><ul><li>Changes in age distribution of population </li></ul><ul><li>--opportunity for orgns catering for old </li></ul><ul><li>Home health care and recreation </li></ul><ul><li>Baby boomers create mkt for customer appliances like washing machines, dish washers, dryers etc </li></ul><ul><li>Saving for retirement creates more inflows into mutual funds and other savings </li></ul>
  30. 30. 4. SOCIAL FORCES <ul><li>Changing social moves and values --- creates both opportunity and threat </li></ul><ul><li>Ex: Health Consciousness </li></ul><ul><li>Miller Lite– low calorie beer </li></ul><ul><li>PepsiCo’s colas & fruit based soft </li></ul><ul><li>drinks </li></ul><ul><li>Tobacco industry – decline due to </li></ul><ul><li>customer awareness of the health </li></ul><ul><li>hazards of smoking </li></ul>
  31. 31. 5. POLITICAL & LEGAL FORCES <ul><li>Political processes shape a society’s laws </li></ul><ul><li>Deregulation lowers the entry barriers leading to intense competition and fare wars </li></ul><ul><li>Govt regulations increase the entry barrier </li></ul><ul><li>Financial support to politicians can help the cos to influence the govt to pass laws favorable to it --- </li></ul><ul><li>Ex:Enron power --deregulation </li></ul><ul><li>Imposition of import duty on </li></ul><ul><li>steel in US </li></ul>
  32. 32. GLOBALIZATION OF INDUSTRY STRUCTURE <ul><li>Surge in value and volume of Intl trade </li></ul><ul><li>Globalization of production ---improved in the cost & quality of factors of production labor, energy, land & capital resulting in lower cost and boost profits </li></ul><ul><li>Globalization of Markets---National mkts are merging into one huge global market </li></ul><ul><li>Ex: Coca Cola, Citigroup Credit Cards, Blue jeans, Sony Play station, McDonald, Nokia phones, Microsoft Windows </li></ul>
  33. 33. IMPLICATIONS OF GLOBALIZATION <ul><li>Industry boundaries do not stop at national borders </li></ul><ul><li>Shift from national markets to Global markets intensified the competitive rivalry </li></ul><ul><li>Rate of Innovation has increased along with Competitive intensity </li></ul><ul><li>Through the threat of entry and the intensity of rivalry has increased, it has created enormous opportunities </li></ul>
  34. 34. NATIONAL COMPETITIVE ADVANTAGE* Attributes: <ul><li>Factor Endowments </li></ul><ul><li>Demand Conditions </li></ul><ul><li>Relating and Supporting Industries </li></ul><ul><li>Firm Strategy, Structure and Rivalry </li></ul>
  35. 35. NATIONAL COMPETITIVE ADVANTAGE* NATIONAL COMPETITIVE ADVANTAGE FACTOR CONDITIONS INTENSITY OF RIVALRY LOCAL DEMAND CONDITIONS COMPETITI- VENESS OF SUP. INDUS
  36. 36. 1. Factor Endowments : <ul><li>BASIC FACTORS: Land, Labor, capital and Raw Materials </li></ul><ul><li>ADVANCED FACTORS : Technological Know How, Managerial Sophistication, Physical Infrastructure like Roads, Railways and Ports </li></ul>
  37. 37. 2.Local Demand Conditions: <ul><li>Companies are more sensitive to the needs of the closest customers </li></ul><ul><li>Creates pressure for innovation and quality </li></ul><ul><li>High standards of product quality due to sophisticated customers </li></ul><ul><li>Ex: Cameras of Japan </li></ul><ul><li>Cell phones of Nokia, Ericsson of </li></ul><ul><li>Finland and Sweden </li></ul>
  38. 38. 3.COMPETITIVENESS OF RELATED AND SUPPORTING INDUSTRIES: <ul><li>Benefits of investments in advanced factors of production by the related & supporting industries will spill over in the industry </li></ul><ul><li>Ex: Sweden—strength in fabricated steel products spilled over into specialty steel industry </li></ul><ul><li>Successful industries within a country tend to be grouped into clusters of related industries Ex: German textile & apparel sector –High quality cotton, wool, synthetic fiber, sewing machine needles and other textile machinery </li></ul>
  39. 39. 4. INTENSITY OF RIVALRY: <ul><li>German & Japan predominantly top management team consists of engineers emphasis on improving processes and product design </li></ul><ul><li>In US the top management contain mainly finance background— short term financial returns– loss of US competitiveness in many engineering based industries </li></ul><ul><li>Rivalry induces companies to improve efficiency </li></ul><ul><li>Creates pressure to innovate, improve quality, reduce costs & upgrade advanced factors </li></ul>
  40. 40. STRATEGIC PLANNING PROCESS MISSION & GOALS SWOT STRAT. CHOICE EXTERNAL OPP & THREATS INTERNAL STRENGTHS WEAKNESS FUNCTIONAL BUSINESS GLOBAL CORPORATE STRATEGIES CORP. PERFORM- -ANCE IMPL. IN FIRM IMPL.IN INDUSTRY FEEDBACK
  41. 41. INTERNAL ANALYSIS <ul><li>We should understand ----- </li></ul><ul><li>How the value is created and profit generated? </li></ul><ul><li>What is the role of Resources, Capabilities and Distinctive competencies in this process? </li></ul><ul><li>The importance of superior efficiency, innovation, quality and response to customers </li></ul><ul><li>To analyze the sources of competitive advantage to identify what is driving the profitability </li></ul><ul><li>How the strengths of the enterprise boost its profitability and the weaknesses lead to lower profitability? </li></ul>
  42. 42. CRITICAL ISSUES IN INTERNAL ANALYSIS <ul><li>What factors influence the durability of competitive advantage? </li></ul><ul><li>Why do successful companies lose their competitive advantage? </li></ul><ul><li>How can companies avoid failure and sustain the competitive advantage over a period of time? </li></ul>
  43. 43. GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE* <ul><li>EFFICIENCY </li></ul><ul><li>QUALITY AND RELIABILITY </li></ul><ul><li>INNOVATION </li></ul><ul><li>RESPONSIVENESS TO CUSTOMERS </li></ul><ul><li>---Differentiate its product offering & creates greater customer perceived value </li></ul><ul><li>---Lower its cost structure </li></ul>
  44. 44. GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE Superior Quality Comp. Adv *Low Cost . *Differentiation Superior Efficiency Superior Customer Responsive- -ness Superior Innovation
  45. 45. 1.EFFICIENCY: <ul><li>EFFICIENCY HELPS A COMPANY ATTAIN A COMPETITIVE ADVANTAGE THROUGH LOWER COST STRUCTURE </li></ul><ul><li>EMPLOYEE PRODUCTIVITY </li></ul><ul><li>CAPITAL PRODUCTIVITY </li></ul><ul><li>PRODUCTIVITY OF R&D SPENDING </li></ul><ul><li>SALES FORCE PRODUCTIVITY </li></ul><ul><li>HIGH PRODUCTIVITY LEADS TO GREATER EFFICIENCY AND LOWER COSTS </li></ul>
  46. 46. 2. QUALITY & RELIABILITY : <ul><li>IF CUSTOMERS PERCEIVE GREATER VALUE IN THE ATTRIBUTES OF A SPECIFIC PRODUCT AS COMPARED TO COMPETITORS </li></ul><ul><li>HIGH QUALITY PRODUCTS INCREASES THE VALUE OF THE PRODUCT IN THE EYES OF THE CUSTOMER &THE COMPANY CAN CHARGE HIGH PRICE </li></ul><ul><li>RELIABLE PRODUCTS GIVE RISE TO GREATER EFFICIENCY AND LOWER UNIT COST ie LESS EMPLOYEE TIME IS WASTED MAKING DEFECTIVE PRODUCTS OR PROVIDING SUBSTANDARD SERVICES </li></ul><ul><li>IN MANY INDUSTRIES QUALITY & RELIABILITY HAS BECOME AN ABSOLUTE IMPERATIVE FOR SURVIVAL </li></ul>
  47. 47. 3. INNOVATION : <ul><li>PRODUCT INNOVATION –Development of products that are new or have superior attributes to existing products. Ex: Intel microprocessors, Cisco’s Routers, Palm’s Hand held computer—increases company’s pricing options </li></ul><ul><li>PROCESS INNOVATION —Development of new process for producing products& delivering to customers Ex: Toyota: Lean production system, Just in time inventory, self managing teams, reduced setup times </li></ul><ul><li>Innovation makes a company UNIQUE as compared to its rivals and it can differentiate itself from its rivals. </li></ul><ul><li>Innovation can reduce its unit costs far below those of competitors </li></ul>
  48. 48. 4. RESPONSIVENESS TO CUSTOMERS : <ul><li>Identifying and satisfying customer needs better than the rivals </li></ul><ul><li>Achieving superior quality and innovation leads to superior responsiveness </li></ul><ul><li>Customize goods and services unique demands of the customers </li></ul><ul><li>Fast response time </li></ul><ul><li>Superior design, superior after sales service and support allows a company to differentiate --- helps to get brand loyalty, and company can charge a premium price for its products </li></ul>
  49. 49. DISTINCTIVE COMPETENCIES <ul><li>ARE FIRM SPECIFIC STRENGTHS THAT ALLOW A COMPANY TO DIFFERENCIATE ITS PRODUCTS AND ACHIEVE SUBSTANTIALLY LOWER COSTS THAN ITS RIVALS THUS GAIN COMPETITIVE ADVANTAGE </li></ul><ul><li>Ex: TOYOTO’S LEAN PRODUCTION SYSTEM CONSISTING OF </li></ul><ul><li>a) JUST IN TIME INVENTORY SYSTEM </li></ul><ul><li>b) SELF MANAGING TEAMS </li></ul><ul><li>c) REDUCED SETUP TIMES FOR COMPLEX EQUIPMENT </li></ul><ul><li>A STRATEGY IS THE DRIVER OF COMPETITIVE ADVANTAGE AND PROFITABILITY </li></ul><ul><li>DISTINCTIVE COMPETENCIES ARISE FROM </li></ul><ul><li>----RESOURCES </li></ul><ul><li>----CAPABILITIES </li></ul>
  50. 50. STRATEGY, RESOURCES, CAPABILITIES AND COMPETENCIES RESOURCES DISTINCTIVE COMPETEN- -CIES CAPABILITIES STRATEGIES COMPETITIVE ADVANTAGE SUPERIOR PROFITA- -BILITY
  51. 51. RESOURCES: <ul><li>CAPITAL OR FINANCIAL, PHYSICAL, SOCIAL OR HUMAN, TECHNOLOGICAL AND ORGANIZATIONAL FACTOR ENDOWMENTS </li></ul><ul><li>------ FIRM SPECIFIC AND DIFFICULT TO IMITATE </li></ul><ul><li>------VALUABLE LEAD TO DISTINCTIVE COMPETENCY </li></ul><ul><li>AND CREATES STRONG DEMAND </li></ul><ul><li>TANGIBLE RESOURCES : Land, buildings, plant, equipment, inventory and money </li></ul><ul><li>INTANGIBLE RESOURCES : Brand names, reputation of the company, knowledge gained by employee through experience & intellectual property of the company including patents, copy rights and trade marks </li></ul><ul><li>EX: Polaroid instant film processing – a valuable resource which vanished with the invention of DIGITAL PHOTOGRAPHY </li></ul>
  52. 52. CAPABILITIES: <ul><li>FIRM’S SKILLS AT COORDINATING ITS RESOURCES AND PUTTING THEM FOR PRODUCTIVE USE </li></ul><ul><li>PART OF ORGANIZATION’S RULES, ROUTINES, PROCEDURES </li></ul><ul><li>THE PRODUCT OF ORGANIZATION’S STRUCTURE, PROCESSES, AND CONTROL SYSTEMS </li></ul><ul><li>DEPENDS ON THE CULTURAL NORMS AND VALUES </li></ul><ul><li>INTANGIBLE </li></ul><ul><li>FOR DISTINCTIVE COMPETENCY A FIRM CAN HAVE </li></ul><ul><li>---A FIRM SPECIFIC AND VALUABLE RESOURCE AND THE CAPABILITIES NECESSARY TO TAKE ADVANTAGE OF THAT RESOURCE ( POLAROID) </li></ul><ul><li>--- A FIRM SPECIFIC CAPABILITY TO MANAGE RESOURCES(NUCOR) </li></ul><ul><li>A COMPANY’S DISTINCTIVE COMPETENCY IS STRONGEST WHEN IT POSESSES FIRM SPECIFIC & VALUABLE RESOURCES AND FIRM SPECIFIC CAPABILITIES TO MANAGE THE RESOURCES </li></ul>
  53. 53. COMPETITIVE ADVANTAGE AND VALUE CREATION <ul><li>PROFITABILITY OF THE COMPANY DEPENDS ON: </li></ul><ul><li>THE AMOUNT OF VALUE CUSTOMER PLACES </li></ul><ul><li>ON THE COMPANY’S PRODUCTS </li></ul><ul><li>THE PRICE THAT A COMPANY CHARGES FOR </li></ul><ul><li>ITS PRODUCTS </li></ul><ul><li>THE COSTS OF CREATING THAT VALUE </li></ul>
  54. 54. VALUE CREATION: <ul><li>V V –Value to consumer </li></ul><ul><li>P --Price </li></ul><ul><li>P C –Cost of Production </li></ul><ul><li>V – P…Consumer surplus </li></ul><ul><li>C P –C ..Profit Margin </li></ul><ul><li>V –C ..Value Created </li></ul>V-P P-C C
  55. 55. ROOTS OF COMPETITIVE ADVANTAGE RESOURCES DISTINCTIVE COMPETEN- -CIES CAPABILITIES SUPERIOR FACTORS VALUE CREATION SUPERIOR PROFITA- -BILITY DIFFEREN- CIATION LOW COST
  56. 56. THE DURABILITY OF COMPETITIVE ADVANTAGE* <ul><li>BARRIERS TO IMITATION </li></ul><ul><li>CAPABILITY OF THE COMPETITORS </li></ul><ul><li>DYNAMISM OF THE INDUSTRY ENVIRONMENT. </li></ul>
  57. 57. BARRIERS TO IMITATION: ARE FACTORS THAT MAKE IT DIFFICULT FOR A COMPETITOR TO COPY A COMPANY’S DISTINCTIVE COMPETENCIES <ul><li>IMITATING RESOURCES: </li></ul><ul><li>TANGIBLE RESOURCES LIKE FIRM SPECIFIC AND VALUABLE TANGIBLE RESOURCES –VISIBLE TO ALL COMPETITORS </li></ul><ul><li>INTANGIBLE RESOURCES LIKE BRAND NAME, MARKETING AND TECHNOLOGICAL KNOW HOW , PATENTS. INVENTIONS AROUND PATENTS CAN BE DONE </li></ul><ul><li>IMITATING CAPABILITIES: </li></ul><ul><li>IMITATING THE CAPABILITIES IS DIFFICULT </li></ul>
  58. 58. CAPABILITY OF COMPETITORS : <ul><li>STRATEGIC COMMITMENT: </li></ul><ul><li>IMITATION BECOMES DIFFICULT DUE TO STRATEGIC COMMITMENT OF THE COMPETITORS </li></ul><ul><li>ABSORPTIVE CAPACITY: </li></ul><ul><li>ABILITY OF THE ENTERPRISE TO IDENTIFY,VALUE, ASSIMILATE AND USE NEW KNOWLEDGE </li></ul><ul><li>Ex: TOYOTA’S LEAN PRODUCTION SYSTEM COULD NOT BE IMITATED BY GENERAL MOTORS DUE TO INTERNAL INERTIA </li></ul>
  59. 59. INDUSTRY DYNAMISM: <ul><li>THE MOST DYNAMIC INDUSTRIES HAVING HIGH RATE OF PRODUCT INNOVATION </li></ul><ul><li>RAPID RATE OF INNOVATION MEANS SHORTENING OF THE PRODUCT LIFE CYCLES AND THE COMPETITIVE ADVANTAGE IS FLEETING </li></ul><ul><li>Ex: HIGH DEGREE OF INNOVATION IN PERSONAL </li></ul><ul><li>COMPUTER CREATED A TURBULENT </li></ul><ul><li>ENVIRONMENT. APPLE COMPUTER LOST TO </li></ul><ul><li>IBM , IBM HAS LOST TO COMPAQ . COMPAQ </li></ul><ul><li>HAS LOST TO DELL </li></ul>
  60. 60. AVOIDING FAILURE & SUSTAINING COMPETITIVE ADVANTAGE <ul><li>INERTIA: Companies find it difficult to change their strategies and structures to adapt to the changing competitive conditions </li></ul><ul><li>Capabilities are difficult to change like procedures and processes </li></ul><ul><li>PRIOR STRATEGIC COMMITMENTS </li></ul><ul><li>THE ICARUS PARADOX </li></ul>
  61. 61. Rising and Falling Companies <ul><li>CRAFTSMAN: Texas Instruments & Digital Equipment corporation Engineering Excellence & ignored the market realities </li></ul><ul><li>BUILDERS: ITT & Gulf Western –enchanted by Diversification beyond the Profitable limit </li></ul><ul><li>PIONEER: Wang Labs– Brilliant innovator ended up with novel and useless innovations </li></ul><ul><li>SALESMAN: P&G , Chrysler Marketing ability to sell anything– Ignored product Development and manufacturing excellence---Inferior Products </li></ul>
  62. 62. STEPS TO AVOID FAILURE <ul><li>FOCUS ON THE BUILDING BLOCKS OF COMPETITIVE ADVANTAGE </li></ul><ul><li>INSTITUTE CONTINUOUS IMPROVEMENT AND LEARNING </li></ul><ul><li>TRACK BEST INDUSTRIAL PRACTICE AND USE BENCH MARKING </li></ul><ul><li>THE ROLE OF LUCK </li></ul>
  63. 63. Assignment on Module -2 --To be submitted by 17 th Jan 2011 <ul><li>Taking the example of any company/ organization describe its Resources, Capabilities and by adopting the suitable strategies how it’s competitive advantage got affected ? </li></ul>

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