The Arizona Center for Innovation (AzCI) provides workshops and sessions designed to help new ventures. This is an overview of considering and building on your competitive advantage. Presented by Jim Butler. Please contact us at: www.azinnovation.com to learn more.

1. Building Your
Competitive Advantage
Presented by Jim Butler

2. © 2011 Arizona Center for Innovation 2
Jim Butler, Owner and President, HJ3
In 2007 Mr. Butler was named as one of Tucson’s “40-Under-40”
by the Arizona Daily Star. In 2008 he was inducted in to the
University of Arizona Entrepreneurship Hall of Fame. He holds an
MBA in Entrepreneurship and Finance from the University of
Arizona.
About the Presenter

3. © 2011 Arizona Center for Innovation 3
Workshop Objectives
• Define competitive advantage
• Understand and recognize key competitive advantages, and
the value of a sustainable competitive advantage
• Use Michael Porter’s 5-Forces Model to position your
company against: the bargaining power of suppliers and
buyers; threat of new entrants; industry competitors; intensity
of rivalry; and substitute products and services.

4. © 2011 Arizona Center for Innovation 4
What is a Competitive Advantage?
A competitive advantage exists when a firm has a
product or service perceived by its target market
customers as better than that of its competitors. This
allows the firm to sustain profits that exceed the
average for its industry

5. © 2011 Arizona Center for Innovation 5
Entrepreneurs are confronted with 2 myths surrounding the
creation of a competitive advantage:
1. Most good business opportunities are already gone
2. Small firms cannot compete as well as big companies
2 Myths Surrounding Competitive Advantage

6. © 2011 Arizona Center for Innovation 6
Flaws that Plague Entrepreneurs Thinking
• Imitate Rivals - Possess no true competitive advantage
• Susceptible to imitation – competitive advantage is not
sustainable
• Misreading the attractiveness of an industry – may not be the
fastest growing or most glamorous

7. © 2011 Arizona Center for Innovation 7
To create a competitive advantage a firm must
have resources and capabilities that are superior
to those of its competitors
Creating a Competitive Advantage

8. © 2011 Arizona Center for Innovation 8
Key Resources – The Firm’s specific assets
• Patents & Trademarks
• Know-How
• Reputation & Brand Equity
• Installed Customer Base
• Advantage Through Geography
Capabilities – The Firm’s ability to utilize its resources
• Ex: Ability to bring products to market faster than competitors
• “Good to Great” : Right people on the bus; sitting in the right seats;
Disciplined Culture; The entire company is focused only on what they can
be the best in the world at.
Creating a Competitive Advantage

9. © 2011 Arizona Center for Innovation 9
Cost advantage
• Deliver the same benefits as competitors but at a lower cost
• Examples – Ikea; Costco; Walmart
Differentiation Advantage
• Deliver benefits that exceed those of competing products
• Example – Apple Computer
Creating a Competitive Advantage

10. © 2011 Arizona Center for Innovation 10
A Model of Competitive Advantage
Resources
Distinctive
Competencies
Cost Advantage
or
Differentiation
Advantage
Value Creation
Capabilities

11. © 2011 Arizona Center for Innovation 11
1. Analyze the industry using the Porter Five Forces Model to
determine the competitive pressures that exist in your industry
2. Analyze and rank your firm against your competitors. How are
you weaker or stronger than them?
3. Determine what your resources are and what your unique
capabilities are that allow you to create distinct competencies?
4. What type of competitive advantage do you have? Cost or
Performance?
5. How must you position yourself in the market to leverage your
competitive advantage?
Positioning Your Firm – Step by Step

12. © 2011 Arizona Center for Innovation 12
The more completely entrepreneurs understand the
forces of competitive pressure, the better they will be
able to assess opportunities and threats facing their
venture – and properly position their company!
Porter’s Five Forces Model
Determine Competitive Pressure in Your Industry

13. © 2011 Arizona Center for Innovation 13
Porter’s 5 Market Forces
Threat of New
Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of
Buyers
Substitutes
Industry
Competitors
Intensity of
Rivalry
Evaluate the competitive pressures in an industry to
determine how a firm must position itself to be successful
Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter

14. © 2011 Arizona Center for Innovation 14
Intensity of Rivalry
• There are many players similar in size
• Players have similar strategies
• There is not much differentiation between
players and their products or services
• Profitability is low for every single company in
the industry
High Intensity of
Rivalry among
competitors is
determined by….
Influences prices as well as costs of competing with rivals in
areas such as product development, sales, and advertising
Competition Erodes Profits and creates commodities – oil, sugar, etc.
Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter

15. © 2011 Arizona Center for Innovation 15
• Create a comparison grid to see how you stack up against the competition.
List those features/details that you think are important to your customers.
(1=Best; 4=Worst)
• Use this to identify key areas of differentiation = I am the best in
class/reliable alternative…how do I translate that to sales?
Analyze Your Competitors
YOU Co A Co B Co C
Sales 2M 4M 10M 7M
Price 4 3 1 2
Packaging 4 1 3 2
Quality 1 3 4 2
Client
Fulfillment
1 2 3 2

16. © 2011 Arizona Center for Innovation 16
Bargaining Power of Suppliers
• Market is dominated by a few large suppliers
• There are no substitutes for the particular input
• Supplier’s customers are fragmented, so their
bargaining power is low
• The switching costs from one supplier to another are
high
• There is the possibility of the supplier integrating
forwards in order to obtain higher prices and margins.
High Bargaining
Power of
Suppliers Occurs
When….
Determines the cost of raw materials and other inputs
Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter

17. © 2011 Arizona Center for Innovation 17
Bargaining Power of Buyers
• There is a concentration of buyers that buy large
volumes
• The Supplying industry comprises a large number of
small operators
• The product has plenty of substitutes
• Switching to an alternative product is relatively simple
and is not related to higher costs
• The customer knows about the production costs of
the product
• There is a possibility of the customer integrating
backwards
Higher Bargaining
Power of Buyers
(customers)
When….
Influences the prices that firms can charge as well as
the cost and investment required to service buyers
Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter

18. © 2011 Arizona Center for Innovation 18
The Threat of New Entrants
• Economies of scale
• Brand loyalty
• IP: Patents, trade secrets & know-How
• High up-front capital requirements
• Access to raw material &/or distribution channels are
controlled by existing players
• High switching costs for customers
• Legislation and government action
Threat of New
Entrants will
depend on barriers
to entry……
Places a Limit on Prices and Shapes the Investment
Required to Deter Entrants
Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter

19. © 2011 Arizona Center for Innovation 19
Threat of Substitutes
• Brand loyalty of customers
• Close customer relationships
• Switching costs for customers
• Relative price for performance of substitutes
The threat of
substitutes are
determined by
factors like…..
The threat of substitutes exists if there are alternative products
with better prices or better performance for the same purpose
Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter

20. © 2011 Arizona Center for Innovation 20
Apple Computer - Porters 5 Forces
PC Market Online Music/Apps Mobile Devices
Threat of Entry
Low
High Capital Requirements
High Brand Loyalty
IP
Low
High Capital Requirements
High Brand Loyalty
IP
Low
High Capital Requirements
High Brand Loyalty
IP
Intensity of Rivalry
Low
Few Large Players
Very different Strategies
High Differentiation
Low
Few Large Players
Very Different Strategies
High Differentiation
High
Few Large Players
More Imitation
Minimal Differentiation
Threat of
Substitutes
Low
High Brand Loyalty
Cam charge premium for
product differentiation
High Switching costs
Low
High Switching Costs
Integration with Player
Close customer relationships
Moderate
Imitation Higher
Phones sold through cell
phone plans
Some Brand Loyalty
Power of Suppliers
Low
Self Reliant
Integration
Moderate
Content providers high
self reliant on software & CE
Low
Wireless providers high
Self reliant on software & CE
Power of Buyers
Moderate
Low Concentration of Buyers
Few Suppliers
Moderate Switching Costs
Low
Low Concentration of Buyers
Few Suppliers
High Switching Costs
Moderate
Low Concentration of Buyers
Few Suppliers
Moderate Switching Costs

21. © 2011 Arizona Center for Innovation 21
Compare to Competitors
PC Market Apple HP Dell Lenovo
Price 4 3 2 1
Quality 1 3 2 4
Hip Features 1 3 2 4
Quality 1 2 3 4
Client Fulfillment 1 3 2 4

22. © 2011 Arizona Center for Innovation 22
A Model of Competitive Advantage - Apple
Resources
Brand Equity
Installed Customer Base
Self Reliant Design Team
Distinctive
Competencies
Best In Class Products
Supported by Most
Loyal Client Base
Cost Advantage
or
Differentiation
Advantage
Value Creation
Capabilities
Continual Innovation
Rapid Product Launch
Hip Products Designed with
the User in Mind!
“Apple is operating its own closed miniature techno-
economy…they produce everything themselves : their own
hardware, software, operating systems, search engines and
consumer electronics to an adorning client base who cant
get enough”
….Technology Review for Time Magazine, Lev Grossman

23. © 2011 Arizona Center for Innovation 23
1. Analyze the industry using the Porter Analysis to determine
the competitive pressures that exist in your industry
2. Analyze and compare your firm to your competitors. How
are you weaker or stronger than them?
3. Determine what your resources are and what your unique
capabilities are that allow you to create distinct
competencies?
4. What type of competitive advantage do you have? Cost or
Differentiation?
5. How must you position yourself in the market to leverage
your competitive advantage and make it sustainable?
Positioning Your Firm – Step by Step

24. © 2011 Arizona Center for Innovation 24
Summary
• A competitive advantage exists when a firm has a product or
service perceived by its target market customers as better
than that of its competitors. This allows the firm to sustain
profits that exceed the average for its industry.
• Use Michael Porter’s 5-Forces Model to position your
company against: the bargaining power of suppliers and
buyers; threat of new entrants; industry competitors; intensity
of rivalry; and substitute products and services.

25. © 2011 Arizona Center for Innovation 25
Things to Keep in Mind
• How will you know how to position your product?
– based on market research and consumer preferences, adjust product
design, delivery accordingly
– Map product characteristics to consumer preferences, not the other way
around
• How do I avoid imitation, and sustain my competitive
advantage?
– who are the competitors, and do they have the resources or
capabilities to imitate our offering
– Can I put resources towards barriers to entry
• Patents, Trade Marks, Copyrights
• High Switching Cost (Customer Loyalty Programs, Exclusive Distributor
Agreements, Unwavering Customer Service)