The Nature And Sources Of Competitive Advantage

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  • The Nature And Sources Of Competitive Advantage

    1. 1. The Nature and Sources of Competitive Advantage <ul><li>The emergence of competitive advantage </li></ul><ul><li>Sustaining competitive advantage </li></ul><ul><li>Competitive advantage in different market settings </li></ul><ul><li>Types of competitive advantage: cost and differentiation </li></ul>OUTLINE
    2. 2. What is competitive advantage? <ul><li>The potential to earn a persistently high rate of profit </li></ul><ul><li>Not the same as profitability </li></ul><ul><ul><li>Long term investments may not show up in short term profits </li></ul></ul><ul><ul><ul><li>Investing in market share, technology, customer loyalty or even executive perks </li></ul></ul></ul>
    3. 3. The Emergence of Competitive Advantage How does competitive advantage emerge? <ul><li>External sources of </li></ul><ul><li>change e.g.: </li></ul><ul><li>Changing customer demand </li></ul><ul><li>Changing prices </li></ul><ul><li>Technological change </li></ul>Internal sources of change Resource heterogeneity among firms means differential impact Some firms faster and more effective in exploiting change Some firms have greater creative and innovative capability (Time-based competition)
    4. 4. Competitive Advantage from Internally-Generated Change: Strategic Innovation <ul><li>Many argue innovation is the only remaining source of competitive advantage (e.g. Hamel) </li></ul><ul><ul><li>Kao (2007) Innovation Nation: How America is Losing its Innovation Edge, Friedman (2005) The World is Flat </li></ul></ul><ul><ul><ul><li>Talent is everywhere, capital is everywhere, Silicon valley is everywhere </li></ul></ul></ul><ul><li>Characteristics of innovation strategies: </li></ul><ul><ul><li>Associated with new entrants to an industry (e.g. Nucor in steel, IKEA in furniture, Home Depot in DIY , Dell in PCs, American Apparel in casual clothing ) </li></ul></ul><ul><ul><li>Reconcile conflicting performance goals (e.g. Toyota’s lean production system combines low cost, high quality, and flexibility. Retailers Primark and Target combine low cost with stylishness.) </li></ul></ul><ul><ul><li>Reconfiguring the value chain e.g.--- </li></ul></ul><ul><ul><ul><li>Nike’s system for manufacturing and distributing shoes totally different from traditional shoe manufacturer </li></ul></ul></ul><ul><ul><ul><li>Southwest Airlines simplification of the normal airline value chain </li></ul></ul></ul><ul><ul><ul><li>Zara’s system of design, manufacture, and distribution </li></ul></ul></ul>
    5. 5. Sustaining Competitive Advantage Against Imitation REQUIREMENT FOR IMITATION Identification - Obscure superior performance - Deterrence --signal aggressive Incentives for imitation intentions to imitators - Pre-emption --exploit all available investment opportunities - Rely upon multiple sources of Diagnosis competitive advantage to create “ causal ambiguity” - Base competitive advantage upon Resource acquisition resources and capabilities that are immobile and difficult to replicate ISOLATING MECHANISM
    6. 6. Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets TRADING MARKETS <ul><li>None (efficient markets) </li></ul><ul><li>Imperfect information </li></ul><ul><li>Transactions costs </li></ul><ul><li>Systematic behavioral trends </li></ul><ul><li>Overshooting </li></ul>None Insider trading Cost minimization Superior diagnosis (e.g. chart analysis) Contrarianism PRODUCTION MARKETS <ul><li>Barriers to imitation </li></ul><ul><li>Barriers to innovation </li></ul>Identify potential barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, etc.) & base strategy upon them. Difficult to influence or exploit. MARKET TYPE SOURCE OF IMPERFECT COMPETITION OPPORTUNITY FOR COMPETITIVE ADVANTAGE
    7. 7. Sources of Competitive Advantage COST ADVANTAGE DIFFERENTIATION ADVANTAGE COMPETITIVE ADVANTAGE Similar product at lower cost Price premium from unique product Concept of “stuck in the middle”
    8. 8. Porter’s Generic Strategies SOURCE OF COMPETITIVE ADVANTAGE Low cost Differentiation Industry-wide COST DIFFERENTIATION COMPETITIVE LEADERSHIP SCOPE Single Segment F O C U S
    9. 9. Features of Cost Leadership and Differentiation Strategies <ul><li>Generic strategy Key strategy elements Resource & organizational </li></ul><ul><li> requirements </li></ul><ul><li>COST Scale-efficient plants. Access to capital. Process </li></ul><ul><li>LEADERSHIP Design for manufacture. engineering skills. Frequent </li></ul><ul><li> Control of overheads & reports. Tight cost control. </li></ul><ul><li> R&D. Avoidance of Specialization of jobs and </li></ul><ul><li> marginal customer functions. Incentives for </li></ul><ul><li> accounts. quantitative targets. </li></ul><ul><li>DIFFERENTIATION Emphasis on branding Marketing. Product </li></ul><ul><li> and brand advertising, engineering. Creativity. </li></ul><ul><li> design, service, and Product R&D </li></ul><ul><li> quality. Qualitative measurement and incentives. Strong cross-functional coordination. </li></ul>
    10. 10. Cost Advantage <ul><li>Economies of experience curve and the benefits of market share </li></ul><ul><li>Sources of cost advantage </li></ul><ul><li>Using the value chain to analyze costs </li></ul><ul><li>C urrent approaches to managing c osts </li></ul>OUTLINE
    11. 11. The Experience Curve The “Law of Experience” The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. Cost per unit of output (in real $) Cumulative Output 19 92 19 94 19 96 19 98 2000 2002 2004
    12. 12. Examples of Experience Curves 100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated unit s (millions) (millions) 1960 Yen 15K 20K 30K Price Index 50 100 200 300 70% slope 75% Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71
    13. 13. The Importance of Market Share <ul><ul><li>If all firms in an industry have the same experience curve, then: </li></ul></ul><ul><ul><li>Change in relative costs over time = f (relative market share) </li></ul></ul><ul><ul><li>This implies that market share is linked to profitability. This is confirmed by PIMS data: </li></ul></ul>BUT : - Association does not imply causation - Costs of acquiring market share offset the returns to market share ROS (%) -2 0 5 10 0-10 10-20 20-30 30-40 over 40 Market Share (%)
    14. 14. Drivers of Cost Advantage PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS CAPACITY UTILIZATION RESIDUAL EFFICIENCY ECONOMIES OF LEARNING ECONOMIES OF SCALE <ul><li>Organizational slack; Motivation & </li></ul><ul><li>culture; Managerial efficiency </li></ul><ul><li>Ratio of fixed to variable costs </li></ul><ul><li>Speed of capacity adjustment </li></ul><ul><li>Location advantages </li></ul><ul><li>Ownership of low-cost inputs </li></ul><ul><li>Non-union labor </li></ul><ul><li>Bargaining power </li></ul><ul><li>Standardizing designs & components </li></ul><ul><li>Design for manufacture </li></ul><ul><li>Process innovation </li></ul><ul><li>Reengineering business processes </li></ul><ul><li>Increased dexterity </li></ul><ul><li>Improved organizational routines </li></ul><ul><li>Indivisibilities </li></ul><ul><li>Specialization and division of labor </li></ul>
    15. 15. Economies of Scale: The Long-Run Cost Curve for a Plant Units of output per period Minimum Efficient Plant Size: the point where most scale economies are exhausted Cost per unit of output Sources of scale economies: - technical input/output relationships - indivisibilities - specialization
    16. 16. The Costs Developing New Car Models (including plant tooling) <ul><li> $ billion </li></ul><ul><li>Ford Mondeo / Contour 6 </li></ul><ul><li>GM Saturn 5 </li></ul><ul><li>Ford Taurus (1996 model) 2.8 </li></ul><ul><li>Ford Escort (new model 1996) 2 </li></ul><ul><li>Renault Clio (1999 model) 1.3 </li></ul><ul><li>Chrysler Neon 1.3 </li></ul><ul><li>Honda Accord (1997 model) 0.6 </li></ul><ul><li>BMW Mini 0.5 </li></ul><ul><li>Rolls Royce Phantom (2003 model) 0.3 </li></ul>
    17. 17. Scale Economies in Advertising: U.S. Soft Drinks 10 20 50 100 200 500 1,000 Annual sales volume (millions of cases) Advertising Expenditure ($ per case) 0.02 0.05 0.10 0.15 0.20 Coke Pepsi Seven Up Dr. Pepper Sprite Diet Pepsi Tab Fresca Diet Rite Diet 7-Up Schweppes SF Dr. Pepper Despite the massive advertising b udgets of brand leaders Co ke and Pepsi, their main brands incur lower advertising costs per unit of sales than their smaller rivals.
    18. 18. Cost Advantage in Short-Haul Passenger Air Transport Costs per Available Seat-Mile Southwest Airlines United Airlines (cents) (cents) Wages and benefits 2.4 3.5 Fuel and oil 1.1 1.1 Aircraft ownership 0.7 0.8 Aircraft maintenance 0.6 0.3 Commissions on ticket sales 0.5 1.0 Advertising 0.2 0.2 Food and beverage 0.0 0.5 Other 1.7 3.1 Total 7.2 10.5
    19. 19. Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture STAGE 1. IDENTIFY THE PRINCIPAL ACTIVITIES STAGE 2. ALLOCATE TOTAL COSTS PURCH- ASING PARTS INVEN- TORIES R&D DESIGN ENGNRNG COMPONENT MFR ASSEMBLY TESTING, QUALITY CONTROL GOODS INVEN- TORIES SALES & MKITG DISTRI- BUTION DEALER & CUSTOMER SUPPORT
    20. 20. Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued) PURCH- ASING PARTS INVEN- TORIES R&D DESIGN ENGNRNG COMPONENT MFR ASSEMBLY TESTING, QUALITY CONTROL GOODS INVEN- TORIES SALES & MKITG DISTRI- BUTION DEALER & CUSTOMER SUPPORT --Plant scale for each -- Level of quality targets -- No. of dealers component -- Frequency of defects -- Sales / dealer -- Process technology -- Level of dealer -- Plant location support -- Run length -- Frequency of defects -- Capacity utilization under warranty Prices paid --Size of commitment -- Plant scale --Cyclicality & depend on: --Productivity of -- Flexibility of production predictability of sales -- Order size R&D/design - - No. of models per plant --Customers’ -- Purchases per --No. & frequency of new -- Degree of automation willingness to wait supplier models -- Sales / model -- Bargaining power -- Wage levels -- Supplier location -- Capacity utilization STAGE 3. IDENTIFY COST DRIVERS
    21. 21. <ul><li>PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR </li></ul><ul><li>INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR </li></ul>Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued) Consolidation of orders to increase discounts, increases inventories Designing different models around common components and platforms reduces manufacturing costs Higher quality parts and materials reduces costs of defects at later stages Higher quality in manufacturing reduces warranty costs STAGE 5. RECCOMENDATIONS FOR COST REDUCTION STAGE 4. IDENTIFY LINKAGES
    22. 22. Dynamic vs. Static Approaches to Manufacturing PRODUCTION SYSTEM MANAGEMENT OF TECHNOLOGY DYNAMIC (Artisan Mode) STATIC (Scientific Management Mode) <ul><li>problem solving </li></ul><ul><li>people matched to tasks </li></ul><ul><li>create employee knowledge </li></ul><ul><li>employees control production </li></ul><ul><li>customer orientation </li></ul><ul><li>quest for “one best way” </li></ul><ul><li>planning & control by staff </li></ul><ul><li>Incentives and penalties to </li></ul><ul><li>ensure conformity to </li></ul><ul><li>objectives </li></ul><ul><li>science driven </li></ul><ul><li>focused around </li></ul><ul><li>corporate R&D </li></ul><ul><li>departments </li></ul><ul><li>emphasis on big </li></ul><ul><li>projects </li></ul><ul><li>continuous, incremental improvement </li></ul><ul><li>market needs pull technology </li></ul><ul><li>product and process innovation </li></ul><ul><li>teamwork and cross- </li></ul><ul><li>functional collaboration </li></ul>
    23. 23. Recent Approaches to Cost Reduction <ul><li>Dramatic changes in strategy and structure </li></ul><ul><li>to adjust to the business conditions of the 1990’s </li></ul><ul><li>Key elements: </li></ul><ul><li>Plant closures </li></ul><ul><li>Outsourcing </li></ul><ul><li>Delayering and cuts in administrative staff </li></ul><ul><li>The fundamental rethinking and radical </li></ul><ul><li>redesign of business processes to achieve </li></ul><ul><li>dynamic improvements in performance. e.g.:- </li></ul><ul><li>Several jobs combined into one </li></ul><ul><li>Steps of a process combined in natural order </li></ul><ul><li>Minimizing steps, controls, and reconciliation </li></ul><ul><li>Use case managers as single points of contact </li></ul><ul><li>Hybrid centralization/ decentralization </li></ul>CORPORATE RESTRUCTURING BUSINESS PROCESS REENGINEERING “Obliterate don’t automate”
    24. 24. Harley Davidson Case <ul><li>Identify Harley-Davidson’s strategy and explain its rationale. </li></ul><ul><li>Compare Harley-Davidson’s resources and capabilities with those of Honda. What does your analysis imply for </li></ul><ul><li>Harley’s potential to establish cost and differentiation advantage over Honda? </li></ul><ul><li>What threats to continued success does Harley-Davidson face? </li></ul><ul><li>How can Harley-Davidson sustain and enhance its competitive position? </li></ul>

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