This document discusses various concepts related to business strategy and competitive advantage. It begins by defining a business-level strategy and outlining the "who, what, why, and how" of competing for advantage. It then discusses how industry and firm effects jointly determine competitive advantage. Key ideas around generating and sustaining advantage through barriers to imitation are presented. The document also discusses concepts like differentiation advantage, cost leadership, learning curves, economies of scale, value chains, and the resource-based view of the firm. Strategic coherence and dynamic strategic activity systems are defined.

1. Business Strategy:
Differentiation, Cost Leadership,
and Integration
Lina Deng
Business Strategy and Competitive Advantage
• A business-level strategy is an integrated and
coordinated set of commitments and actions designed
to provide value to customers and to gain a competitive
advantage by utilizing core competencies in specific
individual product markets.
6–2
Business-Level Strategy:
How to Compete for Advantage?
• Answer the “Who, What, Why, and How”
Ø Who - which customer segments to serve?
Ø What needs, wishes, desires will we satisfy?

2. Ø Why do we want to satisfy them?
Ø How will we satisfy customers’ needs?
• Details actions that managers take in the quest
for competitive advantage
Ø Single product or group of similar products
6–3
Industry and Firm Effects Jointly Determine
Competitive Advantage
6–4
Business Strategy and Competitive Advantage
• Two fundamental questions:
Ø How do you generate advantage?
Ø How do you sustain advantage?
• Key idea for sustainability is “barriers to imitation.”
Ø How long will it be before the first rival
imitates the first mover?
Ø How fast does new imitation occur
once it starts?

3. v These two factors determine appropriability.
6–5
Business Strategy and Competitive Advantage
• Does market share generate competitive advantage?
Ø The computer industry is an excellent example of the lack
of correspondence between market share and profit rates.
IBM was a clear market leader in terms of market share
but had only mediocre economic performance relative to its
rivals. High market share is no guarantee of high rates
of profitability.
6–6
Business Strategy and Competitive Advantage
• Does market share generate competitive advantage?
Ø Perhaps high market share causes high profit rates.
Ø But it could equally well be that there is a third factor
(e.g., good service capabilities, such as those of
Caterpillar), either not considered or unobserved by us,
that causes both high profitability and high market share.
v In this case, we would see a correlation
between profitability and market share
but there is no causal explanation.

4. Business Strategy and Competitive Advantage
• When can market share work to generate and sustain
an advantage?
Ø Scale economies (to generate cost leadership advantage)
combined with high exit costs (to sustain the advantage)
may make market share a defensible advantage.
6–8
Business Strategy and Competitive Advantage
• An organization’s knowledge or expertise can lead to
sustainable advantage if:
Ø The knowledge is tacit rather than articulable;
v Tacit Knowledge: “We know more than we can tell.”
v Tacit Skills: Riding a bike, swimming, “learning by doing,”
which is
critical for maintaining a manufacturing base
Ø The knowledge is not observable in use;
Ø The knowledge is (socially) complex, rather than simple.
6–9

5. Forms of Competitive Advantage
Competitive
Advantage
Cost
Advantage
Differentiation
Advantage
Similar Product
At Lower Cost
Price Premium
From Unique Product
6–10
Strategic Position and Competitive Scope:
Generic Business Strategies
6–11
© 2005 Mara Lederman, Rotman School of Management
Types of Competitive Advantage
Buyer value generated (willingness to pay)
Costs incurred (including opportunity cost of capital)

6. Industry
average
competitor
Successful
differentiated
competitor
Successful
low-cost
competitor
Competitor
with dual
advantage
$
Value
Created
Differentiation Advantage
• Differentiation Advantage, a concept developed by
economist Joan Robinson, occurs when a firm is able
to obtain from its differentiation a price premium in
the market which exceeds the cost of providing
differentiation.

7. 6–13
Value Drivers: Differentiation
• Differentiation:
Ø Product features, customer service, customization, and
complements
Ø Competitive advantage = economic value created (V-C) >
competitors
v Marriott line of Hotels
6–14
Cost Drivers: Cost-Leadership
• Cost Leadership:
Ø Cost of input factors, economies of scale, and learning-curve
and
experience-curve effects
Ø Competitive advantage = economic value created (V-C) >
competitors
v Walmart vs. Kmart
v Dell vs. Compaq, Gateway, & HP
6–15

8. Economies of Scale and Diseconomies of Scale
18
"Big Box" Retailers' Advantage
Box 2 x 2 x 2
Volume 8
Box 3 x 3 x 3
Volume 27
• Cube-Square Rule:
Ø Each dimension increases 50% (2 goes to 3) BUT
Ø Each volume increases 237.5% (8 goes to 27) !!
6–19
Learning Curve: Sources of Gain
Ø Need less time to instruct workers
Ø Workers become more skillful in their movements
Ø Develop better operation sequences
Ø Machines and tooling are continually improved

9. Ø Rejections and rework decrease
Ø Management controls improved
Ø Engineering changes become less frequent
Ø Cost-effective improvements in product design
Ø Enriched knowhow in managing and operating business
Ø More efficient inventory handling and distribution methods
6–20
Limits of “Learning Curve” Advantages
Ø Copying and reverse engineering of products;
Ø Hiring a competitor’s employees;
Ø Purchasing the know-how from consultants;
Ø Obtaining the know-how from customers;
Ø Experience advantages are often nullified by product
obsolences and innovations.
6–21
Learning Curve

10. • The following discussion and applications focus on direct
labor
hours per unit, although we could as easily have used costs. In
developing a learning curve, we make these assumptions:
Ø Direct labor requirements will decrease at a declining rate as
cumulative production increases.
Ø The reduction in time will follow an exponential curve. In
other words,
the production time per unit is reduced by a fixed percentage
each
time production is doubled. We can use a logarithmic model to
draw
a learning curve. The direct labor required for the nth unit, kn,
is
• kn = k1 nb where
• k1 = direct labor hours for the first unit
• n = cumulative number of units produced
• b = log r/log 2
• r = learning rate
6–22
Learning Curve
• Example: The Bellweather Company has a contract for 60
portable
electric generators. The labor-hour requirement for
manufacturing the
first unit is 100. With that as given, Bellweather planners

11. develop an
aggregate capacity plan using learning-curve calculations. They
use
a 90 percent learning curve, based on previous experience with
generator contracts.
• The labor requirement for the second generator is:
• k2 = k1 nb
• = 100 (2)log 0.9/log 2
• = 100 (2)-.152
• = 100 (.9) = 90 hours
• This result for the second unit, 90, is expected, since for a
90%
learning curve there is a 10% percent learning between doubled
quantities.
6–23
Learning Curve
• Example: The Bellweather Company
v For the 8th unit,
v = 100 (8)-.152 = 100 (0.729) = 72.9 hours
v This result is also obtained by 100 (.9) (.9) (.9) =
72.9 hours.
• Learning curves can be used for:
Ø Bid Preparation

12. Ø Financial Planning
Ø Production Scheduling
6–24
The Learning Curve
Per
Unit
Cost ($)
Cumulative Output (units)
0
20
40
60
80
100
120
0 50 100 150 200 250
90%
80%

13. 70%
Per
Unit
Cost ($)
Cumulative Output (units)
0
20
40
60
80
100
120
0 50 100 150 200 250
90%
80%
70%
Aircraft Assembly (1925-57): 80%
Calculator (1975-78): 74%

14. Gaining Competitive Advantage Through Learning
6–26
Avon Pursuing an Integration Strategy
6–27
Value and Cost Drivers
6–28
6–29
Internal Analysis: Resources,
Capabilities, and Activities
Lina Deng
Internal Analysis: Inside the Firm

15. • Comparing two firms in same industry:
Internal focus
Ø Core Competencies
v Unique strengths deep inside that differentiate a firm
v Can drive competitive advantage
Ø Strategic Fit
v Internal strengths fit with the external
environment
Creating Strategic Fit to Leverage Internal Strengths
4–3
The Role of Strategy in Business is to Generate and
Sustain Value via the Linkages Between Positioning,
Organization, and Resources & Capabilities
Positioning
Organization Resources &
Capabilities
4–4

16. Positioning
• Scope of the Firm:
Ø Geographic scope
Ø Product-market scope: Choice of businesses
(corporate portfolio analysis)
Ø Product market positioning
within a business
Ø Vertical integration (value chain)
decisions
Organization
• Structure
Ø Formal definition of authority
Ø Conflict resolution
• Systems
Ø Rules, routines, evaluation and rewards
• Processes
Ø Informal communication, networks, and recruitment
4-6

17. Resources and Capabilities
• Tangible resources
Ø e.g., physical capital
• Organizational capabilities
Ø e.g., routines and standard operating procedures
• Intangible resources
Ø e.g., trademarks, “know-how”
4–8
Linking Resources and Capabilities to Firm Performance
Company Examples of Core Competencies and Applications
4–11
Tangible and Intangible Resources
4–12

18. The Resource-based View
• Google Example
Ø Tangible resources valued at $5 billion
Ø Intangible brand valued at over $100 billion
Ø Googleplex has both tangible and intangible aspects
• Competitive Advantage More Likely…..
Ø From intangible resources
4–14
Two Critical Resource Dimensions in RBV
• Resource heterogeneity
Ø Bundles of resources and capabilities differ across firms
Ø Southwest Airlines and Alaska Airlines have different
resources
v SWA
– Higher employee productivity
– Informal organization, pilots help load luggage
• Resource immobility
Ø Resources tend to be “sticky” and do not move easily
Ø Southwest Airlines sustained advantage
v Several decades superior performance
v Competitors have unsuccessfully imitated SWA model

19. 4–15
Applying RBV: Decision Tree Competitive Implications
The Value Chain
• Primary Activities
Ø Add value directly in transforming inputs into outputs
v Raw materials through production to customers
• Support Activities
Ø Indirectly add value
v Provide support to the primary activities
v Information systems, human resources, accounting, etc.
• Managers can see how competitive advantage flows
from a system of activities (using activity-based
accounting).
3-4Copyright © 2005 by The McGraw-Hill Companies, Inc. All
rights reserved.
The Value Chain
Adapted from Exhibit 3.1 The Value Chain: Primary and
Support Activities

20. Source: Adapted with permission of The Free Press, a division
of Simon &
Schuster, Inc., from Competitive Advantage: Creating and
Sustaining
Superior Performance by Michael E. Porter.
General administration
Human resource management
Technology development
Procurement
Inbound
logistics
Operations Outbound
logistics
Marketing
and sales
Service
4–18
Value Chain: Primary and Support Activities
© 1999 Pankaj Ghemawat

21. Hostess’s Cost Components
0
10
20
30
40
50
60
70
80
C
en
ts
p
er
u
ni
t
Profit
Marketing: Promotions

22. Marketing: Advertising
Outbound logistics
Operations: Manufacturing
Operations: Packaging
Operations: Ingredients
© 1999 Pankaj Ghemawat
Relative Cost Analysis
0
10
20
30
40
50
60
70
80
90

23. Hostess Little Debbie Ontario Baking Savory Pastries
C
en
ts
p
er
u
ni
t
Profit
Marketing: Promotions
Operations: Manufacturing
Operations: Packaging
Operations: Ingredients
Marketing: Advertising
Outbound logistics
Value Chain Analysis
• Outsourcing activities can have
the unintended consequence
of damaging the firm’s potential
to evaluate continuously its
key assumptions, learn, and
create new capabilities and

24. core competencies. Thus,
managers should verify that
the firm does not outsource
activities that stimulate the
development of new
capabilities and competencies.
4–22
Strategic Coherence
The Logic of How The Business Fits Together:
• Southwest Airlines
Ø Low Price
Ø Short Routes
• No Frills
• Point-to-Point
• One Aircraft --
Boeing 737
• High number of
Aircraft per Route
• No Meals
• Flexible/ Lower Staffing
• American Airlines
Ø Premium Price
Ø Short, Long, & Int’l
Ø Variety

25. • Hub & Spoke System
• Multiple Aircraft
• Low number of
Aircraft per Route
• Meals & Service
• Higher Staffing
24
Southwest Airline’s Activity System
Limited
passenger
amenities
Short-haul,
point-to-point
routes between
midsize cities
and secondary
airports
High
aircraft
utilization
Frequent,
reliable
departures

26. Lean, highly
productive
ground and
gate crews
Very low
ticket prices
No meals
No seat
assignments
No baggage
transfers
No
connections
with other
airlines
15-minute
gate
turnarounds
Limited use
of travel
agents
Automatic
ticketing
machines

27. Standardized
fleet of 737
aircraft
Flexible
union
contracts
High level
of employee
stock
ownership
“Southwest,
the low-fare
airline”
High
compensation
of employees
Strategic Coherence: Fit and Balance
• A fit among corporate, business, and functional strategy;
• A fit between strategy formulation and implementation;
• A balance of commitment and flexibility;
• A balance among stakeholders;

28. • A balance of competition and cooperation;
• A balance of hiding and diffusing information;
• A balance of centralization and decentralization; and
• A balance between stability and change.
4–25
Strategic Coherence
• Combining activities that complement and reinforce one
another. These activities dovetail together to help achieve
the overall objectives of the firm.
• Such strategies, which may regarded as systems of
activities are often more successful because they are more
difficult to imitation. Thus, they can lead to a sustainable
competitive advantage.
• Strategic coherence may not be a sufficient condition for
attaining a competitive advantage, but it is often a necessary
one.
4–26
Strategic Coherence
• A sustainable competitive advantage often requires trade-
offs. These tradeoffs arise for at least three reasons:

29. Ø Inconsistencies in image or reputation.
Ø Tradeoffs arising from the activities themselves.
Ø Limits on internal coordination and control
• General management at its core is strategy:
Ø Defining and communicating the company’s unique position;
Ø Making tradeoffs;
Ø Forging a dynamic fit among activities (i.e., strategic
coherence). 4–27
Dynamic Strategic Activity Systems
• A network of interconnected activities in the firm
• Evolve over time – external environment changes
Ø Add new activities & upgrade or remove obsolete ones
• Vanguard Example
Ø A global investment firm - $1.4 trillion managed assets
v Emphasis on low customer cost and quality service
– Among the lowest expense ratios in the industry (0.20%)
Ø Updated the activity system from 1997 to 2011
v New customer segmentation core
v Two new support activities
v Permits customized offerings: long-term and more active
traders
4–28

30. Vanguard Group’s Activity System 1997
Legend
Core
Support
4–29
Vanguard Group’s Activity System 2011
Legend
Core
Support
4–30
Dynamic Capabilities Perspective
• A firm can modify its resource base to gain &
sustain a competitive advantage
Ø Advantage is gained from reconfiguring a firm’s
resource base
Ø Honda core competency in gas-powered engine

31. design
v Could decrease in value
v If consumers move toward electric-powered cars
v BYD competency in batteries would gain advantage
• Dynamic capabilities are an intangible resource
• Resource stocks and flows are a useful view
4–31
Role of Inflows and Outflows in Building Stocks
4–32
IBM Product Scope 1993 and 2010
In 1993, hardware accounted
for 50% of IBM revenues
In 2010, software & (IT) services
accounted for 80% of IBM revenues,
hardware was down to 18%
4–33
How to Protect a
Competitive Advantage

32. 1. Better Expectations of Future Values
Ø Buy Resources at a low cost
v Real Estate Development - highway expansion
2. Path Dependence
Ø Current alternatives are limited by past decisions
v Honda’s core competency in gas engines took decades to
build
4–34
How to Protect a
Competitive Advantage
3. Causal Ambiguity
Ø Cause of success or failure are not apparent
v Why has Apple had such a string of successful products?
– Role of Steve Jobs’ vision?
– Unique talents of the Apple design team?
– Timing of product introductions?
4. Social Complexity
Ø Two or more systems interact creating many possibilities
v A group of 3 people has 3 relationships
v A group of 5 people has 12 relationships

33. 4–36