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Michael Porter's Competitive Advantage

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Michael Porter's Competitive Advantage

  1. 1. Competitive Advantage Author: Michael Porter Instructor: Wesley Shu
  2. 2. How a firm can actually create and sustain a competitive advantage in its industry
  3. 3. Two Basic Types <ul><li>Cost leadership </li></ul><ul><li>Differentiation </li></ul>
  4. 4. Value Chain <ul><li>Identify which activities contributing to cost leadership and differentiation </li></ul><ul><li>Analyze the source of competitive advantage </li></ul>
  5. 5. Value Chain
  6. 6. Primary Activities <ul><li>Inbound Logistics </li></ul><ul><ul><li>Receiving, storing, and disseminating inputs. E.g., warehousing, inventory control </li></ul></ul><ul><li>Operations </li></ul><ul><ul><li>Transforming inputs into the final product form </li></ul></ul>
  7. 7. Primary Activities <ul><li>Outbound Logistics </li></ul><ul><ul><li>Collecting, storing and distributing the product to buyers </li></ul></ul><ul><li>Marketing and Sales </li></ul><ul><ul><li>Providing a means and incentive which allow buyers to purchase the product </li></ul></ul><ul><li>Service </li></ul><ul><ul><li>Providing service to enhance or maintain the value of the product </li></ul></ul>
  8. 8. Primary Activity Focus by Industry X Marketing & Sales X Xerox Corporate Lending NA X Restaurant X X Distributor Service Outbound Logistics Operations Inbound Logistics Industry
  9. 9. Support Activities <ul><li>Procurement </li></ul><ul><ul><li>Function of purchasing inputs used in the value chain </li></ul></ul><ul><li>Technology Development </li></ul>
  10. 10. Support Activities <ul><li>Human Resource Management </li></ul><ul><li>Firm Infrastructure </li></ul><ul><li>planning, finance, accounting, legal, etc. </li></ul>
  11. 11. Competitive Scope <ul><li>Four scopes may affect value chain </li></ul><ul><li>Ex. The value chain serves minicomputer requires extensive sales assistance, less hardware performance – different from what serves small business </li></ul>
  12. 12. Competitive Scope <ul><li>Segment Scope </li></ul><ul><ul><li>Differences required to serve different product or buyer segment </li></ul></ul><ul><li>Vertical Scope </li></ul><ul><ul><li>Division of activities between a firm and its suppliers, channels, and buyers </li></ul></ul>
  13. 13. Competitive Scope <ul><li>Geographic Scope </li></ul><ul><ul><li>Different geographic areas </li></ul></ul><ul><li>Industry Scope </li></ul><ul><ul><li>Interrelationships among business units </li></ul></ul>
  14. 14. “ Generic” Competitive Advantage <ul><li>Cost Leadership </li></ul><ul><li>Differentiation </li></ul><ul><li>Focus </li></ul>
  15. 15. Competitive Strategies Differentiation Focus Cost Focus Narrow Target Differentiation Cost Leadership Broad Target Competitive Scope Differentiation Lower Cost Competitive Advantage
  16. 16. Cost Leadership Strategy <ul><li>Steps to achieve cost leadership </li></ul><ul><li>Make cost assignment </li></ul><ul><li>Identify cost drivers </li></ul><ul><li>Understand cost dynamics </li></ul><ul><li>Control cost drivers </li></ul><ul><li>Reconfigure the value chain </li></ul>
  17. 17. Operating Cost Assignment
  18. 18. Asset Assignment
  19. 19. Why cost assignment <ul><li>Understand the firm’s cost structure </li></ul><ul><li>Find cost drivers of each cost segment </li></ul><ul><li>Match cost structure to buyer’s value chain </li></ul><ul><li>Configure and reconfigure the cost structure </li></ul>
  20. 20. Cost Leadership – Cost Drivers <ul><li>Factors affect costs. </li></ul>
  21. 21. Cost Leadership – Cost Drivers <ul><li>Economies or diseconomies of scale </li></ul><ul><li>Learning and spillover </li></ul><ul><li>Pattern of capacity utilization </li></ul><ul><ul><li>When fixed cost high, capacity utilization is important </li></ul></ul><ul><li>Linkages </li></ul><ul><ul><li>How other activities are performed </li></ul></ul><ul><ul><li>Linkages within the Value Chain </li></ul></ul><ul><ul><li>Vertical Linkages </li></ul></ul>
  22. 22. Cost Leadership – Cost Drivers <ul><li>Interrelationships </li></ul><ul><ul><li>With other business units within a firm </li></ul></ul><ul><li>Integration </li></ul><ul><ul><li>Vertical integration in a value activity </li></ul></ul><ul><li>Timing </li></ul>
  23. 23. Cost Leadership – Cost Drivers <ul><li>Discretionary policies </li></ul><ul><ul><li>Policies that reflect a firm’s strategy </li></ul></ul><ul><li>Location </li></ul><ul><li>Institutional factors </li></ul><ul><ul><li>e.g., government regulations, financial incentives, unionization, etc. </li></ul></ul>
  24. 24. Identify Cost Drivers
  25. 25. Cost Dynamics <ul><li>What cause the change of cost drivers </li></ul>
  26. 26. Cost Dynamics <ul><li>Industry real growth </li></ul><ul><li>Differential scale sensitivity </li></ul><ul><li>Different learning rates </li></ul><ul><li>Differential technological change </li></ul><ul><li>Relative inflation of costs </li></ul><ul><li>Aging </li></ul><ul><li>Market adjustment </li></ul>
  27. 27. How to Achieve Cost Advantage
  28. 28. Analyze Cost Advantage
  29. 29. Control Cost Drivers <ul><li>E.g., control scale – gain the appropriate firm size </li></ul>
  30. 30. Reconfigure the Value Chain <ul><li>Reconfiguration of the value chain presents the opportunity to fundamentally restructure a firm’s cost, compared to settling for incremental improvements. </li></ul><ul><li>By altering the basis of competition in a way that favors a firm’s strengths, it may change the important cost drivers in a way that favors a firm. </li></ul>
  31. 31. Steps in Strategic Cost Analysis <ul><li>Identify the appropriate value chain and assign costs and assets to it. </li></ul><ul><li>Diagnose the cost drivers of each value activity and how they interact. </li></ul><ul><li>Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences. </li></ul><ul><li>Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain and/or downstream value. </li></ul>
  32. 32. Cost Focus <ul><li>A firm dedicates its efforts to a well-chosen segment of an industry can often lower its costs significantly. </li></ul>
  33. 33. Differentiation <ul><li>Emphasize on a unique source of differentiation in the Value Chain, rather than on products or markets only </li></ul><ul><li>Differentiation base on buyers’ value, not only difference that buyers do not value </li></ul><ul><li>Should consider the cost of differentiation </li></ul>
  34. 35. Identify Sources of Differentiation
  35. 36. Drivers of Uniqueness <ul><li>Policy Choices </li></ul><ul><li>Linkages </li></ul><ul><ul><li>Linkages within the value chain </li></ul></ul><ul><ul><li>Supplier linkages </li></ul></ul><ul><ul><li>Channel linkages </li></ul></ul><ul><li>Timing </li></ul><ul><ul><li>Be the first </li></ul></ul><ul><li>Location </li></ul>
  36. 37. Drivers of Uniqueness <ul><li>Interrelationship </li></ul><ul><ul><li>Sharing a value activity with sister business units. E.g., sharing a sales force for both insurance and other financial products </li></ul></ul><ul><li>Proprietary learning </li></ul><ul><li>Integration – e.g., integrating online systems to current ordering systems </li></ul><ul><li>Scale </li></ul><ul><li>Institutional factors – e.g., “Madame’s route” </li></ul>
  37. 38. Why buyers purchase? <ul><li>Purchasing Criteria </li></ul><ul><li>User criteria – firms to meet them by lowering cost or raising buyer performance </li></ul><ul><li>Signaling criteria – telling buyers what benefits to get </li></ul>
  38. 39. Differentiation for creating Buyer Value by <ul><li>Lowering buyer cost </li></ul><ul><li>Raising buyer performance </li></ul><ul><li>Signaling the value </li></ul><ul><li>Linking the firm’s value chain to the buyer’s value chain </li></ul>Through
  39. 40. Steps in Differentiation <ul><li>Determine who the real buyer is </li></ul><ul><li>Identify the buyer’s value chain and the firm’s impact on it </li></ul><ul><li>Determine ranked buyer purchasing criteria </li></ul><ul><li>Assess the existing and potential sources of uniqueness in a firm’s value chain </li></ul>
  40. 41. Steps in Differentiation <ul><li>Identify the cost of existing and potential sources of differentiation </li></ul><ul><li>Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating </li></ul><ul><li>Test the chosen differentiation strategy for sustainability </li></ul><ul><li>Reduce cost in activities that do not affect the chosen forms of differentiation </li></ul>
  41. 42. Discussion: Red Ocean to Blue Ocean
  42. 43. Other Discussion <ul><li>Creative Industries </li></ul><ul><li>Supply Chain Management </li></ul><ul><li>What is “Buyer’s Value Chain”? </li></ul>

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