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COMPETITIVE STRATEGY
CREATING COMPETITIVE
ADVANTAGE
What is Competitive advantage?
… a basis for the firm’s long
term success?
… a basis for value creation?
Do we really know where it resides?
Can it be sustainable?
What is Competitive advantage?
What is Competitive advantage?
“When two or more firms compete
within the same market, one firms
possesses a competitive advantage over its
rivals when it earns a persistently higher
rate of profit (or has the potential to earn a
persistently higher rate of profit)”
R. M. Grant, 2000
The main types of Competitive
The main types of Competitive
Advantage
Advantage
Cost
advantage
Cost
advantage
Differentiation
advantage
Differentiation
advantage
Competitive
advantage
Competitive
advantage
Similar
product
at lower cost
H
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Competitive strategies
Competitive strategies
by
by Porter
Porter
Types of competitive advantage
Types of competitive advantage
Low cost Differentiation
Cost leadershipDifferentiation
Industry-wide
Niche Focus with
low cost
Focus with
differentiation
Market
Market
Five Generic Strategies
Five Generic Strategies
Competitive Advantage
Competitive
Scope
Cost Uniqueness
Broad
target
Narrow
target
Cost
Leadership
Differentiation
Focused
Cost
Leadership
Focused
Differentiation
Integrated
Cost
Leadership/
Differentiation
Cost Leadership Strategy
Cost Leadership Strategy
An integrated set of actions designed to
produce or deliver goods or services at the
lowest cost, relative to
competitors with features that are acceptable
to customers
◦ relatively standardized products
◦ features acceptable to many customers
◦ lowest competitive price
Cost Leadership Strategy
Cost Leadership Strategy
Cost saving actions required by this strategy:
◦ building efficient scale facilities
◦ tightly controlling production costs and
overhead
◦ minimizing costs of sales, R&D and service
◦ building efficient manufacturing facilities
◦ monitoring costs of activities provided by
outsiders
◦ simplifying production processes
How to Obtain a Cost Advantage
How to Obtain a Cost Advantage
Cost Drivers
Cost Drivers
Value Chain
Value Chain
Determine and
Determine and
control
control
Reconfigure, if
Reconfigure, if
needed
needed
• Alter production process
• Change in automation
• New distribution channel
• Direct sales in place
of indirect sales
• New advertising media
• New raw material
• Backward integration
• Forward integration
• Change location
relative to suppliers
or buyers
Product features
Performance
Mix & variety of
products
Service levels
Small vs. large buyers
Process technology
Wage levels
Product features
Hiring, training,
motivation
Factors That Drive Costs
Factors That Drive Costs
Economies of scale
Asset utilization
Capacity utilization
pattern
• Seasonal, cyclical
Interrelationships
Order processing
and distribution
Value chain linkages
• Advertising & sales
• Logistics &
operations
Major Risks of Cost Leadership
Major Risks of Cost Leadership
Strategy
Strategy
Dramatic technological change could take
away your cost advantage
Competitors may learn how to imitate value
chain
Focus on efficiency could cause cost leader
to overlook changes in customer
preferences
Differentiation Strategy
Differentiation Strategy
An integrated set of actions designed by a
firm to produce or deliver goods or services
(at an acceptable cost) that customers
perceive as being different or unique in
ways that are important to them.
◦ price for product can exceed what the firm’s
target customers are willing to pay
◦ Non standardized products
◦ customers value differentiated features more
than they value low cost
Differentiation Strategy
Differentiation Strategy
A product differentiation strategy must meet the
VRIO criteria…
Is it Valuable?
Is it Rare?
Is it costly to Imitate?
Is the firm Organized to exploit it?
…if it is to create competitive advantage.
Factors That Drive Differentiation
Factors That Drive Differentiation
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional design skill
Prestige and exclusivity
Differentiation Strategy
Differentiation Strategy
Differentiation actions required by this
strategy:
◦ Analysis of the value chain identifies in what
parts of the chain and through which links
superior products can be created and
customer perception may be changed
◦ Shaping perceptions through advertising
◦ Focus on quality – customer loyalty.
◦ Capability in R&D.
Differentiation Strategy and Price
Differentiation Strategy and Price
Elasticity of Demand
Elasticity of Demand
•Differentiation strategy, properly used, can:
reduce price elasticity of demand for the
particular product.
•This leads to the ability to charge higher
prices than competitors, without reducing
sales volume.
•Leads to above average profits compared
to sales.
Major Risks of Differentiation
Major Risks of Differentiation
Strategy
Strategy
 Customers may decide that the price differential
between the differentiated product and the cost leader’s
product is too large
 The “me-too” danger. Product features and
characteristics can be easily copied. The company needs to
be one step ahead of the curve and invest in improving and
perfecting the product, otherwise it will quickly become
obsolete.
 The “demanding consumer” danger. Products have
shorter life cycles and consumers gravitate towards what’s
new. In order to remain competitive firms need to keep up
with the latest trends and technologies, or their target
audience will switch to competitive offerings.
Focused Business-Level Strategies
Focused Business-Level Strategies
A focus strategy must exploit a narrow
target’s differences from the balance
of the industry by:
◦ isolating a particular buyer group
◦ isolating a unique segment of a
product line
◦ concentrating on a particular
geographic market.
Factors That May Drive Focused
Factors That May Drive Focused
Strategies
Strategies
Large firms may overlook small
niches
Firm may lack resources to compete
in the broader market
May be able to serve a narrow market
segment more effectively than can
larger industry-wide competitors
Focus strategy may allow the firm to
direct resources to certain value chain
activities to build competitive
advantage.
Major Risks of Focused Strategies
Major Risks of Focused Strategies
Firm may be “outfocused” by
competitors
Large competitor may set its
sights on your niche market
Preferences of niche market may
change to match those of broad
market
Integrated or Hybrid Strategy
Integrated or Hybrid Strategy
A firm that successfully uses an integrated
cost leadership/differentiation strategy should
be in a better position to:
◦ adapt quickly to environmental changes
◦ learn new skills and technologies more
quickly
◦ effectively leverage its core competencies
while competing against its rivals by
providing differentiated products at low costs.
Benefits of Integrated Strategy
Benefits of Integrated Strategy
Successful firms using this strategy
have above-average returns
Firm offers two types of values to
customers
◦ some differentiated features (but
less than a true differentiated firm)
◦ relatively low cost (but not as low as
the cost leader’s price)
Major Risks of Integrated Strategy
Major Risks of Integrated Strategy
An integrated cost/differentiation
business level strategy often involves
compromises (neither the lowest cost
nor the most differentiated firm)
The firm may become “stuck in the
middle” lacking the strong
commitment and expertise that
accompanies firms following either a
cost leadership or a differentiated
strategy
Sustainable competitive
Sustainable competitive
advantage
advantage
What is meant by sustainable competitive
advantage?
◦ Durable
◦ Valuable to the firm
 Exploiting weaknesses and neutralizing threats
◦ Unique
◦ Difficult for competitors to imitate
◦ Not easily substitutable
Examples of SCA
Examples of SCA
For many years, Singapore Airlines were
riding on its SCA of having the best in-flight
service
As more airlines improved their service and
narrowed the gap, SIA sought other
competitive advantages among which are
◦ The most modern fleet
◦ Outstanding Service on the Ground
◦ A super entertainment system in its cabins
◦ Comfort in its First Class cabins at an unparallel
level
Warren Buffet's
Investment Criteria
Warren Buffet was once asked
what is the most important
thing he looks for when
evaluating a company to
invest in. Without hesitation,
he replied, "Sustainable
competitive advantage."
STRATEGIES FOR
◦Market Leaders
◦Challengers
◦Followers, and
◦Nichers
MARKET LEADER`S
MARKET LEADER`S
STRATEGY:
STRATEGY: Defense Strategy
Defense Strategy
A market leader should generally adopt a
defense strategy
5 commonly used defense strategies
◦ Position Defense
◦ Flanking Defense
◦ Contraction Defense
◦ Pre-emptive Defense
◦ Counter-Offensive Defense
Defense Strategy (cont’d)
Defense Strategy (cont’d)
Position Defense
Use ones existing good position as defence.
One of the most successful of the defense
strategies
e.g. High end car manufacturers like Mercedes,
Lamborghini, Ferrari use a position defense
strategy given their
Defense Strategy (cont’d)
Defense Strategy (cont’d)
Flanking Defense:
◦ Secondary markets (flanks) are the weaker
areas and prone to being attacked
◦ Pay attention to the flanks
Defense Strategy (cont’d)
Defense Strategy (cont’d)
Contraction Defense
Withdraw from the most vulnerable segments
and redirect resources to those that are more
defendable
By planned contraction or strategic withdrawal
e.g. India’s TATA Group sold its soaps and
detergents business units to Unilever in 1993
Defense Strategy (cont’d)
Defense Strategy (cont’d)
Pre-emptive Defense
Detect potential attacks and attack the
enemies first
Let it be known how it will retaliate
Product or brand proliferation is a form of
pre-emptive defense e.g. Seiko has over
2,000 models
Defense Strategy (cont’d)
Defense Strategy (cont’d)
Counter-Offensive Defense
Responding to competitors’ head-on attack
by identifying the attacker’s weakness and
then launch a counter attack
e.g. Toyota launched the Lexus to respond
to Mercedes attack
Market Challenger Strategies
Market Challenger Strategies
The market challengers’ strategic objective
is to gain market share and to become
the leader eventually
How?
By attacking the market leader
By attacking other firms of the same size
By attacking smaller firms
Market Challenger Strategies
Market Challenger Strategies
(cont’d)
(cont’d)
Types of Attack Strategies
Frontal attack
Flank attack
Encirclement attack
Bypass attack
Guerrilla attack
Frontal Attack
Frontal Attack
Seldom work unless
◦ The challenger has sufficient fire-power (a 3:1
advantage) and staying power, and
◦ The challenger has clear distinctive advantage(s)
e.g. Japanese and Korean car manufacturers
launched frontal attacks in various ASPAC
countries through quality, price and low cost
Flank attack
Flank attack
Attack the enemy at its weak points or
blind spots i.e. its flanks
Ideal for challenger who does not have
sufficient resources
e.g. In the 1990s, Yaohan attacked
Mitsukoshi and Seibu’s flanks by opening
numerous stores in overseas markets
Encirclement attack
Encirclement attack
Attack the enemy at many fronts at the
same time
Ideal for challenger having superior
resources
e.g. Seiko attacked on fashion, features,
user preferences and anything that
might interest the consumer
Bypass attack
Bypass attack
By diversifying into unrelated products
or markets neglected by the leader
Could overtake the leader by using new
technologies
e.g. Pepsi use a bypass attack strategy
against Coke in China by locating its
bottling plants in the interior provinces
Guerrilla attack
Guerrilla attack
By launching small, intermittent hit-and-run
attacks to harass and destabilize the leader
Usually use to precede a stronger attack
e.g. airlines use short promotions to attack
the national carriers especially when
passenger loads in certain routes are low
Market-Follower Strategies
Market-Follower Strategies
Theodore Levitt in his article, “Innovative
Imitation” argued that a product imitation
strategy might be just as profitable as a
product innovation strategy
e.g. Product innovation--Sony
Product-imitation--Panasonic
Market-Follower Strategies (cont’d)
Market-Follower Strategies (cont’d)
Each follower tries to bring distinctive advantages to
its target market--location, services, financing
Four broad follower strategies:
◦ Counterfeiter (which is illegal)
◦ Cloner e.g. the IBM PC clones
◦ Imitator e.g. car manufacturers imitate the style of one
another
◦ Adapter e.g. many Japanese firms are excellent adapters
initially before developing into challengers and eventually
leaders
Market-Nicher Strategies
Market-Nicher Strategies
Smaller firms can avoid larger firms by
targeting smaller markets or niches that
are of little or no interest to the larger
firms
e.g. Logitech--mouse
Microbrewers--special beers
Market-Nicher Strategies (cont’d)
Market-Nicher Strategies (cont’d)
Nichers must create niches, expand the niches
and protect them
◦ e.g. Nike constantly created new niches--cycling,
walking, hiking, cheerleading, etc
What is the major risk faced by nichers?
◦ Market niche may be attacked by larger firms once they
notice the niches are successful
Multiple Niching
Multiple Niching
“A firm should `stick to its niching’ but not
necessarily to its niche. That is why
multiple niching is preferable to single
niching. By developing strength in two or
more niches the company increases its
chances for survival.”
Philip Kotler
THANK YOU !!
THANK YOU !!

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competetive advantage.pdf

  • 2. What is Competitive advantage? … a basis for the firm’s long term success? … a basis for value creation? Do we really know where it resides? Can it be sustainable?
  • 3. What is Competitive advantage? What is Competitive advantage? “When two or more firms compete within the same market, one firms possesses a competitive advantage over its rivals when it earns a persistently higher rate of profit (or has the potential to earn a persistently higher rate of profit)” R. M. Grant, 2000
  • 4. The main types of Competitive The main types of Competitive Advantage Advantage Cost advantage Cost advantage Differentiation advantage Differentiation advantage Competitive advantage Competitive advantage Similar product at lower cost H i g h e r p r i c e f o r u n i q u e p r o d u c t
  • 5. Competitive strategies Competitive strategies by by Porter Porter Types of competitive advantage Types of competitive advantage Low cost Differentiation Cost leadershipDifferentiation Industry-wide Niche Focus with low cost Focus with differentiation Market Market
  • 6. Five Generic Strategies Five Generic Strategies Competitive Advantage Competitive Scope Cost Uniqueness Broad target Narrow target Cost Leadership Differentiation Focused Cost Leadership Focused Differentiation Integrated Cost Leadership/ Differentiation
  • 7. Cost Leadership Strategy Cost Leadership Strategy An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers ◦ relatively standardized products ◦ features acceptable to many customers ◦ lowest competitive price
  • 8. Cost Leadership Strategy Cost Leadership Strategy Cost saving actions required by this strategy: ◦ building efficient scale facilities ◦ tightly controlling production costs and overhead ◦ minimizing costs of sales, R&D and service ◦ building efficient manufacturing facilities ◦ monitoring costs of activities provided by outsiders ◦ simplifying production processes
  • 9. How to Obtain a Cost Advantage How to Obtain a Cost Advantage Cost Drivers Cost Drivers Value Chain Value Chain Determine and Determine and control control Reconfigure, if Reconfigure, if needed needed • Alter production process • Change in automation • New distribution channel • Direct sales in place of indirect sales • New advertising media • New raw material • Backward integration • Forward integration • Change location relative to suppliers or buyers
  • 10. Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation Factors That Drive Costs Factors That Drive Costs Economies of scale Asset utilization Capacity utilization pattern • Seasonal, cyclical Interrelationships Order processing and distribution Value chain linkages • Advertising & sales • Logistics & operations
  • 11. Major Risks of Cost Leadership Major Risks of Cost Leadership Strategy Strategy Dramatic technological change could take away your cost advantage Competitors may learn how to imitate value chain Focus on efficiency could cause cost leader to overlook changes in customer preferences
  • 12. Differentiation Strategy Differentiation Strategy An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different or unique in ways that are important to them. ◦ price for product can exceed what the firm’s target customers are willing to pay ◦ Non standardized products ◦ customers value differentiated features more than they value low cost
  • 13. Differentiation Strategy Differentiation Strategy A product differentiation strategy must meet the VRIO criteria… Is it Valuable? Is it Rare? Is it costly to Imitate? Is the firm Organized to exploit it? …if it is to create competitive advantage.
  • 14. Factors That Drive Differentiation Factors That Drive Differentiation Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional design skill Prestige and exclusivity
  • 15. Differentiation Strategy Differentiation Strategy Differentiation actions required by this strategy: ◦ Analysis of the value chain identifies in what parts of the chain and through which links superior products can be created and customer perception may be changed ◦ Shaping perceptions through advertising ◦ Focus on quality – customer loyalty. ◦ Capability in R&D.
  • 16. Differentiation Strategy and Price Differentiation Strategy and Price Elasticity of Demand Elasticity of Demand •Differentiation strategy, properly used, can: reduce price elasticity of demand for the particular product. •This leads to the ability to charge higher prices than competitors, without reducing sales volume. •Leads to above average profits compared to sales.
  • 17. Major Risks of Differentiation Major Risks of Differentiation Strategy Strategy  Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large  The “me-too” danger. Product features and characteristics can be easily copied. The company needs to be one step ahead of the curve and invest in improving and perfecting the product, otherwise it will quickly become obsolete.  The “demanding consumer” danger. Products have shorter life cycles and consumers gravitate towards what’s new. In order to remain competitive firms need to keep up with the latest trends and technologies, or their target audience will switch to competitive offerings.
  • 18. Focused Business-Level Strategies Focused Business-Level Strategies A focus strategy must exploit a narrow target’s differences from the balance of the industry by: ◦ isolating a particular buyer group ◦ isolating a unique segment of a product line ◦ concentrating on a particular geographic market.
  • 19. Factors That May Drive Focused Factors That May Drive Focused Strategies Strategies Large firms may overlook small niches Firm may lack resources to compete in the broader market May be able to serve a narrow market segment more effectively than can larger industry-wide competitors Focus strategy may allow the firm to direct resources to certain value chain activities to build competitive advantage.
  • 20. Major Risks of Focused Strategies Major Risks of Focused Strategies Firm may be “outfocused” by competitors Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market
  • 21. Integrated or Hybrid Strategy Integrated or Hybrid Strategy A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: ◦ adapt quickly to environmental changes ◦ learn new skills and technologies more quickly ◦ effectively leverage its core competencies while competing against its rivals by providing differentiated products at low costs.
  • 22. Benefits of Integrated Strategy Benefits of Integrated Strategy Successful firms using this strategy have above-average returns Firm offers two types of values to customers ◦ some differentiated features (but less than a true differentiated firm) ◦ relatively low cost (but not as low as the cost leader’s price)
  • 23. Major Risks of Integrated Strategy Major Risks of Integrated Strategy An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy
  • 24. Sustainable competitive Sustainable competitive advantage advantage What is meant by sustainable competitive advantage? ◦ Durable ◦ Valuable to the firm  Exploiting weaknesses and neutralizing threats ◦ Unique ◦ Difficult for competitors to imitate ◦ Not easily substitutable
  • 25. Examples of SCA Examples of SCA For many years, Singapore Airlines were riding on its SCA of having the best in-flight service As more airlines improved their service and narrowed the gap, SIA sought other competitive advantages among which are ◦ The most modern fleet ◦ Outstanding Service on the Ground ◦ A super entertainment system in its cabins ◦ Comfort in its First Class cabins at an unparallel level
  • 26. Warren Buffet's Investment Criteria Warren Buffet was once asked what is the most important thing he looks for when evaluating a company to invest in. Without hesitation, he replied, "Sustainable competitive advantage."
  • 28. MARKET LEADER`S MARKET LEADER`S STRATEGY: STRATEGY: Defense Strategy Defense Strategy A market leader should generally adopt a defense strategy 5 commonly used defense strategies ◦ Position Defense ◦ Flanking Defense ◦ Contraction Defense ◦ Pre-emptive Defense ◦ Counter-Offensive Defense
  • 29. Defense Strategy (cont’d) Defense Strategy (cont’d) Position Defense Use ones existing good position as defence. One of the most successful of the defense strategies e.g. High end car manufacturers like Mercedes, Lamborghini, Ferrari use a position defense strategy given their
  • 30. Defense Strategy (cont’d) Defense Strategy (cont’d) Flanking Defense: ◦ Secondary markets (flanks) are the weaker areas and prone to being attacked ◦ Pay attention to the flanks
  • 31. Defense Strategy (cont’d) Defense Strategy (cont’d) Contraction Defense Withdraw from the most vulnerable segments and redirect resources to those that are more defendable By planned contraction or strategic withdrawal e.g. India’s TATA Group sold its soaps and detergents business units to Unilever in 1993
  • 32. Defense Strategy (cont’d) Defense Strategy (cont’d) Pre-emptive Defense Detect potential attacks and attack the enemies first Let it be known how it will retaliate Product or brand proliferation is a form of pre-emptive defense e.g. Seiko has over 2,000 models
  • 33. Defense Strategy (cont’d) Defense Strategy (cont’d) Counter-Offensive Defense Responding to competitors’ head-on attack by identifying the attacker’s weakness and then launch a counter attack e.g. Toyota launched the Lexus to respond to Mercedes attack
  • 34. Market Challenger Strategies Market Challenger Strategies The market challengers’ strategic objective is to gain market share and to become the leader eventually How? By attacking the market leader By attacking other firms of the same size By attacking smaller firms
  • 35. Market Challenger Strategies Market Challenger Strategies (cont’d) (cont’d) Types of Attack Strategies Frontal attack Flank attack Encirclement attack Bypass attack Guerrilla attack
  • 36. Frontal Attack Frontal Attack Seldom work unless ◦ The challenger has sufficient fire-power (a 3:1 advantage) and staying power, and ◦ The challenger has clear distinctive advantage(s) e.g. Japanese and Korean car manufacturers launched frontal attacks in various ASPAC countries through quality, price and low cost
  • 37. Flank attack Flank attack Attack the enemy at its weak points or blind spots i.e. its flanks Ideal for challenger who does not have sufficient resources e.g. In the 1990s, Yaohan attacked Mitsukoshi and Seibu’s flanks by opening numerous stores in overseas markets
  • 38. Encirclement attack Encirclement attack Attack the enemy at many fronts at the same time Ideal for challenger having superior resources e.g. Seiko attacked on fashion, features, user preferences and anything that might interest the consumer
  • 39. Bypass attack Bypass attack By diversifying into unrelated products or markets neglected by the leader Could overtake the leader by using new technologies e.g. Pepsi use a bypass attack strategy against Coke in China by locating its bottling plants in the interior provinces
  • 40. Guerrilla attack Guerrilla attack By launching small, intermittent hit-and-run attacks to harass and destabilize the leader Usually use to precede a stronger attack e.g. airlines use short promotions to attack the national carriers especially when passenger loads in certain routes are low
  • 41. Market-Follower Strategies Market-Follower Strategies Theodore Levitt in his article, “Innovative Imitation” argued that a product imitation strategy might be just as profitable as a product innovation strategy e.g. Product innovation--Sony Product-imitation--Panasonic
  • 42. Market-Follower Strategies (cont’d) Market-Follower Strategies (cont’d) Each follower tries to bring distinctive advantages to its target market--location, services, financing Four broad follower strategies: ◦ Counterfeiter (which is illegal) ◦ Cloner e.g. the IBM PC clones ◦ Imitator e.g. car manufacturers imitate the style of one another ◦ Adapter e.g. many Japanese firms are excellent adapters initially before developing into challengers and eventually leaders
  • 43. Market-Nicher Strategies Market-Nicher Strategies Smaller firms can avoid larger firms by targeting smaller markets or niches that are of little or no interest to the larger firms e.g. Logitech--mouse Microbrewers--special beers
  • 44. Market-Nicher Strategies (cont’d) Market-Nicher Strategies (cont’d) Nichers must create niches, expand the niches and protect them ◦ e.g. Nike constantly created new niches--cycling, walking, hiking, cheerleading, etc What is the major risk faced by nichers? ◦ Market niche may be attacked by larger firms once they notice the niches are successful
  • 45. Multiple Niching Multiple Niching “A firm should `stick to its niching’ but not necessarily to its niche. That is why multiple niching is preferable to single niching. By developing strength in two or more niches the company increases its chances for survival.” Philip Kotler