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