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Unit 2
- 1. Unit 2 COMPETITIVE ADVANTAGE PREPARED &PRESENTED BY: MS. HIMANI
- 2. Layout of thepresentation External Environment PESTEL Analysis SWOT Analysis Porter’s Five Forces Model The Competitive Profile Matrix (CPM) Globalization and Industry Structure - Resources Capabilities and competencies Value Chain Analysis – Core competencies Generic building blocks of Competitive Advantage Distinctive Competencies Avoiding failures and sustaining competitive advantage 2 Prepared by: Ms. Himani R.
- 3. External Environment Internalenvironment are the events that occur within an organization. Internal environmental factors are easier to control. Eg. Management, employees, organizational culture, financial issues etc. An external environment is composed of all the outside factors or influences that impact the operation of business. The business must act or react to keep up its flow of operations. The external environment can be broken down into two types: the micro environment and the macro environment. 3 Prepared by: Ms. Himani R.
- 4. Continued The microenvironment consists of the factors that directly impact the operation of a company. Eg. suppliers, customers, marketing intermediaries, financiers, and public perceptions. The macro environment consists of general factors that a business typically has no control over. The success of the company depends on its ability to adapt. Eg. economic, socio-cultural, political, legal, technical, and environmental considerations. 4 Prepared by: Ms. Himani R.
- 5. SWOT Analysis 5 Prepared by:Ms. Himani R.
- 6. Albert Humphrey AlbertHumphrey was an American business and management consultant. He produced a team method for planning which was named SOFT analysis, this has developed into what we now know as a SWOT analysis. 6 Prepared by: Ms. Himani R.
- 7. SWOT analysis Thefirst two sections (Strengths and Weaknesses) is used to identify all of the internal factors. The last two sections (Opportunities and Threats) will be used to identify all of the external factors. 7 Prepared by: Ms. Himani R.
- 8. Strengths & Weaknesses New, innovative product Quality processes and procedures Patents Strong brand names Good reputation among customers Cost advantages from proprietary know-how Prepared by: Ms. Himani R. 8 Lack of marketing expertise Undifferentiated products or services Poor quality goods or services Damaged reputation High cost structure Lack of access to key distribution channels
- 9. Opportunities & Threats A developing market Mergers, joint ventures New market segments New international markets Unfulfilled customer need Arrival of new technologies Loosening of regulations Prepared by: Ms. Himani R. 9 New competitors Price wars Competitor’s innovation Competitor’s superior access to distribution channels Shift in consumer preferences New regulations
- 10. PESTEL Analysis APESTEL analysis is a framework or tool used by marketers to analyse and monitor the macro-environmental (external marketing environment) factors that have an impact on an organisation. The result of which is used to identify threats and weaknesses which is used in a SWOT analysis. PESTEL stands for: P – Political E – Economic S – Social T – Technological E – Environmental L – Legal 10 Prepared by: Ms. Himani R.
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- 12. Porter’s Five ForceModel Identifies and analyzes five competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths. Porter identified five undeniable forces that play a part in shaping every market and industry in the world. The forces are frequently used to measure competition intensity, attractiveness & profitability of an industry or market. Prepared by: Ms. Himani R. 12
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- 14. Porter’s Five ForceModel Prepared by: Ms. Himani R. 14
- 15. The Competitive ProfileMatrix (CPM) The Competitive Profile Matrix (CPM) is a tool that compares the firm and its rivals and reveals their relative strengths and weaknesses. The matrix identifies a firm’s key competitors and compares them using industry’s critical success factors. The analysis also reveals company’s relative strengths and weaknesses against its competitors, so a company would know, which areas it should improve and, which areas to protect. Prepared by: Ms. Himani R. 15
- 16. Continued Critical successfactors (CSF) are the key areas, which must be performed at the highest possible level of excellence if organizations want to succeed in the particular industry. They vary between different industries or even strategic groups and include both internal and external factors. For eg. Union relations, Power over suppliers, Product Quality, Skilled workforce, Efficient supply chain, Customer service, Production capacity, Customer loyalty, Added product features, On time delivery, etc. Prepared by: Ms. Himani R. 16
- 17. Eg. Of CPM CompanyA Company B Company C CSF Weight Rating Score Rating Score Rating Score Range of products 0.05 3 0.15 1 0.05 2 0.10 Successful new introductions 0.04 3 0.12 3 0.12 3 0.12 Sales per employee 0.08 1 0.08 2 0.16 3 0.24 Low cost structure 0.05 1 0.05 3 0.15 4 0.20 Total 0.22 - 0.4 - 0.48 - 0.66 Prepared by: Ms. Himani R. 17
- 18. Continued Weight Each criticalsuccess factor should be assigned a weight ranging from 0.0 (low importance) to 1.0 (high importance). The number indicates how important the factor is in succeeding in the industry. Rating The ratings in CPM refer to how well companies are doing in each area. They range from 4 to 1, where 4 means a major strength, 3 – minor strength, 2 – minor weakness and 1 – major weakness. Score & Total Score The score is the result of weight multiplied by rating. The firm that receives the highest total score is relatively stronger than its competitors. Prepared by: Ms. Himani R. 18
- 19. Globalization & IndustryStructure Globalization is the term to describe the way countries are becoming more interconnected both economically and culturally. This process is a combination of economic, technological, socio-cultural and political forces. Industry is a collection of companies/firms offering goods or services that are close substitutes of each other. An Industry consists of firms that directly compete with each other. Industry structure refers to the number and size distribution of firms in an industry. Prepared by: Ms. Himani R. 19
- 20. Continued i) Fragmented Industry If all firms in an industry are small in size when compared with the size of the whole industry, then it is known as fragmented industry. In a fragmented industry, no firms have large market. Each firm serves only a small piece of total market in competition with others. Eg. agriculture, dry cleaning, salons, soft drinks, automobile etc. ii) Consolidated Industry If small number of firms controls a large share of the industry's output or sales, it is known as a consolidated industry. In the beer industry for example the top three firms account for 80% of industry sales. Prepared by: Ms. Himani R. 20
- 21. Competitive advantage Competitiveadvantage leads to superior profitability. At the most basic level, how profitable a company becomes depends on three factors: The amount of value customers place on the company’s product. The price that a company charges for its products. The cost of creating that value. Value is something that customers assign to a product. A company can raise prices to reflect that value or hold prices lower, which induces more customers to purchase its product & expand unit sales volume. Prepared by: Ms. Himani R. 21
- 22. Continued Competencies arefirm – specific strengths that allow a company to differentiate its products to achieve substantially lower cost than its rivals and thus gain a competitive advantage. Core competency: It is an activity central to a firm's profitability and competitiveness that is performed well by the firm. Core competencies create and sustain firm's ability to meet the critical success factors. Distinctive competency: It is a competitively valuable activity that a firm performs better than its competitors. These provide the basis for competitive advantage. These are cornerstone of strategy. They provide sustainable competitive advantage because these are hard to copy. Prepared by: Ms. Himani R. 22
- 23. Generic building blocksof Competitive Advantage The efficiency of an enterprise depends on the quick flow of information across the complete supply chain i.e. from the customer to manufacturers to supplier. The generic building blocks of a firm to gain competitive advantage are- Quality, (Eg. ISO Mark) Efficiency, (Eg. Japan’s auto industry) Innovation (Eg. Technology integrated) Customer responsiveness (Eg. Indian Postal Service) Prepared by: Ms. Himani R. 23
- 24. Value chain analysis M. Porter introduced the generic value chain model in 1985. Value chain represents all the internal activities a firm engages in to produce goods and services. It is a process where a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation. Prepared by: Ms. Himani R. 24
- 25. VCA Model Prepared by:Ms. Himani R. 25
- 26. Continued Procurement (purchasing)– This is what the organization does to get the resources it needs to operate. This includes finding vendors and negotiating best prices. Human resource management – This is how well a company recruits, hires, trains, motivates, rewards, and retains its workers. People are a significant source of value, so businesses can create a clear advantage with good HR practices. Technological development – These activities relate to managing and processing information, as well as protecting a company's knowledge base. Minimizing information technology costs, staying current with technological advances, and maintaining technical excellence are sources of value creation. Infrastructure – These are a company's support systems, and the functions that allow it to maintain daily operations. Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage. Prepared by: Ms. Himani R. 26
- 27. Continued Inbound logistics– These are all the processes related to receiving, storing, and distributing inputs internally. Your supplier relationships are a key factor in creating value here. Operations – These are the transformation activities that change inputs into outputs that are sold to customers. Here, your operational systems create value. Outbound logistics – These activities deliver your product or service to your customer. These are things like collection, storage, and distribution systems, and they may be internal or external to your organization. Marketing and sales – These are the processes you use to persuade clients to purchase from you instead of your competitors. The benefits you offer, and how well you communicate them, are sources of value here. Service – These are the activities related to maintaining the value of your product or service to your customers, once it's been purchased. Prepared by: Ms. Himani R. 27
- 28. Avoiding failures andsustaining competitive advantage When a company loses its competitive advantage, its profitability falls. The company does not necessarily fail, it may just have average or below-average profitability and can remain in this mode for a considerable time, although its resources & capital base is shrinking. Prepared by: Ms. Himani R. 28
- 29. Continued Reasons forfailure: Inertia Prior strategic commitments The Icarus Paradox Prepared by: Ms. Himani R. 29
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- 31. Continued Steps toavoid Failure: Focus on the Building Blocks of competitive advantage Institute continuous Improvement & Learning Track Best Industrial Practice and use Benchmarking Overcome Inertia Prepared by: Ms. Himani R. 31
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Editor's Notes
- #15 Competition in the Industry The importance of this force is the number of competitors and their ability to threaten a company. The larger the number of competitors, along with the number of equivalent products and services they offer, dictates the power of a company. Suppliers and buyers seek out a company's competition if they are unable to receive a suitable deal. Potential of New Entrants Into an Industry A company's power is also affected by the force of new entrants into its market. The less money and time it costs for a competitor to enter a company's market and be an effective competitor, the more a company's position may be significantly weakened. Power of Suppliers This force addresses how easily suppliers can drive up the price of goods and services. It is affected by the number of suppliers of key aspects of a good or service, how unique these aspects are and how much it would cost a company to switch from one supplier to another. The fewer number of suppliers, and the more a company depends upon a supplier, the more power a supplier holds. Power of Customers This specifically deals with the ability customers have to drive prices down. It is affected by how many buyers, or customers, a company has, how significant each customer is and how much it would cost a customer to switch from one company to another. The smaller and more powerful a client base, the more power it holds. Threat of Substitutes Competitor substitutions that can be used in place of a company's products or services pose a threat. For example, if customers rely on a company to provide a tool or service that can be substituted with another tool or service or by performing the task manually, and this substitution is fairly easy and of low cost, a company's power can be weakened.