Competitive AdvantageWord

　　Week 5: Competitive Advantage Concept of (S) Competitive Advantage Generic Strategy (Porter) Scope Focus Value Chain Value Proposition (Wiersema) Threshold/Unique Capabilities (Hamel) Implications for (Sustainable) Competitive Advantage1

　　The concept of competitive advantage Sustainable Competitive Advantage

　　Generic Business Level StrategiesSource of Competitive Advantage

　　Cost

　　Uniqueness

　　Breadth of Competitive Scope

　　Broad Target Market

　　Cost Leadership

　　Differentiation

　　Narrow Target Market

　　Focused Low Cost

　　Focused Differentiation3

　　Porter’s Generic Business Strategies (cont.) Cost Leadership– Firms with lower costs than their competitors are likely to enjoy competitive advantage if they can maintain this cost advantage over time. – Firms pursuing this strategy will seek to exploit economies of scale and experience by maximizing sales volume.

　　Porter’s Generic Business Strategies (cont.) Cost Leadership (cont.)– Probably most effective in those industries or markets price is most important factor (over service, technology, or product characteristics). – Successful cost leaders develop competitive advantage by offering of comparable quality at lower prices than most industry competitors. Not the same as selling cheap merchandise or products perceived as inferior.

　　Porter’s Generic Business Strategies(cont.)

　　Cost Leadership (cont.)– Successful cost leader does not always have to offer lowest prices. Customer perception is most important factor.

　　– Firms following this strategy will seek to maximize market share.

　　Porter’s Generic Business Strategies (cont.) Cost leadership strategies are characterized by:– Capital-intensive manufacturing or production processes that reduce labor costs; – Process engineering skills that are aimed at lowering production costs; and – Products designed to be manufactured easily and products which share many common components. Leaders have developed sophisticated materials procurement and inventory management systems. Leaders usually have low-cost distribution systems.7

　　Porter’s Generic Business Strategies (cont.) Firms which want to pursue cost leadership strategies should emphasize:– Economies of scale – Tight control on cost, overheads; labour

　　Value chain concept is useful tool for managers using this strategy.

　　Porter’s Generic Business Strategies (cont.) Differentiation strategy– These firms aim to serve the segment of market by offering products/services that are perceived as unique. Likely to work best with products/services that lend themselves well to differentiation.– Even commodities can be differentiated: Morton’s salt.

　　Porter’s Generic Business Strategies (cont.) Differentiation strategy (cont.)– It is the perception of differences that is most important -- not the actual characteristics of competing products. Customer pe

　　rceptions can be fragile and short-lived.

　　– Firms must develop strong marketing capabilities and a reputation for quality or uniqueness.

　　Porter’s Generic Business Strategies (cont.) “Stuck in the Middle”– Porter argued that some firms do not pursue any viable business strategy -- thus, they are stuck in the middle. – This happens for two reasons: They fail to pursue successfully any of the generic business strategies. Firms might attempt to pursue more than one generic strategy.

　　Generic Strategies of Companies in Various IndustriesIndustry AirlineAutomobile

　　Cost Differentiation Leadership Southwest/Ry an Air Kia Wal-Mart Timex American GM Waitrose Seiko

　　Focus Kiwi RollsRoyce Starbucks Rolex12

　　Retailing Watches

　　Limits of Differentiation (cont.) Differentiation strategies can be threatened by a number of factors:– Private-label and store brand competition are serious threats. – Discounting. – Gradual commoditization. Companies fail to invest in maintaining brand image.

　　Concept: Company Value Chain A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service All these activities that a company performs internally combine to form a value chain—so-called because the underlying intent of a company’s activities is to do things that ultimately create value for buyers The value chain contains two types of activities– Primary activities (where most of the value for customers is created)– Support activities that facilitate performance of the primary activities

　　Value Chain FrameworkFirm InfrastructureSupport Activities

　　Human Resource Management Technological Development Procurement Operations

　　Outbound Logistics

　　Marketing Sales

　　Inbound Logistics

　　Service

　　Primary Activities

　　Example: Value Chain Activities for a BakeryPrimary Activities Supply chain management Recipe development and testing Mixing and baking Packaging

　　Support Activities Quality control Human resource management Administration

　　Sales and marketing Distribution

　　Value Creating Activities common to a Cost Leadership Business Level StrategyCost Effective MIS Systems

　　Firm Infrastructure

　　Simplified Planning Practices to Reduce Planning Costs

　　Relatively Few Management Layers to Reduce Overhead

　　Support Activities

　　Consistent Policies to Reduce Turnover Costs

　　Human Resource Management Technological DevelopmentDelivery Schedule Small, Highly that Reduces Trained Sales Costs Force Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes

　　Effective Training Programs to Improve Worker Efficiency and Effectiveness

　　Easy-to-Use Manufacturing Technologies

　　Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials

　　Frequent Evaluation Processes to Procurement Monitor Suppliers’ Performances Effective Product In

　　stallations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume National Scale Advertising

　　Operations

　　Outbound Logistics

　　Selection of Low Cost Transport Carriers

　　Located in Close Proximity with Suppliers

　　Policy Choice of Efficient Order Plant Technology Sizes Organizational Learning

　　Interrelationships with Sister Units 17

　　Primary Activities

　　Marketing Sales

　　Inbound Logistics

　　Highly Efficient Efficient Plant Systems to Link Scale to Minimize Suppliers’ Products Manufacturing with the Firm’s Costs Production Timing of Asset Processes Purchases

　　Service

　　Choices that Drive CostsEconomies of scale Product features

　　Asset utilizationCapacity utilization pattern - Seasonal, cyclical Interrelationships - Order processing and distribution Value chain linkages - Advertising Sales

　　PerformanceMix variety of products Service levels Small vs. large buyers Process technology Wage levels Product features

　　- Logistics Operations

　　Hiring, training, motivation 18

　　Three Key Questions 1 2 3 How can an activity be performed differently or even eliminated? How can a group of linked value activities be regrouped or reordered?

　　How might coalitions with other firms lower or eliminate costs?

　　Gallo sold wine through grocery stores rather than liquor stores because they were more efficient distributors 19

　　Why Do Value Chains of Rivals Differ? Several factors give rise to differences in value chains of rival companies– Different strategies – Different operating practices – Different technologies – Different degrees of vertical integration

　　– Some companies may perform particular activities internally while others outsource them

　　Differences among the value chains of competing companies complicate task of assessing rivals’ relative cost positions20

　　Strategy: Value DisciplinesProduct Leadership (best product)

　　Operational Excellence (low cost producer)Ref: The Discipline of Market Leaders, Michael Treacy Fred Wiersema; 1995

　　Customer Intimacy (best total solution)21

　　Strategy: Value DisciplinesOperational Excellence Competitive price Error free, reliable Fast (on demand) Simple Responsive Consistent information for all Transactional Product Leadership New, state of the art products or services Risk takers Meet volatile customer needs Customer Intimacy Management by Fact Easy to do business with Have it your way (customization) Market segments of one Proactive, flexible

　　Fast concept-tocounterNever satisfied obsolete own and competitors' products Learning organization

　　'Once and Done'

　　Relationship and consultative sellingCross selling22

　　Sample KPIs for Each DisciplineOperational Excellence Price Selection Convenience Zero Defects Growth

　　Product Leadership

　　Customer Intimacy Customer Knowledge Solutions Offered Penetration Customer Data Customer-succe

　　ss focus

　　Marketing Functionality # of Successes # of Failures Learn from key users Interdisciplinary teams Pipeline

　　A “Mental Model” of Competitive AdvantageDefining the businessSelect competitive strategyResource capability requirements Time, success, interconnectedness, investment

　　Rare, valuable. non-substitutable, difficult to imitate resources capabilities24

　　Questions – In your seminars Seminar case Zara