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 What is Competitive advantage?advantage?

Piyoosh Bajoria

“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 The main types of Competitive AdvantageCompetitive Advantage

Piyoosh Bajoria

Cost advantageCost advantage

Differentiation advantage

Differentiation advantage

Competitiveadvantage

Competitiveadvantage

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for unique product

Competitive strategiesCompetitive strategies by by

PorterPorterTypes of competitive advantageTypes of competitive advantage

Low cost Differentiation

Cost leadership DifferentiationIndustry-wide

Niche Focus with low cost

Focus with differentiation

MarketMarket

Five Generic StrategiesFive Generic StrategiesCompetitive Advantage

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Cost Uniqueness

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Cost Leadership

Differentiation

Focused Cost Leadership

Focused Differentiation

Integrated Cost

Leadership/Differentiation

Cost Leadership StrategyCost Leadership StrategyAn 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 StrategyCost 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 How to Obtain a Cost AdvantageAdvantage

Cost DriversCost DriversValue ChainValue Chain

Determine and Determine and controlcontrol

Reconfigure, if Reconfigure, if neededneeded

• Alter production process• Alter production process• Change in automation• Change in automation• New distribution channel• New distribution channel

• Direct sales in place of indirect sales

• Direct sales in place of indirect sales

• New advertising media• New advertising media

• New raw material• New raw material

• Backward integration• Backward integration• Forward integration• Forward integration

• Change location relative to suppliers or buyers

• 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 CostsFactors 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 StrategyStrategy

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 StrategyDifferentiation StrategyAn 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 in ways that are important to them

◦price for product can exceed what the firm’s target customers are willing to pay

◦nonstandardized products◦customers value differentiated features

more than they value low cost

Differentiation StrategyDifferentiation StrategyValue provided by unique features

and value characteristicsCommand premium priceHigh customer serviceSuperior qualityPrestige or exclusivityRapid innovation

Differentiation StrategyDifferentiation StrategyDifferentiation actions required by this strategy:◦developing new systems and processes◦shaping perceptions through advertising◦quality focus◦capability in R&D◦maximize human resource contributions

through low turnover and high motivation

How to Obtain a How to Obtain a Differentiation AdvantageDifferentiation Advantage

Cost DriversValue Chain

Control if Control if neededneeded

Reconfigure to Reconfigure to maximizemaximize

customer perceptions of uniqueness

customer perceptions of uniquenesscustomer reluctance to switch to non-unique

productcustomer reluctance to switch to non-unique

product

• Raise performance of product or service

• Lower buyers’ costs

• Create sustainability through:

Factors That Drive Factors That Drive DifferentiationDifferentiationUnique product featuresUnique product performanceExceptional services New technologiesQuality of inputsExceptional skill or experienceDetailed information

Major Risks of Differentiation Major Risks of Differentiation StrategyStrategy

Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large

Means of differentiation may cease to provide value for which customers are willing to pay

Major Risks of Differentiation Major Risks of Differentiation StrategyStrategy

Experience may narrow customer’s perceptions of the value of differentiated features of the firm’s products

Makers of counterfeit goods may attempt to replicate differentiated features of the firm’s products

Focused Business-Level Focused Business-Level StrategiesStrategiesA 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◦finding their “niche”

Factors That May Drive Factors That May Drive Focused StrategiesFocused Strategies

Large firms may overlook small nichesFirm may lack resources to compete

in the broader marketMay be able to serve a narrow market

segment more effectively than can larger industry-wide competitors

Focus may allow the firm to direct resources to certain value chain activities to build competitive advantage

Major Risks of Focused Major Risks of Focused StrategiesStrategiesFirm may be “outfocused” by

competitorsLarge competitor may set its

sights on your niche marketPreferences of niche market may

change to match those of broad market

Advantages of Integrated Advantages of Integrated StrategyStrategy

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

Benefits of Integrated Benefits of Integrated StrategyStrategySuccessful firms using this strategy

have above-average returnsFirm 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 Major Risks of Integrated StrategyStrategyAn 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 Sustainable competitive competitive advantageadvantageWhat 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 SCAExamples 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

STRATEGIES FOR

◦Market Leaders◦Challengers◦Followers, and◦Nichers

MARKET LEADER`S MARKET LEADER`S STRATEGY: STRATEGY: Defense Defense StrategyStrategyA market leader should generally

adopt a defense strategy5 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 DefenseWithdraw 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 DefenseDetect potential attacks and

attack the enemies firstLet it be known how it will retaliateProduct 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 DefenseResponding 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 defence

Market Challenger Market Challenger StrategiesStrategies

The market challengers’ strategic objective is to gain market share and to become the leader eventually

How?By attacking the market leaderBy attacking other firms of the

same sizeBy attacking smaller firms

Market Challenger Strategies Market Challenger Strategies (cont’d)(cont’d)

Types of Attack StrategiesFrontal attackFlank attackEncirclement attackBypass attackGuerrilla 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 attackFlank 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 attackEncirclement 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 attackBypass 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 attackGuerrilla attackBy 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 Market-Follower StrategiesStrategiesTheodore Levitt in his article,

“Innovative Imitation” argued that a product imitation strategy might be just as profitable as a product innovation strategye.g. Product innovation--Sony

Product-imitation--Panasonic

Market-Follower Strategies Market-Follower Strategies (cont’d)(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 StrategiesMarket-Nicher Strategies

Smaller firms can avoid larger firms by targeting smaller markets or niches that are of little or no interest to the larger firmse.g. Logitech--mouse

Microbrewers--special beers

Market-Nicher Strategies Market-Nicher Strategies (cont’d)(cont’d)

Nichers must create niches, expand the niches and protect them◦ e.g. Nike constantly created new niches--

cycling, walking, hiking, cheerleading, etcWhat is the major risk faced by nichers?

◦ Market niche may be attacked by larger firms once they notice the niches are successful

Multiple NichingMultiple 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