Competitive Advantage 1

8/3/2019 Competitive Advantage 1

1/41

CompetitiveCompetitive Advantage 1Advantage 1

Prof. Rushen Chahal


2/41

Learning OutcomesLearning Outcomes

y Review of Porters 5 Forces Model and its

link to Porters generic strategy

y Describe and evaluate Porters generic

strategy

y Resource-based framework for analysis


3/41

Michael PorterMichael Porter

An industryAn industry

s profit potential iss profit potential is

largelydetermined by thelargelydetermined by the

intensity of competitive rivalryintensity of competitive rivalry

within that industry.within that industry.


4/41

Porters Five ForcesPorters Five Forces


5/41

Advantage of the ModelAdvantage of the Model

y According to Porter, businesses can use

the model to identify how to position

itself to take advantage ofopportunities

and overcome threats


6/41

Threat of New EntrantsThreat of New Entrants

Barriers to

Entry

Barriers to

Entry

Expected RetaliationExpected Retaliation

Government PolicyGovernment Policy

Economies of ScaleEconomies of Scale

Product DifferentiationProduct Differentiation

Capital RequirementsCapital Requirements

Switching CostsSwitching Costs

Access to Distribution ChannelsAccess to Distribution Channels

Cost Disadvantages IndependentCost Disadvantages Independent

of Scaleof Scale


7/41

Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power

in the industry by:

Suppliers exert power

in the industry by:

* Threatening to raise* Threatening to raise

prices or to reduce qualityprices or to reduce quality

Powerful suppliers

can squeeze industry

profitability if firms

are unable to recover

cost increases

Powerful suppliers

can squeeze industry

profitability if firms

are unable to recover

cost increases

Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:

Supplier industry is dominated by aSupplier industry is dominated by afew firmsfew firms

Suppliers products have few substitutesSuppliers products have few substitutes

Buyer is not an important customer toBuyer is not an important customer tosuppliersupplier

Suppliers product is an importantSuppliers product is an importantinput to buyers productinput to buyers product

Suppliers products are differentiatedSuppliers products are differentiated

Suppliers products have highSuppliers products have highswitching costsswitching costs

Supplier poses credible threat ofSupplier poses credible threat of

forward integrationforward integration


8/41

Bargaining Power of BuyersBargaining Power of Buyers

Buyers compete

with the supplying

industry by:

Buyers compete

with the supplying

industry by:

* Bargaining down prices* Bargaining down prices

* Forcinghigherquality* Forcinghigherquality

* Playing firms off of* Playing firms off of

each othereach other

Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:

Buyers are concentrated or purchasesBuyers are concentrated or purchases

are large relative to sellers salesare large relative to sellers sales

Purchase accounts for a significantPurchase accounts for a significant

fraction of suppliers salesfraction of suppliers sales

Products are undifferentiatedProducts are undifferentiated

Buyers face few switching costsBuyers face few switching costs

Buyers industry earns low profitsBuyers industry earns low profitsBuyer presents a credible threat ofBuyer presents a credible threat of

backward integrationbackward integration

Product unimportant to qualityProduct unimportant to quality

Buyer has full informationBuyer has full information


9/41

Threat of Substitute ProductsThreat of Substitute Products

Products

with similar

functionlimit the

prices firms

can charge

Products

with similar

functionlimit the

prices firms

can charge

Keys to evaluate substitute products:Keys to evaluate substitute products:

Products with improvingProducts with improving

price/performance tradeoffsprice/performance tradeoffs

relative to present industryrelative to present industryproductsproducts

Example:Example:

Electronic security systems inElectronic security systems in

place of security guardsplace of security guards

Fax machines in place ofFax machines in place of

overnight mail deliveryovernight mail delivery


10/41

Threat of

Substitute

Products

Threat of

Substitute

Products

Threat of

New

Entrants

Threat of

New

Entrants

Threat of

New

Entrants

Rivalry Among

Competing Firms

in Industry

Rivalry Among

Competing Firms

in Industry

Bargaining

Power of

Buyers

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Bargaining

Power of

Suppliers

Porters Five Forces

Model of Competition

Porters Five Forces

Model of Competition


11/41

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:

Jockeying for strategic positionJockeying for strategic position

Using price competitionUsing price competition

Staging advertising battlesStaging advertising battles

Making new product introductionsMaking new product introductions

Increasing consumer warranties or serviceIncreasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, butAdvertising battles may increase total industry demand, but

may be costly to smaller competitorsmay be costly to smaller competitors


12/41

Porters 5 Forces and ProfitPorters 5 Forces and Profit

ForceForce Profitability willProfitability willbe higher if:be higher if:

Profitability willProfitability willbe lower if:be lower if:

Bargaining powerBargaining power

of suppliersof suppliers

Weak suppliersWeak suppliers Strong suppliersStrong suppliers

Bargaining powerBargaining power

of buyersof buyers

Weak buyersWeak buyers Strong buyersStrong buyers

Threat of newThreat of new

entrantsentrants

High entryHigh entry

barriersbarriers

Low entry barriersLow entry barriers

Threat ofThreat of

substitutessubstitutes

Few possibleFew possible


Many possibleMany possible


CompetitiveCompetitive

rivalryrivalry

Little rivalryLittle rivalry Intense rivalryIntense rivalry


13/41

SummarySummaryAs rivalry among competingAs rivalry among competing

firmsfirms intensifiesintensifies, industry, industryprofitsprofits declinedecline, in some, in some

cases to the point where ancases to the point where an

industry becomesindustry becomes inherentlyinherently

unattractiveunattractive..


14/41

Competitive Positioning School ofCompetitive Positioning School of

Thought (Outside In)Thought (Outside In)

y Based on Porters 5 Forces, generic strategy, and

value chain frameworks

In which industry should the organization compete?(Use Porters 5 Forces Model)

Which generic strategy to use? (Use Porters Generic

Strategy Framework)

How to configure the value chain to support the strategy?

(Use the value chain analysis framework)


15/41

Generic StrategyGeneric Strategy

y According to Porter, competitive

advantage, and thus higher profits will

result either from:

y Differentiation of products (distinctive,

more product features) and selling them

at a premium price, OR

y Producing products at a lower pricethan competitors


16/41

Generic Strategy (cont.)Generic Strategy (cont.)

y In association with choosingdifferentiation or cost leadership, theorganization must decide between:

y Targeting thewhole market with thechosen strategy, OR

y Targeting a specific segment of themarket


17/41

Generic Strategy FrameworkGeneric Strategy Framework

Cost leadershipCost leadership DifferentiationDifferentiation

Cost focusCost focus DifferentiationDifferentiationfocusfocus

StrategicScope

Broad

Narrow

Low cost Differentiation

NOTE: If 2 or more competitors choose the same box, competition will increase


18/41




StrategicScope

Broad

Narrow




19/41

Cost Leadership Strategy:Cost Leadership Strategy:

AdvantagesAdvantagesy Higher profits resulting from charging prices

below that of competitors, because unit costsare lower

y Increase market share and sales by reducingthe price below that charged by competitors(assuming price elasticity of demand)

y Ability to enter new markets by charging lowerprices

y Is a barrier to entry for competitors trying toenter the industry


20/41

Cost Leadership and the ValueCost Leadership and the Value

ChainChainy Analysis of the value chain identifies

where cost savings can be made in the

various parts and links


21/41

Cost Leadership and the ValueCost Leadership and the Value

ChainChainy With a cost leadership strategy, the value

chain must be organized to:

Reduce per unit costs by copying, rather than original

design, using cheaper resources, producing basicproducts, reducing labor costs and increasing labor

productivity

Achieve economies of scale by high-volume sales

Using high-volume purchasing to get discounts

Locating where costs are low


22/41

Cost Leadership and Price ElasticityCost Leadership and Price Elasticity

of Demandof Demandy Cost leadership strategy is best used in a

market or segment when demand is price

elastic, OR

y When charging a similar price to

competitors at the same time as

increasing advertising to increase sales


23/41




StrategicScope

Broad

Narrow




24/41

Differentiation Strategy: AdvantagesDifferentiation Strategy: Advantages

y Products will get a premium price

y Demand for products is less price elastic

than that for competitors products

y It is an additional barrier to entry for

competitors to enter the industry


25/41

Differentiation Strategy and theDifferentiation Strategy and the

Value ChainValue Chainy 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 bechanged


26/41

Differentiation Strategy and theDifferentiation Strategy and the

Value ChainValue Chainy With differentiation strategy, the value chain

must be organized to:

y Create products that are superior tocompetitors products in design, technology,performance, etc.

y Offer superior after-sales service

y Have superior distribution channels

y

Create a strong brand namey Create distinctive or superior packaging


27/41

Differentiation Strategy and PriceDifferentiation Strategy and Price

Elasticity of DemandElasticity of Demand

y Differentiation strategy, properly used, can:

y reduce price elasticity of demand for the

product

y lead to the ability to charge higher prices thancompetitors, without reducing sales volume

y lead to above average profits compared to sales


28/41

Generic Strategy: Focus StrategyGeneric Strategy: Focus Strategy

y Focus strategy targets a segment of the

product market, rather than the whole market

or many markets

ySegment is determined by the bases forsegmentation, i.e., geographic, psychographic,

demographic, behavioral characteristics

y Within the segment, eithercost leadership or

differentiation strategy is used


29/41




S

trategicScope

Broad

Narrow




30/41

Focus Strategy: AdvantagesFocus Strategy: Advantages

y Lower investment costs required

compared to a strategy aimed at the

entire market or many markets

y It allows for specialization and greater

knowledge

y It makes entry into a new market more

simple


31/41


Cost leadershipCost leadership

Ryan Air,Ryan Air,WalmartWalmart

DifferentiationDifferentiation

McDonalds,McDonalds,BMWBMW


Ferrari, RollsFerrari, Rolls

RoyceRoyce

S

trategicScope

Broad

Narrow



32/41

Hybrid StrategyHybrid Strategy

y Based on the idea that a strategy can be

successful by using a mix of

differentiation, price and cost leadership

y Example: Toyota


33/41

Alternative to 5 Forces Analysis:Alternative to 5 Forces Analysis:

ResourceResource--based Frameworkbased Framework

y Resource-based framework is designed to

compensate for disadvantages in

traditional models (like Porters 5 Forces)

y Emphasizes the importance of core

competence in achieving competitive

advantage


34/41


y Complicated and comprehensive

analysis

y Analysis of 5 inter-related areas:

Organization

Industry

Product markets

Resource markets Other industries


35/41


ResourceMarkets

ProductMarkets

Organization

CompanyIndustry

CompetenceRelatedIndustry

OrganizationsProducts

New Markets

Substitutes

SupplierPower

Competitive Rivalry

Threat of new entrants

BuyerPower

Threat ofSubstitutes


36/41

ResourceResource--based Framework:based Framework:

OrganizationOrganization

y Focuses on competences, corecompetences, resources and value chain(as we discussed in detail in Chapter 2)

y This part of the analysis includes ananalysis of:

Resources

Organizational competences, core

competences and activities Value chain


37/41

ResourceResource--based Framework: Industrybased Framework: Industry

y Focuses on analysis of competitors:

Skills and competences

Configuration of value-adding activities

Technology

Number and size

Performance (focus on financial performance)

Ease of entry and exit (barriers)

Strategic groupings


38/41

A Note on Strategic GroupingsA Note on Strategic Groupings

y Strategic groups the group of competitorsrepresenting an organizations closestcompetitors

y Example: a group of branded clothes including

Polo (Ralph Lauren), Tommy Hilfiger, and Izod(Lacoste), among others, may be a strategicgroup, even though there are other lowerquality brands that are technically competitors

y Example 2: Rolex, Tag Heuer, Tissot may be part

of a strategic group that does not includeSwatch, Timex, Seiko, even though they are allwatchmakers


39/41

ResourceResource--based Framework: Productbased Framework: Product

MarketsMarketsy Analysis is focused on:

Customer needs and satisfaction

Unmet customer needs

Market segments and profitability

Number of competitors to the market and relativemarket share

Number of customers and their purchasing power

Access to distribution channels

Ease of entry Potential for competence leveraging

Need for new competence building


40/41

ProductProduct--based Framework: Resourcebased Framework: Resource

MarketsMarketsy Resource markets: where organizations obtain

finance, human resources, human resources,physical resources, technological resources

y Analysis focuses on:

Resource requirements

Number of actual and potential suppliers

Size of suppliers

Potential collaboration with suppliers (cooperation)

Access by competitors to suppliers

Nature of the resource and availability of substitutes


41/41

ResourceResource--based Framework:based Framework:

CompetenceCompetence--related Industriesrelated Industries

y Focuses on analysis ofother industrieswith similar competences and which mayproduce products that can be substitutes

of the organizations productsy Analysis is useful to identify:

Potential threats

Other industries in which the organization

may be able to leverage their competences New markets

Competitive Advantage 1

Documents

Transcript of Competitive Advantage 1