Competitive Advantage

Competitive AdvantageCompetitive Advantage

Michael E Porter Michael E Porter ……

““An industry’s profit potential is An industry’s profit potential is largely determined by the largely determined by the intensity of intensity of competitive rivalrycompetitive rivalry within that within that industry.” industry.”

Porter’s Five ForcesPorter’s Five Forces

Advantage of the ModelAdvantage of the Model

According to Porter, businesses can use the model to According to Porter, businesses can use the model to identify how to position itself to take advantage of identify how to position itself to take advantage of opportunitiesopportunities and overcome and overcome threatsthreats

Porter’s 5 Forces and ProfitPorter’s 5 Forces and Profit

ForceForce Profitability will Profitability will be higher if:be higher if:

Profitability will Profitability will be lower if:be lower if:

Bargaining power Bargaining power of suppliersof suppliers

Weak suppliersWeak suppliers Strong suppliersStrong suppliers

Bargaining power Bargaining power of buyersof buyers

Weak buyersWeak buyers Strong buyersStrong buyers

Threat of new Threat of new entrantsentrants

High entry barriersHigh entry barriers Low entry barriersLow entry barriers

Threat of Threat of substitutessubstitutes

Few possible Few possible substitutessubstitutes

Many possible Many possible substitutessubstitutes

Competitive rivalryCompetitive rivalry Little Little rivalryrivalry Intense rivalryIntense rivalry

Generic StrategyGeneric Strategy

According to Porter, According to Porter, competitive advantagecompetitive advantage, and , and thus thus higher profitshigher profits will result either from:will result either from:

DifferentiationDifferentiation of products (distinctive, more of products (distinctive, more product features) and selling them at a product features) and selling them at a premium premium priceprice, OR, OR

ProducingProducing products at a products at a lower price lower price than than competitorscompetitors

(cont.)(cont.)

In association with choosing In association with choosing differentiationdifferentiation or or cost leadershipcost leadership, the organization must decide , the organization must decide between:between:

Targeting the Targeting the whole marketwhole market with the chosen with the chosen strategy, ORstrategy, OR

Targeting a specific Targeting a specific segmentsegment of the market of the market

Generic Strategy FrameworkGeneric Strategy Framework

Cost leadershipCost leadership DifferentiationDifferentiation

Cost focusCost focus Differentiation Differentiation focusfocus

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Low cost Differentiation

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

Cost leadership: AdvantagesCost leadership: Advantages Higher profits resulting from charging prices below that Higher profits resulting from charging prices below that

of competitors, because unit costs are lowerof competitors, because unit costs are lower

Increase Increase market sharemarket share and and salessales by reducing the by reducing the price below that charged by competitors (assuming price below that charged by competitors (assuming price elasticity of demand)price elasticity of demand)

Ability to enter new markets by charging lower pricesAbility to enter new markets by charging lower prices

Cost Leadership and the Value Cost Leadership and the Value ChainChain

With a With a cost leadership strategycost leadership strategy, the value chain , the value chain must be organized to:must be organized to:Reduce per unit costsReduce per unit costs by copying, rather than by copying, rather than

original design, using cheaper resources, original design, using cheaper resources, producing basic products, reducing labor costs producing basic products, reducing labor costs and increasing labor productivityand increasing labor productivity

Achieve Achieve economies of scaleeconomies of scale by high-volume by high-volume salessales

Using Using high-volume purchasing high-volume purchasing to get discountsto get discountsLocating where costs are lowLocating where costs are low

Cost Leadership and Price Cost Leadership and Price Elasticity of DemandElasticity of Demand

Cost leadership strategy is best used in a market or segment Cost leadership strategy is best used in a market or segment when demand is price elasticwhen demand is price elastic, ,

When charging a similar price to competitors, the firm can When charging a similar price to competitors, the firm can

increase advertising to increase salesincrease advertising to increase sales




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Differentiation Strategy: Differentiation Strategy: AdvantagesAdvantages

Products will get a premium priceProducts will get a premium price Demand for products is less price elastic than that Demand for products is less price elastic than that

for competitor’s productsfor competitor’s products It is an additional barrier to entry for competitors to It is an additional barrier to entry for competitors to

enter the industryenter the industry

Differentiation Strategy and the Differentiation Strategy and the Value ChainValue Chain

With With differentiation strategydifferentiation strategy, the value chain must be , the value chain must be organized to:organized to:

Create products that are superior to competitors’ Create products that are superior to competitors’ products in products in design, technology, performance etc.design, technology, performance etc.

Offer superior after-sales serviceOffer superior after-sales serviceHave superior distribution channelsHave superior distribution channelsCreate a strong brand nameCreate a strong brand nameCreate distinctive or superior packagingCreate distinctive or superior packaging

Differentiation Strategy and Price Differentiation Strategy and Price Elasticity of DemandElasticity of Demand

Differentiation strategy, if properly used, can:Differentiation strategy, if properly used, can:reduce price elasticity of demandreduce price elasticity of demand for the for the

productproductlead to the ability to charge higher prices than lead to the ability to charge higher prices than

competitors, without reducing sales volumecompetitors, without reducing sales volumelead to above average profits compared to saleslead to above average profits compared to sales




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Focus StrategyFocus Strategy

Focus strategy – targets a Focus strategy – targets a segmentsegment of the product market, of the product market, rather than the whole market or many marketsrather than the whole market or many markets

Segment is determined by the bases for segmentation, i.e., Segment is determined by the bases for segmentation, i.e., geographic, psychographic, demographic, behavioral geographic, psychographic, demographic, behavioral characteristicscharacteristics

Within the segment, Within the segment, eithereither cost leadership or differentiation cost leadership or differentiation strategy is usedstrategy is used

AdvantagesAdvantages

Lower investment costs required compared to a Lower investment costs required compared to a strategy aimed at the entire market or many marketsstrategy aimed at the entire market or many markets

It allows for specialization and greater knowledgeIt allows for specialization and greater knowledge

It makes entry into a new market more simple It makes entry into a new market more simple

Hybrid StrategyHybrid Strategy

Based on the idea that a strategy can be successful Based on the idea that a strategy can be successful by using a by using a mixmix of differentiation, price and cost of differentiation, price and cost leadershipleadership

Example: ToyotaExample: Toyota

Alternative to 5 Forces Analysis: Alternative to 5 Forces Analysis: Resource-based FrameworkResource-based Framework

Resource-based framework is designed to Resource-based framework is designed to compensate for disadvantages in traditional models compensate for disadvantages in traditional models (like Porter’s 5 Forces)(like Porter’s 5 Forces)

Emphasizes the importance of core competence in Emphasizes the importance of core competence in achieving competitive advantageachieving competitive advantage

Resource-based FrameworkResource-based Framework

Complicated and Complicated and comprehensivecomprehensive analysis analysis Analysis of 5 inter-related areas:Analysis of 5 inter-related areas:

OrganizationOrganizationIndustryIndustryProduct marketsProduct marketsResource marketsResource marketsOther industriesOther industries

Resource-based FrameworkResource-based Framework

ResourceMarkets

Product Markets

Organization

CompanyIndustry

CompetenceRelatedIndustry

Organization’sProducts

New Markets

Substitutes

SupplierPower

Competitive Rivalry

Threat of new entrants

BuyerPower

Threat ofSubstitutes

Resource-based Framework: Resource-based Framework: OrganizationOrganization

Focuses on competences, core competences, Focuses on competences, core competences, resources and value chain.resources and value chain.

This part of the analysis includes an analysis of:This part of the analysis includes an analysis of:ResourcesResourcesOrganizational competences, core competences and Organizational competences, core competences and

activitiesactivitiesValue chain Value chain

Resource-based Framework: Resource-based Framework: IndustryIndustry

Focuses on analysis of competitors’:Focuses on analysis of competitors’:Skills and competencesSkills and competencesConfiguration of value-adding activitiesConfiguration of value-adding activitiesTechnologyTechnologyNumber and sizeNumber and sizePerformance (focus on financial performance)Performance (focus on financial performance)Ease of entry and exit (Ease of entry and exit (barriersbarriers))Strategic groupingsStrategic groupings

Resource-based Framework: Resource-based Framework: Product MarketsProduct Markets

Analysis is focused on:Analysis is focused on:Customer needs and satisfactionCustomer needs and satisfactionMarket segments and profitabilityMarket segments and profitabilityNumber of competitors to the market and relative market Number of competitors to the market and relative market

shareshareNumber of customers and their purchasing powerNumber of customers and their purchasing powerAccess to distribution channelsAccess to distribution channelsEase of entryEase of entryPotential for competence leveragingPotential for competence leveragingNeed for new competence buildingNeed for new competence building

Product-based Framework: Product-based Framework: Resource MarketsResource Markets

Resource markets: where organizations obtain Resource markets: where organizations obtain finance, human resources, physical resources, finance, human resources, physical resources, technological resourcestechnological resources

Analysis focuses on: Analysis focuses on: Resource requirementsResource requirementsNumber of actual and potential suppliersNumber of actual and potential suppliersSize of suppliersSize of suppliersPotential collaboration with suppliers (cooperation)Potential collaboration with suppliers (cooperation)Access by competitors to suppliersAccess by competitors to suppliersNature of the resource and availability of substitutesNature of the resource and availability of substitutes

Resource-based Framework: Resource-based Framework: Competence-related IndustriesCompetence-related Industries

Focuses on analysis of Focuses on analysis of otherother industriesindustries with similar with similar competences and which may produce products that competences and which may produce products that can be substitutes of the organization’s productscan be substitutes of the organization’s products

Analysis is useful to identify:Analysis is useful to identify:Potential threatsPotential threatsOther industries in which the organization may be able to Other industries in which the organization may be able to

leverage their competencesleverage their competencesNew marketsNew markets

THANK YOUTHANK YOU

Competitive Advantage

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