Porter’s Theory of Competitive Advantage

Firm Success

Sustainable CompetitiveAdvantage

Drivers

Activities / Value System

Attractive RelativePosition

AttractiveIndustryStructure

Managerial Choices

InitialConditions

The Michael Porter Paradigm (1980-2001)

The Michael Porter Paradigm

Holding industry constant, some firms do better than others because of their relative position, or competitive advantage, within the industry.

Attractive Relative Position

Strategic or Relative Position

Mantra #3 - If everyone can do it, you can't

achieve extraordinary results.

Strategy is not about operational excellence - JIT, TQM, MBO, etc.

Strategy is about doing things differently than your rivals.

A company’s strategy must enable it to deliver a value proposition, or set of benefits, different from those that competitors offer.

Attractive Relative Position

Competitive Advantage

Total Revenue

- Total Cost

= Profit

Competitive Advantage

Willingness to Pay

- Cost

= Profit

Competitive Advantage

In order to increase profit you to

drive increase the wedge between

Willingness to Pay

and

Cost

Competitive Advantage

In order to increase profit you have two choices:

Increase Revenues Profitably or

Decrease Cost Without Decreasing WTP

Competitive Advantage

Competitive Advantage #1

Low Costs

Competitive Advantage # 1

Low Costs

“But what is most stunning of all about Southwest is that since 1973, when it first turned a profit, the company hasn't lost a penny. In an industry plagued by fare wars, recessions, oil crises, and other disasters, this is an astounding feat. No other airline has ever come close to it. Even during the Persian Gulf war, when every other major carrier gushed red ink, Southwest made money. In just this past quarter, because of rising jet-fuel prices, five of the largest air carriers—including Delta, United, and American--lost money. Southwest made $121 million in net profits—up 65% from a year ago” (Fortune, May 28, 2001).

Airline - Market Capitalization (2/05/07)($millions)

Delta $241

American $8,420

United $4,910

Northwest $314

Continental $3,840

Alaska $1,680

US Air / America West $5,190

Southwest $11,900

The company has fostered a 33-year tradition of success by focusing on very large stores with a huge selection of national brands at prices below our competition. In addition, the very nature of having employee stockholders that have seen their Employee Stock Ownership Plan (Pension Plan) grow at a 16.5% annual compound growth rate creates extremely dedicated employees. This has made WinCo a very successful company.

Competitive Advantage

Competitive Advantage #2

Differentiation (Monopoly)

Competitive Advantage # 2

Differentiation

TRADER JOE'S: A UNIQUE GROCERY STOREOur Mission... At Trader Joe's, our mission is to bring you the best food and beverage values you can find anywhere, and the information you need to make informed buying decisions. You'll find more than 800 unique grocery items in our label, at prices everyone can afford. We work hard at buying things right: Our buyers travel the world searching for new items; we work with a variety of suppliers who make interesting products for us; and we make special purchases which are presented to us throughout the year. All our private label products have their own "angle," i.e., great flavor, unusual recipes, high quality ingredients, special nutritional claims, and all natural ingredients.

Porter’s Generic Strategies

Strategic Advantage

Strategic

Target

Uniqueness Low-Cost

Position

Broad Differentiation Overall Cost

Leadership

Niche

Competitive Advantage Must Come From…Activities in the Value Chain

R&D HRM

Service

M arketing and Sales

Operations

Logistics

And in the Fit and Complexity of the Activity System

R&D HRM

M arketing and Sales Service

Operations Logistics

Why is one firm able to perform activities better than another firm?

Advantage must lie in the DRIVERS or inputs of the ACTIVITIES.

Drivers

0

10

20

30

40

50

60

70

80

Collins' Kitchen - Cost Components (Ghemawat & Rivkin, 1998)

Activity 11 7 15 26 5 7 1

Total 11 18 33 59 64 71 72

Ingred. Pack. Manuf. Logis. Adv. Promo Profit

Unit Costs

Collins Kitchen vs. Betsy Baking

0

5

10

15

20

25

30

Ingred. Pack. Manuf. Logis. Adv. Promo Profit

Cost

per

uni

t

Collins

Betsy Baking

Examples of Drivers:

Scale Learning Location Timing

Drivers

Why are some firms able to maintain advantages in DRIVERS and RESOURCES?

MANAGERIAL CHOICES

INITIAL CONDITIONS

Managerial Choices and Initial Conditions

SWOT Analysis – Strategic Fit

STRENGTHS WEAKNESSES

OPPORTUNITIES Aggressive Turnaround

THREATS Diversification Defensive

What makes a strength?

Resource Based View of Firm

Resources - all assets, capabilities, competencies, organizational processes, firm attributes, information, knowledge, and so for that are controlled by a firm and enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness.

Typical Resources

Characteristics of Resources

1. Valuable - Do a firm's resources and capabilities enable the firm to respond to environmental threats or opportunities?

2. Rare - How many competing firms already possess particular valuable resources and capabilities?

Characteristics of Resources

3. Costly to Imitate - Do firms without a resources or capability face a cost disadvantage in obtaining it compared to firms that already possess it?

4. Exploited by Organization - Is a firm organized to exploit the full competitive potential of its resources and capabilities?

Resource ValueResources

CharacteristicsCompetitive Implication

Profits (Relative to Average)

•Not Valuable Disadvantage Below

•Valuable•Not Rare

Parity Normal

•Valuable•Rare

•Not Costly to Imitate

Advantage Above

All Sustained

Advantage

Above

Examples

Resources and Activities

ResourceEndowments

(Stocks)

Activities(Flows)

Resources and Activities

MakingResource

Commitments

DevelopingCapabilities

Are you a stock picker…?

Example of Successful Resource Picking

In 1980 Microsoft purchased the QDOS operating system (the precursor to MS-DOS) from Seattle Computer Products for $50,000.

Microsoft had knowledge that IBM needed an PC operating system.

Or an architect…?

Capability Building

A capability is “an organizationally embedded nontransferable firm-specific resource whose purpose is to improve the productivity of other resources possessed by the firm.”

“Capabilities cannot easily be bought; they must be built.”

Example of Capability Building

Wal-Mart internally developed a unique ‘cross-docking’ logistical system which enhanced the productivity of other resources, such as its commercial real estate, its trucking fleet, its workforce, and its information technology.

It’s all about the resources you possess

to do

Conclusion

Mantra #4

I pick the right poker games to play in and,

I am a good poker player.

Finally: What’s wrong with the logic of competitive advantage?

Typical consultant advice:

Firms with sustainable competitive advantages achieve superior performance.

Therefore you must develop sustainable competitive advantages (Industry and SWOT analysis, resource picking and capability building, etc…)

Strategic Management Research

1. A firm with long-term superior performance is identified.

2. The firm is studied in detail.

3. An explanation is provided to explain the firm’s superior performance.

4. The explanation is often attributed to sustained competitive advantage(s).

“The Logic Behind Competitive Advantage” (Powell, SMJ, v 22, 2001)

Consider the following logical propositions (a proposition is an assertion to which we assign a truth value, either T or F):

Strategy Logic

1. If p then q; If firm X achieved sustained superior performance (SSP), then firm X had one or more sustainable competitive advantages (SCA) (SCA is a necessary but not sufficient condition for SSP).

2. If q then p; If firm X had one or more sustainable competitive advantages, then firm X achieved sustained superior performance (SCA is a sufficient but not necessary condition for SSP).

Strategy Logic

First, we must prove the propositions to be true which has not been done yet. Second, we cannot infer proposition 2 from 1, owing to the general logical fallacy of “affirming the consequence.”

At a minimum, sustained superior performance requires sustained competitive advantage and the absence of competitive disadvantages.

Conditions of Sustained Superior Performance

SCA = Sustainable Competitive Advantages

DA = Competitive Disadvantages

DA Absent DA Present

SCA Present + 0

SCA Absent 0 -