The Nature and Sources of Competitive Advantage The emergence of competitive advantage Sustaining...

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Transcript of The Nature and Sources of Competitive Advantage The emergence of competitive advantage Sustaining...

  • Slide 1
  • The Nature and Sources of Competitive Advantage The emergence of competitive advantage Sustaining competitive advantage Competitive advantage in different market settings Types of competitive advantage: cost and differentiation OUTLINE
  • Slide 2
  • What is competitive advantage? The potential to earn a persistently high rate of profit Not the same as profitability Long term investments may not show up in short term profits Investing in market share, technology, customer loyalty or even executive perks
  • Slide 3
  • How does competitive advantage emerge? External sources of change e.g.: Changing customer demand Changing prices Technological change Internal sources of change Resource heterogeneity among firms means differential impact Some firms faster and more effective in exploiting change Some firms have greater creative and innovative capability The Emergence of Competitive Advantage (Time-based competition)
  • Slide 4
  • Competitive Advantage from Internally- Generated Change: Strategic Innovation Many argue innovation is the only remaining source of competitive advantage (e.g. Hamel) Kao (2007) Innovation Nation: How America is Losing its Innovation Edge, Friedman (2005) The World is Flat Talent is everywhere, capital is everywhere, Silicon valley is everywhere Characteristics of innovation strategies: Associated with new entrants to an industry (e.g. Nucor in steel, IKEA in furniture, Home Depot in DIY, Dell in PCs, American Apparel in casual clothing) Reconcile conflicting performance goals (e.g. Toyotas lean production system combines low cost, high quality, and flexibility. Retailers Primark and Target combine low cost with stylishness.) Reconfiguring the value chain e.g.--- Nikes system for manufacturing and distributing shoes totally different from traditional shoe manufacturer Southwest Airlines simplification of the normal airline value chain Zaras system of design, manufacture, and distribution
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  • REQUIREMENT FOR IMITATION Identification- Obscure superior performance - Deterrence--signal aggressive Incentives for imitation intentions to imitators - Pre-emption--exploit all available investment opportunities - Rely upon multiple sources of Diagnosis competitive advantage to create causal ambiguity - Base competitive advantage upon Resource acquisition resources and capabilities that are immobile and difficult to replicate ISOLATING MECHANISM Sustaining Competitive Advantage Against Imitation
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  • TRADING MARKETS None (efficient markets) Imperfect information Transactions costs Systematic behavioral trends Overshooting None Insider trading Cost minimization Superior diagnosis (e.g. chart analysis) Contrarianism PRODUCTION MARKETS Barriers to imitation Barriers to innovation Identify potential barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, etc.) & base strategy upon them. Difficult to influence or exploit. MARKET TYPE SOURCE OF IMPERFECT COMPETITION OPPORTUNITY FOR COMPETITIVE ADVANTAGE Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets
  • Slide 7
  • Sources of Competitive Advantage COST ADVANTAGE COST ADVANTAGE DIFFERENTIATION ADVANTAGE DIFFERENTIATION ADVANTAGE COMPETITIVE ADVANTAGE COMPETITIVE ADVANTAGE Similar product at lower cost Price premium from unique product Concept of stuck in the middle
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  • Porters Generic Strategies SOURCE OF COMPETITIVE ADVANTAGE Low cost Differentiation Industry-wide COST DIFFERENTIATION COMPETITIVE LEADERSHIP SCOPE Single Segment F O C U S
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  • Features of Cost Leadership and Differentiation Strategies Generic strategy Key strategy elements Resource & organizational requirements COST Scale-efficient plants. Access to capital. Process LEADERSHIP Design for manufacture. engineering skills. Frequent Control of overheads & reports. Tight cost control. R&D. Avoidance of Specialization of jobs and marginal customer functions. Incentives for accounts. quantitative targets. DIFFERENTIATION Emphasis on branding Marketing. Product and brand advertising, engineering. Creativity. design, service, and Product R&D quality.Qualitative measurement and incentives. Strong cross-functional coordination.
  • Slide 10
  • Cost Advantage Economies of experience curve and the benefits of market share Sources of cost advantage Using the value chain to analyze costs Current approaches to managing costs OUTLINE
  • Slide 11
  • The Experience Curve The Law of Experience The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. Cost per unit of output (in real $) Cumulative Output 1992 1994 1996 1998 2000 2002 2004
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  • Examples of Experience Curves 100K200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated units (millions) 1960 Yen 15K 20K 30K Price Index 50 100 200 300 70% slope 75% Japanese clocks & watches, 1962-72UK refrigerators, 1957-71
  • Slide 13
  • The Importance of Market Share If all firms in an industry have the same experience curve, then: Change in relative costs over time = f (relative market share) This implies that market share is linked to profitability. This is confirmed by PIMS data: BUT:- Association does not imply causation - Costs of acquiring market share offset the returns to market share ROS (%) -2 0 510 0-10 10-20 20-30 30-40 over 40 Market Share (%)
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  • Drivers of Cost Advantage PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS CAPACITY UTILIZATION RESIDUAL EFFICIENCY ECONOMIES OF LEARNING ECONOMIES OF SCALE Organizational slack; Motivation & culture; Managerial efficiency Ratio of fixed to variable costs Speed of capacity adjustment Location advantages Ownership of low-cost inputs Non-union labor Bargaining power Standardizing designs & components Design for manufacture Process innovation Reengineering business processes Increased dexterity Improved organizational routines Indivisibilities Specialization and division of labor
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  • Economies of Scale: The Long-Run Cost Curve for a Plant Units of output per period Minimum Efficient Plant Size: the point where most scale economies are exhausted Cost per unit of output Sources of scale economies: - technical input/output relationships - indivisibilities - specialization
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  • The Costs Developing New Car Models (including plant tooling) $ billion Ford Mondeo / Contour 6 GM Saturn 5 Ford Taurus (1996 model)2.8 Ford Escort (new model 1996)2 Renault Clio (1999 model)1.3 Chrysler Neon1.3 Honda Accord (1997 model)0.6 BMW Mini0.5 Rolls Royce Phantom (2003 model) 0.3
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  • 10 20 50 100 200 500 1,000 Annual sales volume (millions of cases) Advertising Expenditure ($ per case) 0.02 0.05 0.10 0.15 0.20 Coke Pepsi Seven Up Dr. Pepper Sprite Diet Pepsi Tab Fresca Diet Rite Diet 7-Up Schweppe s SF Dr. Pepper Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main brands incur lower advertising costs per unit of sales than their smaller rivals. Scale Economies in Advertising: U.S. Soft Drinks
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  • Cost Advantage in Short-Haul Passenger Air Transport Costs per Available Seat-Mile Southwest Airlines United Airlines (cents) Wages and benefits2.43.5 Fuel and oil1.11.1 Aircraft ownership0.70.8 Aircraft maintenance0.60.3 Commissions on ticket sales0.51.0 Advertising0.20.2 Food and beverage0.00.5 Other1.73.1 Total7.210.5
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  • Slide 20
  • PURCH- ASING PARTS INVEN- TORIES R&D DESIGN ENGNRNG COMPONENT MFR ASSEMBLY TESTING, QUALITY CONTROL GOODS INVEN- TORIES SALES & MKITG DISTRI- BUTION DEALER & CUSTOMER SUPPORT --Plant scale for each -- Level of quality targets -- No. of dealers component -- Frequency of defects -- Sales / dealer -- Process technology -- Level of dealer -- Plant location support -- Run length -- Frequency of defects -- Capacity utilization under warranty Prices paid --Size of commitment -- Plant scale --Cyclicality & depend on: --Productivity of -- Flexibility of production predictability of sales -- Order size R&D/design -- No. of models per plant--Customers --Purchases per --No. & frequency of new -- Degree of automation willingness to wait supplier models -- Sales / model -- Bargaining power-- Wage levels -- Supplier location -- Capacity utilization STAGE 3. IDENTIFY COST DRIVERS Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued)
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  • PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR Consolidation of orders to increase discounts, increases inventories Designing different models around common components and platforms reduces manufacturing costs Higher quality parts and materials reduces costs of defects at later stages Higher quality in manufacturing reduces warranty costs STAGE 5. RECCOMENDATIONS FOR COST REDUCTION STAGE 4. IDENTIFY LINKAGES Applying the Value Chain to Cost Analysis: The Case of Automobile Manufactur