Sustainable Competitive Advantage, Porters Generic Strategy

What is Competitive advantage?

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)

Competitive Advantage
Definition - A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retains more customers than its competition.

There can be many types of competitive advantages including

The firm's cost structure, Product offerings, Distribution network and Customer support.

 Competitive advantage comes from performing better than competitors Sustainable competitive advantage comes from performing better than competitors for a long time Competitive Advantage Examples Focus on a narrow market niche eBay -Online auctions McAfee -Virus protection auctions

 Develop expertise, resource strengths, and capabilities not easily imitated by rivals FedEx -Next-day delivery of small packages Walt Disney - Theme park management and family entertainment Toyota - Sophisticated production system Strive to be the industrys low-cost provider Wal-Mart Outcompete rivals on a key differentiating feature Johnson & Johnson Reliability in baby products Harley Davison -King-of-the-road styling Rolex -Top-of-the-line prestige Mercedes-Benz - Engineering design and performance Amazon.com-Wide selection and convenience

There are two main types of competitive advantages:

Comparative advantage and Differential advantage.

 Comparative advantage, or cost advantage, is a firm's ability to produce a good or service at a lower cost than its competitors, which gives the firm the ability sell its goods or services at a lower price than its competition or to generate a larger margin on sales. A differential advantage is created when a firm's products or services differ from its competitors and are seen as better than a competitor's products by customers

What do you mean by Sustainable?

Sustainable is not measured in calendar time. Sustainable does not mean the advantage will last forever. Sustainable suggests the advantage lasts long enough that competitors stop trying to duplicate the strategy that makes the advantage sustained. Where are we? Assets Capabilities Competencies Competitive Advantage Competitive advantage.

 A competitive advantage is simply an advantage you have over your competitors. A competency will produce competitive advantage provided: It produces value for the organization, and It does this in a way that cannot easily be pursued by competitors.

Sustainable Competitive Advantage:

The primary objective of business-level strategy was to create sources of sustainable competitive advantage (SCA). How do we know SCA? When we see it? What is it? When is it considered sustainable?

To produce SCA, the capability must:

Produce value Be rare Imperfectly imitable, i.e. not be easily imitated or substituted Be exploitable by the organization

1. The Question of Value:

Capabilities are valuable when they enable a firm to conceive of or implement strategies that improve efficiency and effectiveness. Value is dependent on type of strategy: Low cost strategy: Lower costs (Timex) Differentiator: add enhancing features (Rolex)

To be valuable, the capability must either:

Increase efficiency (outputs / inputs) Information system reduces customer service agents required, or increases the number of calls the same number of agents can answer Increase effectiveness (enable some new capability not previously held) Opening a new regional campus enables outreach to a new market of students

The Question of Rareness:

Valuable resources or capabilities that are shared by large numbers of firms in an industry are therefore not rare, and cannot be a source of SCA. Given the following, which are rare? A web server An MIS instructor A state-of-the-art stamping press None of these are rare. Some researchers think only organizational assets or resources are rare (such as culture). What do you think?

The Question of Imitability

Valuable, rare resources can only be sources of SCA if firms that do not possess them cannot obtain them. They must be imperfectly imitable, i.e. impossible to perfectly imitate them.

Ways imitation can be avoided:

Unique Historical Conditions (Caterpillar, e.g.) Causal Ambiguity (why resources create SCA is not understood, even by the firm owning them) Imitating firms cannot duplicate the strategy since they do not understand why it is successful in the first place. Social Complexity (trust, teamwork, informal relationships, causal ambiguity where cause of effectiveness is uncertain) E.g. A competitor steals all the scientists in an R&D lab and relocates them to a new facility. But, the dynamics, culture and atmosphere are not the same.

The Question of Substitutability

There must be no equivalent resources that can be exploited to implement the same strategies. Forms of substitutability: Duplication: Although no two management teams are the same, they can be strategically equivalent, produce the same results. Substitution: Very different resources can be substitutes, E.g. A charismatic leader with a clear vision vs. a strategic planning dept. - a superior marketing strategy for a recognized brand name. A superior technical support group for an intelligent diagnostic software package An asset is anything the firm owns or controls.

Asset is to Accounting as Resource is to Management.

Types of assets:
Physical: plant equipment, location, access to raw materials Human: training, experience, judgment, decisionmaking skills, intelligence, relationships, knowledge Organizational: Culture, formal reporting structures, control systems, coordinating systems, informal relationships. A capability is usually considered a bundle of assets or resources to perform a business process (which is composed of individual activities) e.g. the product development process involves conceptualization, product design, pilot testing, new product launch in production, process debugging, etc. All firms have capabilities.

Competencies vs. Core Competencies vs. Distinctive Competencies

 A competency is an internal capability that a company performs better than other internal capabilities. A core competency is a well-performed internal capability that is central, not peripheral, to a companys strategy, competitiveness, and profitability. A distinctive competence is a competitively valuable capability that a company performs better than its rivals.

Examples: Distinctive Competencies

Toyota, Honda, Nissan Low-cost, high-quality manufacturing capability and short design-tomarket cycles Intel - Ability to design and manufacture ever more powerful microprocessors for PCs Motorola - Defect-free manufacture (sixsigma quality) of cell phones

 SCA is an element (or combination of elements) of the business strategy that provides a meaningful advantage over both existing and future competitors. An SCA needs to be meaningful, sustainable and substantial. An SCA needs to be supported and enhanced over time. The assets and competencies of an organization represent the most sustainable element of a business strategy, because these are usually difficult to copy or counter. An SCA should be visible to customers and provide or enhance a value proposition. The key is to link an SCA with the positioning of a business. A solid value proposition can fail if a key ingredient is missing (e.g., Pringles).

Sustainable Competitive Advantages vs. Key Success factors(KSF)

A KSF is an asset or competence needed to compete, whereas, an SCA is an asset or competence that is the basis for a continuing advantage. An SCA is analogous to a Point of Differentiation (POD), whereas a KSF can be analogous to either a Point of Parity (POP) or a POD.

Frameworks for Sustainable Competitive Advantage

Knowledge-based strategy Generic strategy Hybrid strategy Core competence/distinctive capability/resource based strategy

Knowledge-based Strategy

Types of Knowledge
Explicit knowledge - knowledge whose meaning is clearly stated, the details of which can be recorded and stored Examples: human resource audit, financial analysis, market research Tacit knowledge unstated, based on individual knowledge and experience, a is difficult to record and store (but is also difficult to imitate)

Knowledge and Core Competence

Core competences can come from Knowledge of customers and their needs Knowledge of technology and how to use it distinctively Knowledge of products and processes Knowledge of the business environment Knowledge of competitors Knowledge of countries and culture

Porters Generic Strategy framework:

Porters generic strategy is based on answering two questions:

Should strategy be differentiation or cost leadership? Should the scope of strategy be broad or narrow?

Generic Strategy
According to Porter, competitive advantage, and thus higher profits will result either from: Differentiation of products and selling them at a premium price OR Producing products at a lower price than competitors In association with choosing differentiation or cost leadership, the organization must decide between: Targeting the whole market with the chosen strategy, OR Targeting a specific segment of the market

PORTERS GENERIC STRATEGIES

Generic Strategy: Cost Leadership Strategy

Strategy focus: organize value adding activities to be the lowest cost producer of a product in an industry

Strategy - Cost Leadership

With this strategy, the objective is to become the lowest-cost producer in the industry. Many (perhaps all) market segments in the industry are supplied with the emphasis placed minimizing costs. If the achieved selling price can at least equal (or near) the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are perfectly acceptable to the majority of customers.

 Occasionally, a low-cost leader will also discount its product to maximize sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share. Examples of Cost Leadership: Dell Computers & Wal-Mart

Advantages
Higher profits resulting from charging prices below that of competitors, because unit costs are lower Increase market share and sales by reducing the price below that charged by competitors (assuming price elasticity of demand) Ability to enter new markets by charging lower prices Is a barrier to entry for competitors trying to enter the industry?

Generic Strategy: Differentiation Strategy

Differentiation strategy focuses on changing customer perception about a product, i.e., that the product is superior to other products Based on actual superiority (superior features) or perceived superiority

Generic Strategy framework

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

Differentiation
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price.

Differentiation Strategy:
Advantages Products will get a premium price Demand for products is less price elastic than that for competitors products It is an additional barrier to entry for competitors to enter the industry

Focus or Niche strategy

The focus strategy is also known as a 'niche' strategy. Where an organization can afford neither a wide scope cost leadership nor a wide scope differentiation strategy, a niche strategy could be more suitable. Here an organization focuses effort and resources on a narrow, defined segment of a market. Competitive advantage is generated specifically for the niche. A niche strategy is often used by smaller firms. A company could use either a cost focus or a differentiation focus.

The focus strategy has two variant

In cost focus a firm seeks a cost advantage in its target segment, while in Differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments.

Generic Strategy: Focus Strategy

Focus strategy - targets a segment of the product market, rather than the whole market or many markets Segment is determined by the bases for segmentation, i.e., geographic, psychographic, demographic, behavioral characteristics Within the segment, either cost leadership or differentiation strategy is used

Strategy Differentiation Focus

In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants. Examples of Differentiation Focus: any successful niche retailers.

Strategy - Cost Focus

Here a business seeks a lower-cost advantage in just one or a small number of market segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called "me-too's". Examples of Cost Focus: Many smaller retailers featuring own-label or discounted label products.

Criticisms of Porters Generic Strategy

A hybrid strategy may be successful, although Porter argues that either differentiation or cost leadership must be used (a mix of the two leads to being stuck in the middle) Cost leadership alone does not lead to sales of products Differentiation strategies may be used to increase sales volume, rather than charging a premium price. Price may be used to differentiate Generic strategy doesnt create competitive advantage; rather it is a model to help an organization in analysis The resource based framework may be more accepted now