COMPETITIVE STRATEGY CREATING COMPETITIVE ADVANTAGE

What is Competitive advantage?

a basis for the firms long term success? a basis for value creation?

Do we really know where it resides? Can it be sustainable?

What is Competitive advantage?

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)
R. M. Grant, 2000

When two or more firms compete

The main types of Competitive Advantage

Cost advantage Competitive advantage Differentiation advantage

Competitive strategies by Porter

Types of competitive advantage
Low cost Industry-wide Differentiation

Cost leadership

Differentiation

Market
Niche
Focus with low cost

Focus with differentiation

Five Generic Strategies

Competitive Advantage
Cost Uniqueness Differentiation Cost Leadership

Competitive Scope

Broad target

Narrow target

Integrated Cost Leadership/ Differentiation Focused Cost Leadership Focused Differentiation

Cost Leadership Strategy

An integrated set of actions designed to produce or deliver goods or services at the

lowest cost, relative to

competitors with features that are acceptable to customers relatively standardized products features acceptable to many customers lowest competitive price

Cost Leadership Strategy

Cost saving actions required by this strategy: building efficient scale facilities tightly controlling production costs and overhead minimizing costs of sales, R&D and service building efficient manufacturing facilities monitoring costs of activities provided by outsiders simplifying production processes

How to Obtain a Cost Advantage

Determine and control Reconfigure, if needed

Cost Drivers

Value Chain

Alter production process Change in automation New distribution channel New advertising media Direct sales in place of indirect sales

New raw material Forward integration Backward integration Change location relative to suppliers or buyers

Factors That Drive Costs

Economies of scale Asset utilization Capacity utilization pattern Seasonal, cyclical Interrelationships Order processing and distribution Value chain linkages Advertising & sales Logistics & operations

Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation

Major Risks of Cost Leadership Strategy

Dramatic technological change could take away your cost advantage Competitors may learn how to imitate value chain Focus on efficiency could cause cost leader to overlook changes in customer preferences

Differentiation Strategy
An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different or unique in ways that are important to them.
price for product can exceed what the firms target customers are willing to pay Non standardized products customers value differentiated features more than they value low cost

Differentiation Strategy
A product differentiation strategy must meet the VRIO criteria Is it Valuable? Is it Rare? Is it costly to Imitate? Is the firm Organized to exploit it?

if it is to create competitive advantage.

Factors That Drive Differentiation

Unique

product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional design skill Prestige and exclusivity

Differentiation Strategy
Differentiation actions required by this strategy: 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 be changed Shaping perceptions through advertising Focus on quality customer loyalty. Capability in R&D.

Differentiation Strategy and Price Elasticity of Demand

Differentiation strategy, properly used, can: reduce price elasticity of demand for the particular product. This leads to the ability to charge higher prices than competitors, without reducing sales volume. Leads to above average profits compared to sales.

Major Risks of Differentiation Strategy

Customers may decide that the price differential between the differentiated product and the cost leaders product is too large The me-too danger. Product features and characteristics can be easily copied. The company needs to be one step ahead of the curve and invest in improving and perfecting the product, otherwise it will quickly become obsolete. The demanding consumer danger. Products have shorter life cycles and consumers gravitate towards whats new. In order to remain competitive firms need to keep up with the latest trends and technologies, or their target audience will switch to competitive offerings.

Focused Business-Level Strategies

A focus strategy must exploit a narrow targets differences from the balance of the industry by: isolating a particular buyer group isolating a unique segment of a product line concentrating on a particular geographic market.

Factors That May Drive Focused Strategies

Large firms may overlook small niches Firm may lack resources to compete in the broader market May be able to serve a narrow market segment more effectively than can larger industry-wide competitors Focus strategy may allow the firm to direct resources to certain value chain activities to build competitive advantage.

Major Risks of Focused Strategies

Firm

may be outfocused by competitors Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market

Integrated or Hybrid Strategy

A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: adapt quickly to environmental changes learn new skills and technologies more quickly effectively leverage its core competencies while competing against its rivals by providing differentiated products at low costs.

Benefits of Integrated Strategy

Successful firms using this strategy have above-average returns Firm offers two types of values to customers some differentiated features (but less than a true differentiated firm) relatively low cost (but not as low as the cost leaders price)

Major Risks of Integrated Strategy

An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) The firm may become stuck in the middle lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy

Sustainable competitive advantage

What is meant by sustainable competitive advantage?

Durable Valuable to the firm

Exploiting weaknesses and neutralizing threats

Unique Difficult for competitors to imitate Not easily substitutable

Examples of SCA
For many years, Singapore Airlines were riding on its SCA of having the best in-flight service As more airlines improved their service and narrowed the gap, SIA sought other competitive advantages among which are

The most modern fleet Outstanding Service on the Ground A super entertainment system in its cabins Comfort in its First Class cabins at an unparallel level

Warren Buffet's Investment Criteria Warren Buffet was once asked what is the most important thing he looks for when evaluating a company to invest in. Without hesitation, he replied, "Sustainable competitive advantage."

 STRATEGIES

FOR

Market Leaders Challengers Followers, and Nichers

MARKET LEADER`S STRATEGY: Defense Strategy

A market leader should generally adopt a defense strategy 5 commonly used defense strategies

Position Defense Flanking Defense Contraction Defense Pre-emptive Defense Counter-Offensive Defense

Defense Strategy (contd)

Position Defense
Use ones existing good position as defence. One of the most successful of the defense strategies e.g. High end car manufacturers like Mercedes, Lamborghini, Ferrari use a position defense strategy given their

Defense Strategy (contd)

Flanking Defense:
Secondary markets (flanks) are the weaker areas and prone to being attacked Pay attention to the flanks

Defense Strategy (contd)

Contraction Defense
Withdraw from the most vulnerable segments and redirect resources to those that are more defendable By planned contraction or strategic withdrawal e.g. Indias TATA Group sold its soaps and detergents business units to Unilever in 1993

Defense Strategy (contd)

Pre-emptive Defense
Detect potential attacks and attack the enemies first Let it be known how it will retaliate Product or brand proliferation is a form of pre-emptive defense e.g. Seiko has over 2,000 models

Defense Strategy (contd)

Counter-Offensive Defense
Responding to competitors head-on attack by identifying the attackers weakness and then launch a counter attack e.g. Toyota launched the Lexus to respond to Mercedes attack

Market Challenger Strategies

The market challengers strategic objective is to gain market share and to become the leader eventually How? By attacking the market leader By attacking other firms of the same size By attacking smaller firms

Market Challenger Strategies (contd)

Types of Attack Strategies
Frontal attack Flank attack Encirclement attack Bypass attack Guerrilla attack

Frontal Attack

Seldom work unless

The challenger has sufficient fire-power (a 3:1 advantage) and staying power, and The challenger has clear distinctive advantage(s)

e.g. Japanese and Korean car manufacturers launched frontal attacks in various ASPAC countries through quality, price and low cost

Flank attack
Attack the enemy at its weak points or blind spots i.e. its flanks Ideal for challenger who does not have sufficient resources e.g. In the 1990s, Yaohan attacked Mitsukoshi and Seibus flanks by opening numerous stores in overseas markets

Encirclement attack
Attack the enemy at many fronts at the same time Ideal for challenger having superior resources e.g. Seiko attacked on fashion, features, user preferences and anything that might interest the consumer

Bypass attack
By diversifying into unrelated products or markets neglected by the leader Could overtake the leader by using new technologies e.g. Pepsi use a bypass attack strategy against Coke in China by locating its bottling plants in the interior provinces

Guerrilla attack
By launching small, intermittent hit-andrun attacks to harass and destabilize the leader Usually use to precede a stronger attack e.g. airlines use short promotions to attack the national carriers especially when passenger loads in certain routes are low

Market-Follower Strategies

Theodore Levitt in his article, Innovative Imitation argued that a product imitation strategy might be just as profitable as a product innovation strategy e.g. Product innovation--Sony Product-imitation--Panasonic

Market-Follower Strategies (contd)

Each follower tries to bring distinctive advantages to its target market--location, services, financing Four broad follower strategies:

Counterfeiter (which is illegal) Cloner e.g. the IBM PC clones Imitator e.g. car manufacturers imitate the style of one another Adapter e.g. many Japanese firms are excellent adapters initially before developing into challengers and eventually leaders

Market-Nicher Strategies

Smaller firms can avoid larger firms by targeting smaller markets or niches that are of little or no interest to the larger firms e.g. Logitech--mouse Microbrewers--special beers

Market-Nicher Strategies (contd)

Nichers must create niches, expand the niches and protect them
e.g. Nike constantly created new niches--cycling, walking, hiking, cheerleading, etc

What is the major risk faced by nichers?

Market niche may be attacked by larger firms once they notice the niches are successful

Multiple Niching
A firm should `stick to its niching but not necessarily to its niche. That is why multiple niching is preferable to single niching. By developing strength in two or more niches the company increases its chances for survival. Philip Kotler

THANK YOU !!