Week 6

Creating sustainable competitive advantage

WhatisCompetitiveAdvantage? Competitive advantage is a companys ability to perform in one or more ways that competitors cannot or will not match. Philip Kotler If you dont have a competitive advantage, dont compete.

Jack Welch, GE

OtherCharacteristicsofCompetitive Advantage
Substantiality

Is it substantial enough to make a difference? it be neutralized by competitors quickly?

Sustainability
Can

Ability

to be leveraged into visible business attributes that will influence customers

(Source: Strategic Marketing Management , Aakers)

CompetitivePositioningSchoolofThought (OutsideIn)

Based on Porters 5 Forces, generic strategy, and value chain frameworks

In which industry should the organization compete? (Use Porters 5 Forces Model)

Which generic strategy to use? (Use Porters Generic Strategy Framework) How to configure the value chain to support the strategy? (Use the value chain analysis framework)

GenericStrategy
According

to Porter, competitive advantage, and thus higher profits will result either from: Differentiation of products (distinctive, more product features) and selling them at a premium price, OR Producing products at a lower price than competitors

GenericStrategy(cont.)
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

GenericStrategyFramework
Low cost Differentiation

epocS cigetartS

daorB

Cost leadership Differentiation

Cost focus
worraN

Differentiation focus

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

GenericStrategyFramework
Low cost Differentiation

epocS cigetartS

daorB

Cost leadership Differentiation

Cost focus
worraN

Differentiation focus

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

CostLeadershipStrategy: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

CostLeadershipandtheValueChain
Analysis

of the value chain identifies where cost savings can be made in the various parts and links

CostLeadershipandtheValueChain

With a cost leadership strategy, the value chain must be organized to:
Reduce per unit costs by copying, rather than original design, using cheaper resources, producing basic products, reducing labor costs and increasing labor productivity Achieve economies of scale by high-volume sales Using high-volume purchasing to get discounts Locating where costs are low

CostLeadershipandPriceElasticityof Demand Cost leadership strategy is best used in a market or segment when demand is price elastic, OR When charging a similar price to competitors at the same time as increasing advertising to increase sales

GenericStrategyFramework
Low cost Differentiation

epocS cigetartS

daorB

Cost leadership Differentiation

Cost focus
worraN

Differentiation focus

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

DifferentiationStrategy: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

DifferentiationStrategyandtheValueChain
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

DifferentiationStrategyandtheValueChain
With differentiation strategy, the value chain must be organized to: Create products that are superior to competitors products in design, technology, performance, etc. Offer superior after-sales service Have superior distribution channels Create a strong brand name Create distinctive or superior packaging

DifferentiationStrategyandPrice ElasticityofDemand
Differentiation strategy, properly used, can: reduce price elasticity of demand for the product lead to the ability to charge higher prices than competitors, without reducing sales volume lead to above average profits compared to sales

GenericStrategy:FocusStrategy
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

GenericStrategyFramework
Low cost Differentiation

epocS cigetartS

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

Broad Narrow

Cost leadership Differentiation

Cost focus

Differentiation focus

FocusStrategy:Advantages
Lower

investment costs required compared to a strategy aimed at the entire market or many markets It allows for specialization and greater knowledge It makes entry into a new market more simple

GenericStrategyFramework
Low cost Differentiation

epocS cigetartS

Cost leadership Differentiation Ryan Air, McDonalds, Walmart BMW Cost focus Differentiation focus Ferrari, Rolls Royce

worraN

daorB

HybridStrategy
Based

on the idea that a strategy can be successful by using a mix of differentiation, price and cost leadership Example: Toyota

DevelopingaSuccessfulValueProposition

Func tional value Offering value proposition Monetary value Psyc hologic al value Offering

Func tional needs Monetary needs Psyc hologic al needs Customer Customer needs

CompetitiveParityandCompetitive Advantage.
Irrelevant attributes Irrelevant attributes Unique benefits C ompetitive advantage C ompetitive parity Unique benefits Shared benefits

Shared benefits

Offering A

Offering B

CompetitiveAdvantageandCustomerValue

C ompany offering

C ompetitive advantage

C ompetitive offering

Value

Value

C ustomer needs

TheCCDValueManagementFramework
Creating value Product Service Brand Price Incentives C ommunication Distribution Communicating value Delivering value

Reconceptualizingthe4PFramework
4-P framework Product Price Promotion Place

C -C -D framework

Creating value Product Service Brand Price Incentives

Communicating value

Delivering value

C ommunication

Distribution

Alternativeto5ForcesAnalysis:Resource basedFramework Resource-based framework is designed to compensate for disadvantages in traditional models (like Porters 5 Forces) Emphasizes the importance of core competence in achieving competitive advantage

ResourcebasedFramework
Complicated

and comprehensive analysis Analysis of 5 inter-related areas:

Organization Industry Product markets Resource markets Other industries

ResourcebasedFramework
Competitive Rivalry Com pany Indus try Buyer Power Supplier Power Reso urce Mark ets Orga nizati on Com peten ce Relat ed Indus Threat try new entrants of Prod uct Mark ets Threat of Substitutes New Markets

Organizations Products

Substitutes

ResourcebasedFramework: Organization
Focuses

on competences, core competences, resources and value chain This part of the analysis includes an analysis of:
Resources Organizational

activities Value chain

competences, core competences and

ResourcebasedFramework:Industry
Focuses

on analysis of competitors:

Skills

and competences Configuration of value-adding activities Technology Number and size Performance (focus on financial performance) Ease of entry and exit (barriers) Strategic groupings

ANoteonStrategicGroupings
Strategic groups the group of competitors representing an organizations closest competitors Example: a group of branded clothes including Polo (Ralph Lauren), Tommy Hilfiger, and Izod (Lacoste), among others, may be a strategic group, even though there are other lower quality brands that are technically competitors Example 2: Rolex, Tag Heuer, Tissot may be part of a strategic group that does not include Swatch, Timex, Seiko, even though they are all watchmakers

Resource-based Framework: Product Markets

Analysis is focused on:

Customer needs and satisfaction Unmet customer needs Market segments and profitability Number of competitors to the market and relative market share Number of customers and their purchasing power Access to distribution channels Ease of entry Potential for competence leveraging Need for new competence building

Product-based Framework: Resource Markets

Resource markets: where organizations obtain finance, human resources, human resources, physical resources, technological resources Analysis focuses on:

Resource requirements Number of actual and potential suppliers Size of suppliers Potential collaboration with suppliers (cooperation) Access by competitors to suppliers Nature of the resource and availability of substitutes

ResourcebasedFramework:Competence relatedIndustries
Focuses

on analysis of other industries with similar competences and which may produce products that can be substitutes of the organizations products Analysis is useful to identify:
Potential

threats Other industries in which the organization may be able to leverage their competences New markets

EXHIBIT A - FORD MODEL T THE MINDSET OF HENRY FORD Henry Fords model T remained unchanged for years while General Motors (Chevrolet) was making changes often using new technology. Henry Ford said: Well give the customer any colour he wants as long as it is black. It was an arrogant statement by an arrogant man who had been on top so long he thought nothing could dislodge him from the number one position. In the late 1920s Ford nearly went out of business as a result of this myopic approach. General Motors (Chevrolet) took over as number one in the US and Ford did not catch up until the late 1980s.

Blocks to Individual Creativity

Strategic blocks: one right answer approaches, inflexibility in thinking. They include the tendency to rely heavily on past experience or particular techniques without challenging their appropriateness; focusing on a narrow range of options for either problem definition or problem solving; and adapting an over-ly serious approach to problems which prevents the emergence of a playful, imaginative and humorous climate. Value blocks: over-generalized rigidity influenced by personal values. These occur when personal beliefs and values restrict the range of ideas contemplated. Values co-exist and failure to reconcile them contributes to difficult personal and organizational dilemmas. Perceptual blocks: over-narrow focus of attention and interest. These arise from a lack of sensory awareness at a physical level and therefore contribute to a lack of awareness of implications of situations. Self-image blocks: poor effectiveness through fear of failure, timidity in expressing ideas, etc. They arise from a lack of self confidence in the value of ones own ideas. Individuals may be reluctant to seek help and talk about personal feelings. This barrier seems to be the greatest impediment to the successful implementation of new ideas.

Strategies for declining/ stagnant industries