competetiveadvantage-types of strategy

8/21/2019 Competetiveadvantage-types of Strategy

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COMPETITIVE STRATEGY

CREATING COMPETITIVE

ADVANTAGE


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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?


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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 apersistently higher rate of profit)

R. M. Grant, 2000


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The main types of Competitive

Advantage

Cost advantage

Differentiationadvantage

Competitiveadvantage


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Competitive strategies

by Porter

Types of competitive advantageLow cost Differentiation

Cost leadership Differentiationndustry wide

Niche Focus withlow cost Focus withdifferentiation

Market


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Five Generic Strategies

Competitive Advantage

CompetitiveSco

pe

Cost Uniqueness

Bro

ad

target

Narrow

target

CostLeadership

Differentiation

FocusedCost

Leadership

FocusedDifferentiation

IntegratedCost

Leadership/Differentiation


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Cost Leadership Strategy

An integrated set of actions designed toproduce 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


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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 byoutsiders

simplifying production processes


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How to Obtain a Cost Advantage

Cost DriversValue Chain

Determine andcontrol

Reconfigure, ifneeded

Alter production process

Change in automation

New distribution channel

Direct sales in placeof indirect sales

New advertising media

New raw material

Backward integration

Forward integration

Change locationrelative to suppliersor buyers


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Product features

Performance

Mix & variety of

products Service levels

Small vs. large buyers

Process technology

Wage levels Product features

Hiring, training,

motivation

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


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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


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Differentiation Strategy

An integrated set of actions designed by afirm to produce or deliver goods or services

(at an acceptable cost) that customers

perceive as being different or unique inways 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


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A product differentiation strategy must meet the

VRIOcriteria

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.


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Factors That Drive

Differentiation

Unique product features

Unique product performance

Exceptional services New technologies

Quality of inputs

Exceptional design skill

Prestige and exclusivity


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Differentiation actions required by thisstrategy:

Analysis of the value chain identifies in what

parts of the chain and through which linkssuperior products can be created and

customer perception may be changed

Shaping perceptions through advertising

Focus on qualitycustomer loyalty.

Capability in R&D.


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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 comparedto sales.


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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 companyneeds to be one step ahead of the curve and invest in

improving and perfecting the product, otherwise it will

quickly become obsolete.

The demandingconsumer danger.Products have

shorter life cycles and consumers gravitate towardswhats 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.


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Focused Business-Level

StrategiesA focus strategy must exploit a narrowtargets differences from the balance

of the industry by:

isolating a particular buyer group isolating a unique segment of a

product line

concentrating on a particulargeographic market.


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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 marketsegment more effectively than canlarger industry-wide competitors

Focus strategy may allow the firm todirect resources to certain value chainactivities to build competitiveadvantage.


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Major Risks of Focused

Strategies Firm may be outfocused bycompetitors

Large competitor may set its

sights on your niche market

Preferences of niche market may

change to match those of broadmarket


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Integrated or Hybrid Strategy

A firm that successfully uses an integratedcost leadership/differentiation strategy should

be in a better position to: adapt quickly to environmental changes

learn new skills and technologies morequickly

effectively leverage its core competencieswhile competing against its rivals byproviding differentiated products at low costs.


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Benefits of Integrated Strategy

Successful firms using this strategyhave 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 asthe cost leaders price)


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Major Risks of Integrated

StrategyAn integrated cost/differentiationbusiness 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 firmsfollowing either a cost leadership or a

differentiated strategy


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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


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Examples of SCA

For many years, Singapore Airlines wereriding on its SCA of having the best in-flightservice

As more airlines improved their service and

narrowed the gap, SIA sought othercompetitive 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


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Warren Buffet s InvestmentCriteriaWarren Buffetwas once asked

what is the most important

thing he looks for whenevaluating a company

to invest in. Without

hesitation, he replied,

"Sustainable competitiveadvantage."
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STRATEGIES FOR

Market Leaders

ChallengersFollowers, and

Nichers


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MARKET LEADER`S

STRATEGY: Defense StrategyA 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


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Defense Strategy (contd)

Position Defense

Use ones existing good position as defence.

One of the most successful of the defensestrategies

e.g. High end car manufacturers likeMercedes, Lamborghini, Ferrari use aposition defense strategy given their


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Flanking Defense:

Secondary markets (flanks) are the weakerareas and prone to being attacked

Pay attention to the flanks


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Contraction Defense

Withdraw from the most vulnerable segments

and redirect resources to those that are moredefendable

By planned contraction or strategic

withdrawal

e.g. Indias TATA Group sold its soaps anddetergents business units to Unilever in 1993


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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 hasover 2,000 models


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Counter-Offensive Defense

Responding to competitors head-on

attack by identifying the attackersweakness and then launch a counter

attack

e.g. Toyota launched the Lexus torespond to Mercedes attack


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Market Challenger Strategies

The market challengers strategicobjective 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


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Market Challenger Strategies

(contd)

Types of Attack Strategies

Frontal attack

Flank attack Encirclement attack

Bypass attack

Guerrilla attack


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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


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Flank attack

Attack the enemy at its weak points

or blind spots i.e. its flanks

Ideal for challenger who does nothave sufficient resources

e.g. In the 1990s, Yaohan attacked

Mitsukoshi and Seibus flanks byopening numerous stores in

overseas markets


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Encirclement attack

Attack the enemy at many fronts at

the same time

Ideal for challenger having superiorresources

e.g. Seiko attacked on fashion,

features, user preferences andanything that might interest the

consumer


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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 attackstrategy against Coke in China by

locating its bottling plants in the

interior provinces


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Guerrilla attack

By launching small, intermittent hit-and-

run 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


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Market-Follower Strategies

Theodore Levitt in his article,Innovative Imitationargued that a

product imitation strategy might be just

as profitable as a product innovationstrategy

e.g. Product innovation--Sony

Product-imitation--Panasonic


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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 oneanother

Adapter e.g. many Japanese firms are excellent

adapters initially before developing into challengers

and eventually leaders


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Market-Nicher Strategies

Smaller firms can avoid larger firms by

targeting smaller markets or niches

that are of little or no interest to thelarger firms

e.g. Logitech--mouse

Microbrewers--special beers


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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


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Multiple Niching

A firm should `stick to its niching butnot necessarily to its niche. That is

why multiple niching is preferable to

single niching. By developing strengthin two or more niches the company

increases its chances for survival.

Philip Kotler


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