sustainable competitive advantage, porter's generic strategy

8/3/2019 Sustainable Competitive Advantage, Porter's Generic Strategy

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Sustainable Competitive

Advantage, Porters Generic

Strategy


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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 a persistently higher rate

of profit)


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Competitive Advantage

Definition - A competitive advantage is anadvantage over competitors gained by offeringconsumers greater value, either by means of

lower prices or by providing greater benefitsand service that justifies higher prices.

An advantage that a firm has over itscompetitors, allowing it to generate greatersales or margins and/or retains more customersthan its competition.


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There can be many types of

competitive advantages including

The firm's cost structure,

Product offerings,

Distribution network and Customer support.


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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


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Develop expertise, resource strengths, and capabilities noteasily 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 differentiatingfeature 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


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There are two main types of

competitive advantages:

Comparative advantage and

Differential advantage.


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Comparative advantage, or cost advantage, is afirm's ability to produce a good or service at alower cost than its competitors, which gives the

firm the ability sell its goods or services at alower price than its competition or to generate alarger margin on sales.

A differential advantage is created when a firm's

products or services differ from its competitorsand are seen as better than a competitor's productsby customers


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What do you mean by Sustainable?

Sustainable is not measured in calendar time.Sustainable does not mean the advantage will lastforever.

Sustainable suggests the advantage lasts long enough

that competitors stop trying to duplicate the strategythat makes the advantage sustained. Where are we?

Assets

Capabilities

Competencies Competitive Advantage

Competitive advantage.


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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 bepursued by competitors.


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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?


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To produce SCA, the capability must:

Produce value

Be rare

Imperfectly imitable, i.e. not be easily imitatedor substituted

Be exploitable by the organization


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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)

T b l bl h bili


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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


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The Question of Rareness:

Valuable resources or capabilities that are sharedby large numbers of firms in an industry aretherefore 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-artstamping press

None of these are rare.

Some researchers think only organizational assetsor resources are rare (such as culture).

What do you think?


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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.


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Ways imitation can be avoided:

Unique Historical Conditions (Caterpillar, e.g.)

Causal Ambiguity (why resources create SCA is notunderstood, 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 ofeffectiveness is uncertain)

E.g. A competitor steals all the scientists in an R&D laband relocates them to a new facility.

But, the dynamics, culture and atmosphere are notthe same.


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The Question of Substitutability

There must be no equivalent resources that can be exploitedto implement the same strategies.

Forms of substitutability:

Duplication: Although no two management teams are the

same, they can be strategically equivalent, produce the sameresults.

Substitution: Very different resources can be substitutes,

E.g. A charismatic leader with a clear vision vs. a strategicplanning 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 firmowns or controls.


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Asset is to Accounting as Resource

is to Management.


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Types of assets:

Physical: plant equipment, location, access to rawmaterials

Human: training, experience, judgment, decision-making skills, intelligence, relationships, knowledge

Organizational: Culture, formal reporting structures,control systems, coordinating systems, informalrelationships. A capability is usually considered abundle of assets or resources to perform a businessprocess (which is composed of individual activities)

e.g. the product development process involvesconceptualization, product design, pilot testing, newproduct launch in production, process debugging, etc.All firms have capabilities.


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Competencies vs. Core

Competencies vs. Distinctive

Competencies


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A competency is an internal capability that acompany performs better than other internalcapabilities.

A core competency is a well-performed internalcapability that is central, not peripheral, to acompanys strategy, competitiveness, andprofitability.

A distinctive competence is a competitivelyvaluable capability that a company performsbetter than its rivals.


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Examples: Distinctive Competencies

Toyota, Honda, Nissan Low-cost, high-quality

manufacturing capability and short design-to-

market cycles

Intel - Ability to design and manufacture ever

more powerful microprocessors for PCs

Motorola - Defect-free manufacture (six-

sigma quality) of cell phones


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SCA is an element (or combination of elements) of thebusiness strategy that provides a meaningful advantageover both existing and future competitors. An SCAneeds to be meaningful, sustainable and substantial.

An SCA needs to be supported and enhanced over time.The assets and competencies of an organizationrepresent the most sustainable element of a businessstrategy, because these are usually difficult to copy orcounter.

An SCA should be visible to customers and provide orenhance a value proposition. The key is to link an SCAwith the positioning of a business. A solid valueproposition can fail if a key ingredient is missing (e.g.,Pringles).

Sustainable Competitive Advantages


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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 aPOD.

Frameworks for Sustainable


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Frameworks for Sustainable

Competitive Advantage

Knowledge-based strategy

Generic strategy

Hybrid strategy Core competence/distinctive

capability/resource based strategy


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Knowledge-based Strategy


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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)


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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


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Porters Generic Strategy

framework:

Porters generic strategy is based on


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Porter s generic strategy is based on

answering two questions:

Should strategy be differentiation or cost

leadership?

Should the scope of strategy be broad or

narrow?


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Generic Strategy

According to Porter, competitive advantage, and thushigher profits will result either from:

Differentiation of products and selling them at apremium price

OR Producing products at a lower price than competitors

In association with choosing differentiation or costleadership, the organization must decide between:

Targeting the whole market with the chosen strategy,OR

Targeting a specific segment of the market

PORTERS GENERIC


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PORTER S GENERIC

STRATEGIES

Generic Strategy: Cost Leadership


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Generic Strategy: Cost Leadership

Strategy

Strategy focus: organize value adding

activities to be the lowest cost producer of a

product in an industry


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Strategy - Cost Leadership

With this strategy, the objective is to become thelowest-cost producer in the industry. Many (perhaps all)market segments in the industry are supplied with theemphasis placed minimizing costs.

If the achieved selling price can at least equal (or near)the average for the market, then the lowest-costproducer will (in theory) enjoy the best profits.

This strategy is usually associated with large-scale

businesses offering "standard" products with relativelylittle differentiation that are perfectly acceptable to themajority of customers.


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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 doingso, it can further increase its market share.

Examples of Cost Leadership:

Dell Computers & Wal-Mart


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Advantages

Higher profits resulting from charging pricesbelow that of competitors, because unit costs arelower

Increase market share and sales by reducing theprice 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


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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) orperceived superiority


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Generic Strategy framework

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


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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 apremium price.


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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 toenter the industry


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Focus or Niche strategy

The focus strategy is also known as a 'niche' strategy.

Where an organization can afford neither a wide scopecost leadership nor a wide scope differentiationstrategy, a niche strategy could be more suitable. Here

an organization focuses effort and resources on anarrow, defined segment of a market.

Competitive advantage is generated specifically for theniche. A niche strategy is often used by smaller firms.

A company could use either a cost focus or adifferentiation focus.


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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 otherindustry segments.

Cost focus exploits differences in cost behaviour in some

segments, while differentiation focus exploits the special needs

of buyers in certain segments.


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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


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StrategyDifferentiation Focus

In the differentiation focus strategy, a business aims todifferentiate within just one or a small number of targetmarket segments.

The special customer needs of the segment mean that thereare opportunities to provide products that are clearlydifferent from competitors who may be targeting a broadergroup of customers.

The important issue for any business adopting this strategyis to ensure that customers really do have different needsand wants - in other words that there is a valid basis fordifferentiation - and that existing competitor products arenot meeting those needs and wants.

Examples of Differentiation Focus: any successful nicheretailers.

S C


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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 marketleader, 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


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Criticisms of Porter s Generic

Strategy

A hybrid strategy may be successful, although Porterargues that either differentiation or cost leadership mustbe used (a mix of the two leads to being stuck in themiddle)

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 acceptednow

sustainable competitive advantage, porter's generic strategy

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