The Nature and Sources of Competitive Advantage

The Nature and Sources of Competitive Advantage

• The emergence of competitive advantage• Sustaining competitive advantage• Competitive advantage in different market

settings• Types of competitive advantage: cost and

differentiation

OUTLINE

The Emergence of Competitive Advantage

The Emergence of Competitive Advantage

How does competitive advantage emerge?

External sources ofchange e.g.:•Changing customer demand•Changing prices•Technological change

Internal sources of change

Resource heterogeneity among firms means differential impact

Some firms faster and more effective

in exploiting change

Some firmshave greater creative

and innovativecapability

Competitive Advantage from Internally-Generated Change: Strategic InnovationCompetitive Advantage from Internally-Generated Change: Strategic Innovation

Characteristics of innovatory strategies:– Associated with new entrants to an industry (e.g. Nucor in

steel, IKEA in furniture, Enron in energy, Home Depot in DIY, Dell in PCs)

– Reconcile conflicting performance goals (e.g. Toyota’s lean production system combines low cost, high quality, and flexibility. Richardson Sheffield in kitchen knives is low cost, innovative and customer responsive.)

– Reconfiguring the value chain e.g.---• Nike’s system for manufacturing and distributing shoes totally

different from traditional shoe manufacturer• Southwest Airlines simplification of the normal airline value chain• Zara’s system of design, manafacture, and distribution

REQUIREMENT FOR IMITATION

Identification - Obscure superior performance

- Deterrence--signal aggressiveIncentives for imitation intentions to imitators

- Pre-emption--exploit all available investment opportunities

- Rely upon multiple sources of Diagnosis competitive advantage to create

“causal ambiguity”

- Base competitive advantage upon Resource acquisition resources and capabilities that are

immobile and difficult to replicate

ISOLATING MECHANISM

Sustaining Competitive Advantage Against ImitationSustaining Competitive Advantage Against Imitation

Competitive Advantage in Different Market Settings

Competitive Advantage in Different Market Settings

SOURCE OF IMPERFECTIONOF COMPETITION

MARKET TYPE OPPORTUNITY FORCOMPETITIVE ADVANTAGE

TRADING MARKETS

•None (efficient markets)•Imperfect information availability•Transactions costs•Systematic behavioral trends

•Overshooting

NoneInsider tradingCost minimizationSuperior diagnosis(e.g.... chart analysis)Contrarianism

PRODUCTION MARKETS

•Barriers to imitation

•Barriers to innovation

Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility,barriers to resource replication) & base strategy upon them.Difficult to influence or exploit.

TRADING MARKETS

•None (efficient markets)•Imperfect information availability•Transactions costs•Systematic behavioral trends

•Overshooting

NoneInsider tradingCost minimizationSuperior diagnosis(e.g.... chart analysis)Contrarianism

PRODUCTION MARKETS

•Barriers to imitation

•Barriers to innovation

Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility,barriers to resource replication) & base strategy upon them.Difficult to influence or exploit.

MARKET TYPE

SOURCE OF IMPERFECTION

OF COMPETITION

OPPORTUNITY FOR COMPETITIVE

ADVANTAGE

Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets

Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets

Sources of Competitive AdvantageSources of Competitive Advantage

COST ADVANTAGE

COST ADVANTAGE

DIFFERENTIATIONADVANTAGE

DIFFERENTIATIONADVANTAGE

COMPETITIVEADVANTAGE

COMPETITIVEADVANTAGE

Similar product

at lower cost

Price premium

from unique product

Porter’s Generic StrategiesPorter’s Generic Strategies

SOURCE OF COMPETITIVE ADVANTAGE

Low cost Differentiation

Industry-wide COST DIFFERENTIATION

COMPETITIVE LEADERSHIP

SCOPE

Single Segment F O C U S

Features of Cost Leadership and Differentiation Strategies

Features of Cost Leadership and Differentiation Strategies

Generic strategy Key strategy elements Resource & organizational

requirements

COST Scale-efficient plants. Access to capital. Process

LEADERSHIP Design for manufacture. engineering skills. Frequent

Control of overheads & reports. Tight cost control.

R&D. Avoidance of Specialization of jobs and

marginal customer functions. Incentives for

accounts. quantitative targets.

DIFFERENTIATION Emphasis on branding Marketing. Product

and brand advertising, engineering. Creativity.

design, service, and Product R&D

quality. Qualitative measurement and incentives.

Strong cross-functional

coordination.