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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
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