Competitive Advantage

COMETITVE ADVANTAGES

• When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage.

Competitive Advantage DefinedCompetitive Advantage Defined

A business (or business unit) has a competitive advantage A business (or business unit) has a competitive advantage when it earns a higher rate of when it earns a higher rate of economiceconomic profit than the profit than the average rate of economic profit of other firms competing in average rate of economic profit of other firms competing in the same marketthe same market

Benefit positionBenefit positionrelative to relative to

competitorscompetitors

Cost positionCost positionrelative to relative to

competitorscompetitors

EconomicEconomicprofitabilityprofitability

Value CreatedValue Createdrelative torelative to

competitorscompetitors

MarketMarket economicseconomics

• Michael Porter identified two basic types of competitive advantage:

Cost advantage Differentiation advantage

Cost and differentiation advantages are known as positional advantages since they describe the firm’s position in the industry as a leader in either cost or differentiation.

Resources

DistinctiveCompetencies

Capabilities

Cost AdvantageOr

Differentiation Advantage

Value Creation

A Model of Competitive Advantage

• A competitive advantages is essentially a position of superiority on the part of the firm in some function/factor/activity in relation to its competition. it is through this superiority that the firm attempts to carve out a comfortable position for itself in the relevant industry. In developing a competitive advantages, a firm is basically trying to see how it can perform a particular function or a grouped of functions in a superior/distinctive way compared to competition

Way to win a competitive advantage

• Become the low-cost producer• Make the best made product• Provide customer more value for the money• Save customer money• Provide superior customer service• Enhance performance buyer gets• Provide more convenient locations• Make a more reliable & durable product

Examples of competitive advantage

Toshiba of Japan, variety in production serves as a competitive advantage.

As a contrast to the flexibility of Toshiba, Sony enjoys the advantage of low cost in personal stereo players.

Caterpillar has built a competitive advantage in its business of earth moving equipment through after- sales service.

Types of competitive advantage• Cost advantage – A strategy to seek out

and secure a cost advantage of some kind - lower average costs, lower labour costs, etc. prices lower than competitor.

• Differentiation:- products with same quality that makes them more attractive than the competitor.

Competitive advantage factors (sources of competitive advantage)

In MarketingMarket standing

Market share

Innovation in marketing

New product leadership

Price leadership

Advertising effectiveness

Market research capability

Product mix and product lines

In finance

AssetsLiquidityLeverageCash flowProfitabilityCostsCost of capitalKnowledge and dynamics in tax planning

In R&DNature and depth and quality of R&D capability

Resources allocation to R&D

Quality, expertise and experience of R&D personnel

Engineering capability for pursuing R&D suggestions

Speed of R&D

In human resources

Quality, knowledge and expertise and experiences of personnel

Personnel turnover

Labour costs

Industrial relations

In Corporate factors and overall resources

Company size

Corporate image

Quality of management in general

The CEO

Corporate performance record

Innovation record

Quality of strategic planning

Organizational culture/ structure

CORE COMPETENCE

Core competence

• Core competencies lead to the development of core products. Core products are not directly sold to end users; rather , they are used to build a large number of end user products.

Business 1

Competence1

Core Product

2

Competence4

Business 2 Business 4

Core product

1

Competence2

Business 3

Competence3

1 2 3 4 5 6 7 8 9 10 11 12

End Products

Developing core competencies

• According to Prahalad and Hamel, core competencies arise from the integration of multiple technologies and the coordination of diverse production skills. Core competencies tend to be rooted in the ability to integrate and coordinate various groups in the organization. Core competencies serve as the glue that bonds the business units together into a coherent portfolio.

There are three tests useful for identifying a core competencies. A core competencies should:

Provide access to wide Variety of markets, and

Contribute significantly to the end- product benefits, and

Be difficult for competitors to imitate.

Examples of core competence

• Sony has a core competence in miniaturization; it can make any product tiny.

• Honda has a core competence in engines, which gives it an advantages in diverse products like cars, motorcycles, lawn-mowers and generators.

• Conan in optics, imaging and microprocessor controls; they together lend canon advantage in products as diverse as copier,leser printer, cameras and image scanners.

Distinction between competitive advantage

and core competence

• A competitive advantage does not constitute a sure success formula for a firm; a core competence usually does.

• A competitive advantage helps a firm in a specific and limited way ; core competence helps it in a far- reaching and multifaceted manner.

• A competitive adv. Provides competitive strength to the firm in a given business/product. A core competence helps a firm to play a variety of business/products.

• A competitive adv. Can be easily imitated; competitors do catch up fast with a firm in competitive adv. A core competence is an exclusive and inimitable preserve of a firm. It is long –lasting ; competitors cannot easily catch up with the firm in core competence.

• A core competence is fundamental and unique to a firm; competitive advantages are not unique to any firm over the long-term.

The value chain

• To analyze the specific activities through which firms can create a competitive advantage, it is useful to model the firm as a chain of value- creating activities.

• Micheal Porter identified a set of interrelated generic activities common to a wide range of firms.

InboundLogistics

Operations OutboundLogistics

Service Marketing &

Sales

Primary value chain activities

The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit margin.

Inbound logistics:- include the receiving, warehousing, and inventory control of input materials.

Operation:- are the value – creating activities that transform the inputs into the final product.

Outbound logistics:- are the activities required to get the finished product to the customer, including warehousing, order fulfillment,etc.

Marketing & sales:-are those activities associated with getting buyers to purchase the product, including channel selection, advertisement , pricing, etc.

Service :- activities are those that maintain and enhance the product’s value including customer support, repair services, etc.

Porter’s Generic Strategies

Broad

(Industry

Wide)

Cost Leadership

strategy

Differentiation

strategy

Narrow

(Market

Segment)

Focus

Strategy

(Low cost)

Focus

Strategy

(Differentiation)

Low cost Product

Uniqueness

Target scope

Advantage

• Cost Leadership strategy:- this generic strategy calls for begin the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share. Firms that succeed in cost leadership often have the following internal strengths:

Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome.

Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process.

Efficient distribution channels.

High level of expertise in manufacturing process engineering.

• Differentiation strategy:- a differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. Firms that succeed in a differentiation strategy often have the following internal strength:

Firms that succeed in a differentiation strategy often have the following internal strength:

Access to leading scientific research.Strong sales team with the ability to

successful communicate the perceived strength of the product.

Corporate reputation for quality and innovation.

Highly skilled and creative product development team.

• Focus strategy :- The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly. because of their narrow market focus, firm pursuing a focus strategy have lower volume and therefore less bargaining power with their suppliers. However, firms pursuing a differentiation focus-strategy may be able to pass higher costs on to customers since close substitute products do not exist.

TURNAROUND STRATEGIES

Reversing a negative trend

Retrenchment - internal/external - improve internal efficiency - Divestment/liquidation

Danger signs:•Persistent negative cash flows•Negative profits•Declining market share•Deterioration in physical facilities•High turnover, low morale, Mismanagement•Uncompetitive products, sick company