Sustaining Competitive Advantage

Chapter IV

Competitive Advantage Generating a new source of competitive advantage is the

ultimate act of creativity in business

Creating advantage is an art, not a science– But not a black art

As in all arts, the process matters a great deal– Respond to and act on the outside world– Build in internal consistency from the start

Personal traits and habits also matter– Balance between creativity and analysis– Courage to do something different

Sources of Competitive Advantage

Structural Advantage Structural Advantage

Frontline Execution Frontline Execution

Insight / Foresight Insight / Foresight

Cost Advantage

Cost Advantage Differentiation DifferentiationPorter’s Sources

of Competitive Advantage

Structural Advantage Output increases and average costs fall Company size increases and risk is

diversified

Transaction costs and risks are very high

Frequency of transactions is recurrent and asset specificity is high

Limited access to: Privileged locations Intellectual property Regulatory rights Distribution networks Brands and reputations Customer information

Economies of scale

Economies of scale

Vertical Market Failure

Vertical Market Failure

Privileged Assets

Privileged Assets

Frontline ExecutionProduct/service Characteristics

•Range•Complexity•Life cycle

Product/service Characteristics

•Range•Complexity•Life cycle

Process Requirements

•Product/service development•Logistics•Sales/marketing requirements

Process Requirements

•Product/service development•Logistics•Sales/marketing requirements

Environmental Requirements

•Seasonality•Service expectations•Market share stability

Environmental Requirements

•Seasonality•Service expectations•Market share stability

Complex order management and scheduling systems

Skilled management of inbound flows Flexible operations and supply chain/service

factory design Unique skills and expertise requirements for

service operations

Skilled project management Flexible capacity utilization Customer satisfaction measurement and

feedback mechanisms Sales force coverage, talent and training

requirements Information systems to assess profitability of

segment customers

Build-in-advance requirements Delivery and inventory requirements Distribution configuration Capacity planning and utilization

Insight/Foresight

High degree of uncertainty

High degree of uncertainty

Large value placed on innovation

Large value placed on innovation

Difficult/impossible to

develop or sustain structural

or executional advantage

Difficult/impossible to

develop or sustain structural

or executional advantage

Allows business units to identify ways to eliminate, reduce or manage the uncertainty company faces, e.g., high tech, telecommunications, electric utilities

Helps companies understand the real drivers of value for customers, which allows them to identify and launch successful new products and services, e.g., software, new technologies, fashion

helps to understand relationships among different variables and draw out key implications, e.g., industries which make complex marketing and pricing decisions

In today’s faster-moving environments, these elements are less and less to be relied on

Significant advantage to see new relationships

among sets of variables

Significant advantage to see new relationships

among sets of variables

Cost Advantage Analysis (1)

1.Identify the appropriate value chain and assign costs and assets to it

2.Diagnose the cost drivers of each value activity and how they interact

3.Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences

Cost Advantage Analysis (2)

4.Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain

5.Ensure that cost reduction efforts do not erode differentiation

6.Test the cost reduction strategy for sustainability

Gain cost advantage by:Controlling cost driversReconfiguring the value

chain

Distribution of Operating Costs

OPERATING COSTS

HR Management (2%)Procurement (1%)

Firm Infrastructure (9%)Technology Development (9%)

1%

Inbound logistics

(3%)

Operations (67%) Outbound

logistics (1%)Marketi

ng & Sales (6%)

Service (1%)

Margin (5%)

Purchased operating inputs

Human Resource costs

27%

40%

Distribution Assets

ASSETS

Firm InfrastructureHR

Management (1%)

(16%)

(2%)

Inbound logistics

(8%)

Operations (46%) Outbound

logistics (20%)Marketi

ng & Sales (6%)

Service (2%)

Liquid Assets

Fixed Assets

(38%)

Technology Development (2%)

Procurement (1%)

(8%)

(6%) (15%)

(5%)

Differentiation – Drivers of Uniqueness Policy choices Linkages within value chain, with suppliers,

customers, competitors, etc Timing Location Interrelationships Learning Integration Scale Institutional Factors

Routes of Differentiation

Proliferate the sources of differentiation in the value chain

Make actual product use consistent intended use (understand buyers’ needs and modify product accordingly)

Employ signals of value to reinforce differentiation on use criteria (advertising)

Exploit all sources of differentiation that are not costly

Reduce cost in activities that do not affect buyer value

Shift the decision maker to make a firm’s uniqueness more valuable, etc

Steps in Differentiation (1)

1. Determine who the real buyer is

2. Identify the buyer’s value chain and firm’s impact on it

3. Determine ranked buyer purchasing criteria

Steps in Differentiation (2)

4. Assess the existing and potential sources of uniqueness in a firm’s value chain

5. Identify cost of existing and potential sources of differentiation

6. Choose the configuration of activities that creates the most valuable differentiation for the buyer relative to cost of differentiation

7. Test the differentiation strategy for sustainability

Ranked Buyer Purchase Criteria - Example

ContentFormatLayoutPriceSubscription Frequency

ContentFormatLayoutPriceSubscription Frequency

AdvertisingDistributionMarket positionDisplay in storesAvailability

AdvertisingDistributionMarket positionDisplay in storesAvailability

Speed of distributionOnline versionPromotional supportReliability

Speed of distributionOnline versionPromotional supportReliability

AudienceSales per issueOnline community

AudienceSales per issueOnline community

Signaling Criteria

Use Criteria

End User

Channels

Activities that Influence Buyer purchase criteria

Inbound

Logistics

US

ER

CR

ITE

RIA

SIG

NA

LIN

G

CR

ITE

RIA

Operatio

ns

Outbou

n

d

Crite

riaM

arke

ti

ng &

Sales Ser

vice

Procu

rem

ent

Technol

ogy

Devel

opm

e

ntHR

Managem

ent

Firm

infr

astr

ucture

Conformance to

specificationsDelivery

time

Features

Sales force

quality

Sales aids

Attractiveness of

facilities

xxx

x

x

xx x

x

x

x xx

x x

x

x

x

x

Sustaining Competitive Advantage1. Micro level: Analyzing and anticipating individual

players, especially competitors

2. Macro level: Understanding and responding to generic threats to advantage

3. Overarching: Designing strategy for robustness and organization for ability to learn and to make tradeoffs

SlackSlack

ImitationImitation

HoldupHoldup

SubstitutionSubstitution

Hints to Sustaining Competitive Advantage Attacked competitors indirectly, placed them on

the horns of a dilemma Vision the future and the industry shape

“Fly below the radar screen until will be too late for competitors”

Made clear tradeoffs (it will make your strategy sustainable against imitation)

Be always a second faster than your competition Be unique

Learn from your and competitors success and failure

Key tests to Effective Competitive Strategies1. External consistency: Does the strategy tap

the opportunities and neutralize the threats posed by the outside world in a unique manner?– Driven by outside opportunities and threats– Systemic change possible– Explicit recognition of what company is not doing

2. Internal consistency: Do the parts of the strategy fit together to form a whole that is greater than the sum of the parts?

3. Dynamic consistency: Does the strategy call on the company to do today what is necessary to succeed tomorrow?– Responsive to discontinuous changes in outside world

Example – Internal Consistency at Dell