Chapter 12Competitive factors

Chapter Outline

COMPETITIVE FACTORS

COMPETITIVE ADVANTAGE

PORTER’S 5 FORCES

PROTER’S VALUE CHAIN

Environmental analysis

Part of a firm’s environmental analysis will involve assessing the degree and sources of competition within the industry

Key issue whether the firm has a sustainable competitive advantage Different ways in which a firm can achieve a

competitive advantage Main competitive forces in an industry How different activities and departments within the

firm contribute to its competitiveness

Competitive advantage Michael Porter stated that a firm wishing to obtain a

competitive advantage over its rivals is faced with two choices:

1. Cost leadership vs. differentiation

2. Degree of focus

3 generic strategies: Cost leadership, e.g. Nissan, Ford, Honda Differentiation, e.g. BMW, Jaguar, Mercedes Focus, e.g. Ferrari, Rolls Royce

Competitive advantage1. Cost leadership vs. differentiation

Is the company seeking to compete by achieving lower costs than its rivals for similar p/s?

If so, then it can either undercut competitors on price, or charge similar prices and enjoy superior margins.

OR

Is the company wishing to differentiate itself by offering a better product than competitors?

Here the customer is prepared to pay a premium price for added value which the customer perceives in the product.

The firm thus enjoys a greater margin than the undifferentiated product.

Competitive advantage2. Degree of focus

What is the scope of the area in which the company wishes to obtain competitive advantage?

Is it industry-wide or is it restricted to a specific niche?

Porter argues that trying to be both a cost leader and a differentiator usually results in the firm becoming ‘stuck in the middle’ with no clear competitive advantage – a recipe for disaster.

Competitive advantage

Cost leadership Differentiation

Cost focus Differentiation focus

Lower Cost Differentiation

BASIS OF COMPETITION

Broad target

Narrow target

COMPETITIVE SCOPE

Competitive strategies Cost leadership strategy

Seeking to attain the lowest total overall costs relative to other industry competitors.

Differentiation strategy Attempting to create a unique and

distinctive product or service for which customers will pay a premium.

Focus strategy Using a cost or differentiation

advantage to exploit a particular market segment rather a larger market.

WA

SALVAGE

Cost leadership Low-cost producer in an industry for a given level of

quality Products are sold either at average industry prices to

earn a profit higher than that of rivals, or below average industry prices to gain market share

In case of price war, firm can maintain some profitability while competitors suffer losses

Usually targets a broad market Ways to acquire cost advantages: improve process

efficiencies, unique access to a large source of lower cost materials, outsourcing, vertical integration

Differentiation Development of a p/s that offers unique attributes that

are valued by customers and that customers perceive to be better than or different from the product of the competition

Differentiation focus: business aims to differentiate within just one or a small number of target market segments (important – there must be a valid basis for differentiation)

May be successful if a company can Reduce the ongoing cost to the customer of using the product

(cheaper to run) Increase customer satisfaction with the product (better product) Modify the customer’s perception of value (brand names)

Focus Concentrates on a narrow segment (a particular buyer

group, market segment, geographical region, service need, product feature or section of the product range)

Within that segment is attempted to achieve either a cost advantage or differentiation

Premise is that needs of the group can be better serviced by focusing entirely on it

Firm with focus strategy often enjoy high customer loyalty

May be the only way into a market for a small company competing against larger companies

Porter’s five forces analysis

Porter’s five forces model

Porter’s value chain

Porter developed his value chain to determine whether and how a firm’s activities contribute towards its competitive advantage

Approach involves breaking the firm down into 5 ‘primary’ and 4 ‘support’ activities, and then looking at each to see if they give a cost advantage or quality advantage

‘Primary’ activities Activity Description Example

Inbound logistics

Receiving, storing and handling raw material inputs

A just-in-time stock system could give a cost advantage

Operations Transformation of the raw material into finished p/s

Using skilled craftsmen could give a quality advantage

Outbound logistics

Storing, distributing & delivering finished goods to customers

Outsourcing deliveries could give a cost advantage

Marketing and sales

Market research + 4Ps Sponsorship of a sports celebrity could enhance the image of the product

Service All activities that occur after the point of sale, such as installation, training, repair

Marks & Spencer’s friendly approach to returns gives it a perceived quality advantage

‘Support’ activities Activity Description Example

Firm infrastructure

How the firm is organised

Centralised buying could result in cost savings due to bulk discounts

Technology development

How the firm uses technology

The latest computer-controlled machinery gives a greater flexibility to tailor products to individual customer specifications.

HR development

How people contribute to competitive advantage

Employing expert buyers could enable a supermarket to purchase better wines than competitors

Procurement Purchasing, but not just limited to materials

Buying a building out of town could give a cost advantage over High Street competitors

Results of analysis

How different departments contribute to competitive adv Purchasing

Cost advantages – sourcing cheaper materials, bulk discounts, centralised buying

Quality adv – sourcing higher quality materials, employing expert buyers

Production Cost adv – mass production lines, standardisation,

employing workers just above the minimum wage, keeping stock levels low

Quality adv – using better quality materials, more quality control procedures, employing highly-skilled staff, flexible manufacturing systems, use of technology to ensure better consistency, ongoing training of staff

How different departments contribute to competitive adv Marketing

Cost adv – word-of-mouth promotion, sell direct to cut distribution costs

Quality adv – market research can help tailor product to meet customer needs, large promotional budgets, sponsorship, perceived quality pricing, brand development

Service Cost adv – outsourcing (?), not offering service

provision, low paid staff Quality adv – outsourcing (?), highly-skilled staff

Chapter Summary

Competitive factorsPart of external analysis

Complements PEST analysis

Competitive advantage- Cost leadership- Differentiation- Focus

Porter’s value chain- Primary activities(inbound logistics, operations, outbound logistics, marketing, service)

- Support activities (procurement, infrastructure, technology)

Porter’s 5 forces- Competitive rivalry- Threat of entry- Threat of substitutes- Power of suppliers- Power of buyers