Fall 2000 MGTO321 (L1 & L2) -- Dr. JT Li 1

Lecture #10:The Nature and Sources of

Competitive Advantage

Lecture #10:The Nature and Sources of

Competitive Advantage

• Sources of competitive advantage

• Cost leadership

• Differentiation

Fall 2000 MGTO321 (L1 & L2) -- Dr. JT Li 2

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

Fall 2000 MGTO321 (L1 & L2) -- Dr. JT Li 3

Porter’s Generic StrategiesPorter’s Generic Strategies

SOURCE OF COMPETITIVE ADVANTAGE

Low cost Differentiation

Industry-wide COST DIFFERENTIATION

COMPETITIVE LEADERSHIP

SCOPE

Single Segment

FOCUS

Fall 2000 MGTO321 (L1 & L2) -- Dr. JT Li 4

Cost & DifferentiationCost & Differentiation

normal revenues

normal costs

higher revenues

lower costs

$

superior profit

superior profit

Fall 2000 MGTO321 (L1 & L2) -- Dr. JT Li 5

Drivers of Cost AdvantageDrivers of Cost Advantage

PRODUCTION TECHNIQUES

PRODUCT DESIGN

INPUT COSTS

CAPACITY UTILIZATION

MANAGERIAL/ ORGANIZATIONALEFFICIENCY

ECONOMIES OF LEARNING

ECONOMIES OF SCALE

• Organizational slack

• Ratio of fixed to variable costs• Costs of installing and closing capacity

• Location advantages• Ownership of low-cost inputs • Bargaining power• Supplier cooperation

• Design to facilitate automation• Economize on costs and materials

• Automization• Effiecient utilization of materials• Few defects

• Increased dexterity• Improved coordination

• Minimum efficiency scale• Specilaization

Fall 2000 MGTO321 (L1 & L2) -- Dr. JT Li 6

Economies of Scale: The Long-Run Cost Curve for a Plant

Economies of Scale: The Long-Run Cost Curve for a Plant

Units of outputper periodMinimum

EfficientPlant Size

Cost perunit ofoutput

Sources of scale economies:

- technical input/output relationships- specialization

Fall 2000 MGTO321 (L1 & L2) -- Dr. JT Li 7

Scale Economies in Advertising: U.S. Soft Drinks

Scale Economies in Advertising: U.S. Soft Drinks

Despite the massive advertising by brand leaders Coca Cola and Pepsi Cola, it isthe smaller brands which incur the highest advertising costs per unit of sales:

10 20 50 100 200 500 1,000

Annual sales volume (millions of cases)

Adv

ertis

ing

Exp

endi

ture

($

per

case

)0.

02

0

.05

0.1

0

0.1

5

0

.20

CokePepsi

Seven up

Dr. PepperSprite

Diet Pepsi

Tab

Fresca

Diet Rite

Diet 7-Up

SchweppesSF Dr. Pepper

Fall 2000 MGTO321 (L1 & L2) -- Dr. JT Li 8

Static Drivers of DifferentiationStatic Drivers of Differentiation

• Product features and performance• Complementary services• Intensity of marketing• Technology• Quality of inputs• Organizational procedures• Location• Vertical integration

Fall 2000 MGTO321 (L1 & L2) -- Dr. JT Li 9

Dynamic Cost and Differentiation

Dynamic Cost and Differentiation

• Total Quality movement (TQM)• Business Process Reengineering• Restructuring

Fall 2000 MGTO321 (L1 & L2) -- Dr. JT Li 10

Recent Approaches to Cost ReductionRecent Approaches to Cost Reduction

Key elements:

• Plant closures

• Outsourcing

• Delayering and cuts in administrative staff

Fundamental rethinking and redesign of business processes to achieve improvements in performance. e.g.:-

• Several jobs combined into one

• Steps of a process combined in natural order

• Minimizing steps, controls, and reconciliation

• Hybrid centralization/ decentralization

CORPORATERESTRUCTURING

BUSINESSPROCESS

REENGINEERING

Fall 2000 MGTO321 (L1 & L2) -- Dr. JT Li 11

SummarySummary

• Generic strategies• Managing cost and differentiation strategies• Static and dynamic drivers of cost and

differentiation• Value chain