Strategic Elements of Competitive Advantage

PPT 6

(First ppt slides after the mid-term)

Assist. Prof. Dr. Ayşen Akyüz

Industry Analysis:

Forces Influencing Competition

� Industry – group of firms that produce products that are close substitutes for each other

Michael E. Porter identifies

five forces that influence

industry competition:

the threat of new entrants,

the threat of substitute

products or services,

the bargaining power of

buyers,

the bargaining power of

suppliers,

and

competitive rivalry.

Porter’s Force 1:

Threat of New Entrants

� New entrants to an industry bring new capacity, a desire to gain market share and position, and, quite often, new approaches to serving customer needs.

� The decision to become a new entrant in an industry is often accompanied by a major commitment of resources.

� New entrants mean reduced profitability

� Barriers to entry determines the extent of threat of new industry entrants

Threat of New Entrants:

Barriers to Entry

� Industry is more attractive to new entrants when:

� Advantages of economies of scale are absent.

� Capital requirements to enter the industry are

low

� Cost advantages are not related to company

size

� Buyers are not loyal to existing brands

� Government does not restrict the entrance of

new companies

Threat of New Entrants:

Barriers to Entry

� Distribution channels

� Are there current distribution channels available with capacity?

� Government policy

� Are there regulations in place that restrict competitive entry?

� Cost advantages independent of scale economies

� Is there access to raw materials, large pool of low-cost labor, favorable locations, and government subsidies?

� Competitor response

� How will the market react in anticipation of increased competition within a given market?

Porter’s Force 2:

Threat of Substitute Products

� Availability of substitute products places limits on the prices market leaders can charge

� Industry is more attractive when:

� Quality substitutes are not readily available

� High prices induce buyers to switch to the substitute

Porter’s Force 3:

Bargaining Power of Buyers� Buyers=manufacturers and retailers, not consumers

� Buyers seek to pay the lowest possible price

� Buyers’ influence is high when number of customers is small and cost of switching to a competitor’s product is low.

� Buyers have leverage over suppliers when:

� They purchase in large quantities (enhances supplier dependence on buyer)

� Suppliers’ products are commodities

� Industry is more attractive when:

� Customers’ switching costs are high

� Number of buyers is large

� Customers want differentiated products

� Customers find it difficult to collect information for comparing

suppliers

Porter’s Force 4:

Bargaining Power of Suppliers� When suppliers have leverage, they can raise prices high enough to

affect the profitability of their customers

� Leverage occurs when

� Suppliers are large and few in number

� Supplier’s products are critical inputs, are highly differentiated, or carry switching costs

� Few substitutes exist

� Suppliers are willing and able to sell product themselves

� Industry is more attractive when:

� Many suppliers sell a commodity product

� Substitutes are available

� Switching costs are low

Porter’s Force 5:

Rivalry Among Competitors

� Refers to all actions taken by firms in the industry to improve their positions and gain advantage over each other

� Price competition

� Advertising battles

� Product positioning

� Differentiation

Competitive Advantage

� Achieved when there is a match between a firm’s distinctive competencies and the factors critical for success within its industry

� Two ways to achieve competitive advantage

� Low-cost strategy

� Product differentiation

Generic Strategies for Creating

Competitive Advantage

� Cost Leadership—low price

� Product Differentiation—premium price

� Focused Differentiation—premium price

Cost Leadership

� Goal: to be the low-cost producer in the industry (or market segment).

� Low-cost leaders have advantages:

� Reaching buyers who buy on the basis of price

� The power to set the industry’s price floor.

� Must construct the most efficient facilities

� Must obtain the largest market share so that its per

unit cost is the lowest in the industry

� Only works if barriers exist that prevent competitors

from achieving the same low costs

Product Differentiation

� When a product has perceived uniqueness, in a broad market, it is said to have achieved competitive advantage by differentiation.

� Extremely effective for defending market position

� Extremely effective for obtaining above-average financial returns; unique products command a premium price

Focused Differentiation

� The product not only has actual uniqueness but it also has a very narrow target market

� Results from a better understanding of customer’s wants and desires

� It might emphasize high quality, extraordinary service, innovative design, technological capability, or an unusually positive brand image

� Ex.: High-end audio equipment

Sustaining a Competitive

Advantage� Competitive advantage counts for little if it cannot be

sustained over the long-term.

� Factors reducing competitive advantage

� Evolutionary changes in the industry

� Technological changes

� Customer preferences

� Imitation by competitors

� Defending competitive advantage

� Patents, copyrights, trademarks, regulations, and tariffs

� Competing on price

� Long-term contracts with suppliers (and customers)

Global Competition and National

Competitive Advantage

� Global competition occurs when a firm takes a global

view of competition and sets about maximizing profits

worldwide

� The effect is beneficial to consumers because prices

generally fall as a result of global competition

� While creating value for consumers, it can destroy

the potential for jobs and profits

Global Competition and National

Competitive Advantage

Factor Conditions

� Human Resources – the quantity of workers available, skills possessed by those workers, wage levels, and work ethic

� Physical Resources – the availability, quantity, quality, and cost of land, water, minerals, and other natural resources

� Knowledge Resources – the availability within a nation of a significant population having scientific, technical, and market-related knowledge

Factor Conditions

� Capital Resources – the

availability, amount, cost, and

types of capital available; also

includes savings rate, interest

rates, tax laws, and government

deficit

� Infrastructure Resources – this

includes a nation’s banking,

healthcare, transportation, and

communication systems

� Related and Supporting Industries: The advantage that a

nation gains by being home to internationally competitive

industries in fields that are related to, or in direct support of,

other industries

� Globally-competitive supplier industries provide inputs to

downstream industries.

� They are globally competitive in terms of price and quality and

gain competitive advantage.

� Downstream industries have easier access to inputs and

technology, and to the managerial and organizational structures

that made them competitive.

� Demand Conditions are the factors that either train firms for world-class

competition or that fail to adequately prepare them to compete in the global

marketplace.

Three characteristics of home demand are important to creation of competitive

advantage:

• Composition of Home Demand. This demand element determines how

firms perceive, interpret, and respond to buyer needs.

• Size and Pattern of Growth of Home Demand. These are important

only if the composition of the home demand is sophisticated and

anticipates foreign demand.

• If home demand reflects or anticipates foreign demand, large-scale

facilities and programs will be an advantage in global competition.

• Rapid home market growth. This is an incentive to invest in and adopt

new technologies faster, and to build large, efficient facilities.

• Early market saturation puts pressure on a company to expand into

international markets and innovate.

�

Firm Strategy, Structure,

and Rivalry� Domestic rivalry in a single national market is a powerful

influence on competitive advantage

� The absence of significant domestic rivalry can lead to

complacency in the home firms and eventually cause them

to become noncompetitive in the world markets

� It is not the number of domestic rivals that is important;

rather, it is the intensity of the competition and the quality of

the competitors that make the difference.

� Differences in management styles, organizational skills, and

strategic perspectives create advantages and

disadvantages.

� For example, German company structure is hierarchical while Italian firms run like small family businesses.

Current Issues in

Competitive Advantage

� Today’s business environment, market stability is undermined by:

� Short product life cycles

� Short product design cycles

� New technologies

� Globalization

� Result is an escalation and acceleration of competitive forces