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COMPETITIVE STRATEGY CREATING COMPETITIVE
ADVANTAGE
What is Competitive advantage?
… a basis for the firm’s long term success? … a basis for value creation?
Do we really know where it resides?Can it be sustainable?
What is Competitive What is Competitive advantage?advantage?
“When two or more firms compete within the same market, one firms possesses a competitive advantage over its rivals when it earns a persistently higher rate of profit (or has the potential to earn a persistently higher rate of profit)”
R. M. Grant, 2000
The main types of The main types of Competitive AdvantageCompetitive Advantage
Cost advantageCost advantage
Differentiation advantage
Differentiation advantage
Competitiveadvantage
Competitiveadvantage
Similar
product
at lower c
ost
Higher price
for unique product
Competitive strategiesCompetitive strategies by by
PorterPorterTypes of competitive advantageTypes of competitive advantage
Low cost Differentiation
Cost leadership DifferentiationIndustry-wide
Niche Focus with low cost
Focus with differentiation
MarketMarket
Five Generic StrategiesFive Generic StrategiesCompetitive Advantage
Co
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ive
Sco
pe
Cost Uniqueness
Bro
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targ
etN
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Cost Leadership
Differentiation
Focused Cost Leadership
Focused Differentiation
Integrated Cost
Leadership/Differentiation
Cost Leadership StrategyCost Leadership StrategyAn integrated set of actions designed to produce or deliver goods or services at the
lowest cost, relative to
competitors with features that are acceptable to customers
◦relatively standardized products◦features acceptable to many customers◦ lowest competitive price
Cost Leadership StrategyCost Leadership Strategy
Cost saving actions required by this strategy:◦building efficient scale facilities◦tightly controlling production costs and
overhead◦minimizing costs of sales, R&D and service◦building efficient manufacturing facilities◦monitoring costs of activities provided by
outsiders◦simplifying production processes
How to Obtain a Cost How to Obtain a Cost AdvantageAdvantage
Cost DriversCost DriversValue ChainValue Chain
Determine and Determine and controlcontrol
Reconfigure, if Reconfigure, if neededneeded
• Alter production process• Alter production process• Change in automation• Change in automation• New distribution channel• New distribution channel
• Direct sales in place of indirect sales
• Direct sales in place of indirect sales
• New advertising media• New advertising media
• New raw material• New raw material
• Backward integration• Backward integration• Forward integration• Forward integration
• Change location relative to suppliers or buyers
• Change location relative to suppliers or buyers
Product features Performance Mix & variety of
products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training,
motivation
Factors That Drive CostsFactors That Drive Costs
Economies of scale Asset utilization Capacity utilization
pattern• Seasonal, cyclical
Interrelationships Order processing
and distribution Value chain linkages
• Advertising & sales• Logistics &
operations
Major Risks of Cost Leadership Major Risks of Cost Leadership StrategyStrategy
Dramatic technological change could take away your cost advantage
Competitors may learn how to imitate value chain
Focus on efficiency could cause cost leader to overlook changes in customer preferences
Differentiation StrategyDifferentiation Strategy
An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different or unique in ways that are important to them.
◦price for product can exceed what the firm’s target customers are willing to pay
◦Non standardized products◦customers value differentiated features more
than they value low cost
Differentiation StrategyDifferentiation StrategyA product differentiation strategy must
meet theVRIO criteria…Is it Valuable?
Is it Rare?Is it costly to Imitate?
Is the firm Organized to exploit it?
…if it is to create competitive advantage.
Factors That Drive Factors That Drive DifferentiationDifferentiation
Unique product featuresUnique product performanceExceptional services New technologiesQuality of inputsExceptional design skillPrestige and exclusivity
Differentiation StrategyDifferentiation StrategyDifferentiation actions required by this strategy:◦Analysis of the value chain identifies in what
parts of the chain and through which links superior products can be created and customer perception may be changed
◦Shaping perceptions through advertising◦Focus on quality – customer loyalty.◦Capability in R&D.
Differentiation Strategy and Differentiation Strategy and PricePriceElasticity of DemandElasticity of Demand
•Differentiation strategy, properly used, can: reduce price elasticity of demand for the particular product.•This leads to the ability to charge higher prices than competitors, without reducing sales volume.•Leads to above average profits compared to sales.
Major Risks of Differentiation Major Risks of Differentiation StrategyStrategy
Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large
The “me-too” danger. Product features and characteristics can be easily copied. The company needs to be one step ahead of the curve and invest in improving and perfecting the product, otherwise it will quickly become obsolete.
The “demanding consumer” danger. Products have shorter life cycles and consumers gravitate towards what’s new. In order to remain competitive firms need to keep up with the latest trends and technologies, or their target audience will switch to competitive offerings.
Focused Business-Level Focused Business-Level StrategiesStrategies
A focus strategy must exploit a narrow target’s differences from the balance of the industry by:◦isolating a particular buyer group◦isolating a unique segment of a
product line◦concentrating on a particular
geographic market.
Factors That May Drive Factors That May Drive Focused StrategiesFocused Strategies
Large firms may overlook small nichesFirm may lack resources to compete
in the broader marketMay be able to serve a narrow market
segment more effectively than can larger industry-wide competitors
Focus strategy may allow the firm to direct resources to certain value chain activities to build competitive advantage.
Major Risks of Focused Major Risks of Focused StrategiesStrategies
Firm may be “outfocused” by competitors
Large competitor may set its sights on your niche market
Preferences of niche market may change to match those of broad market
Integrated or Hybrid Integrated or Hybrid StrategyStrategy
A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to:◦adapt quickly to environmental changes◦learn new skills and technologies more
quickly◦effectively leverage its core competencies
while competing against its rivals by providing differentiated products at low costs.
Benefits of Integrated Benefits of Integrated StrategyStrategy
Successful firms using this strategy have above-average returns
Firm offers two types of values to customers◦some differentiated features (but
less than a true differentiated firm)◦relatively low cost (but not as low as
the cost leader’s price)
Major Risks of Integrated Major Risks of Integrated StrategyStrategy
An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm)
The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy
Sustainable Sustainable competitive competitive advantageadvantageWhat is meant by sustainable
competitive advantage? ◦Durable◦Valuable to the firm Exploiting weaknesses and neutralizing
threats
◦Unique◦Difficult for competitors to imitate◦Not easily substitutable
Examples of SCAExamples of SCA
For many years, Singapore Airlines were riding on its SCA of having the best in-flight service
As more airlines improved their service and narrowed the gap, SIA sought other competitive advantages among which are ◦ The most modern fleet ◦ Outstanding Service on the Ground ◦ A super entertainment system in its cabins◦ Comfort in its First Class cabins at an unparallel
level
Warren Buffet's Investment CriteriaWarren Buffet was once asked what is the most important thing he looks for when evaluating a company to invest in. Without hesitation, he replied, "Sustainable competitive advantage."
STRATEGIES FOR
◦Market Leaders◦Challengers◦Followers, and◦Nichers
MARKET LEADER`S MARKET LEADER`S STRATEGY: STRATEGY: Defense Defense StrategyStrategyA market leader should generally
adopt a defense strategy5 commonly used defense strategies
◦ Position Defense◦ Flanking Defense◦ Contraction Defense◦ Pre-emptive Defense◦ Counter-Offensive Defense
Defense Strategy (cont’d)Defense Strategy (cont’d)
Position Defense
Use ones existing good position as defence.
One of the most successful of the defense strategies
e.g. High end car manufacturers like Mercedes, Lamborghini, Ferrari use a position defense strategy given their
Defense Strategy (cont’d)Defense Strategy (cont’d)
Flanking Defense: ◦Secondary markets (flanks) are the
weaker areas and prone to being attacked
◦Pay attention to the flanks
Defense Strategy (cont’d)Defense Strategy (cont’d)
Contraction DefenseWithdraw from the most vulnerable
segments and redirect resources to those that are more defendable
By planned contraction or strategic withdrawal
e.g. India’s TATA Group sold its soaps and detergents business units to Unilever in 1993
Defense Strategy (cont’d)Defense Strategy (cont’d)
Pre-emptive DefenseDetect potential attacks and
attack the enemies firstLet it be known how it will retaliateProduct or brand proliferation is a
form of pre-emptive defense e.g. Seiko has over 2,000 models
Defense Strategy (cont’d)Defense Strategy (cont’d)
Counter-Offensive DefenseResponding to competitors’ head-
on attack by identifying the attacker’s weakness and then launch a counter attack
e.g. Toyota launched the Lexus to respond to Mercedes attack
Market Challenger Market Challenger StrategiesStrategies
The market challengers’ strategic objective is to gain market share and to become the leader eventually
How?By attacking the market leaderBy attacking other firms of the
same sizeBy attacking smaller firms
Market Challenger Strategies Market Challenger Strategies (cont’d)(cont’d)
Types of Attack StrategiesFrontal attackFlank attackEncirclement attackBypass attackGuerrilla attack
Frontal Attack Frontal Attack
Seldom work unless◦ The challenger has sufficient fire-power (a
3:1 advantage) and staying power, and◦ The challenger has clear distinctive
advantage(s) e.g. Japanese and Korean car
manufacturers launched frontal attacks in various ASPAC countries through quality, price and low cost
Flank attackFlank attack
Attack the enemy at its weak points or blind spots i.e. its flanks
Ideal for challenger who does not have sufficient resources
e.g. In the 1990s, Yaohan attacked Mitsukoshi and Seibu’s flanks by opening numerous stores in overseas markets
Encirclement attackEncirclement attack
Attack the enemy at many fronts at the same time
Ideal for challenger having superior resources
e.g. Seiko attacked on fashion, features, user preferences and anything that might interest the consumer
Bypass attackBypass attack
By diversifying into unrelated products or markets neglected by the leader
Could overtake the leader by using new technologies
e.g. Pepsi use a bypass attack strategy against Coke in China by locating its bottling plants in the interior provinces
Guerrilla attackGuerrilla attackBy launching small, intermittent
hit-and-run attacks to harass and destabilize the leader
Usually use to precede a stronger attack
e.g. airlines use short promotions to attack the national carriers especially when passenger loads in certain routes are low
Market-Follower Market-Follower StrategiesStrategies
Theodore Levitt in his article, “Innovative Imitation” argued that a product imitation strategy might be just as profitable as a product innovation strategye.g. Product innovation--Sony
Product-imitation--Panasonic
Market-Follower Strategies Market-Follower Strategies (cont’d)(cont’d)Each follower tries to bring distinctive
advantages to its target market--location, services, financing
Four broad follower strategies:◦ Counterfeiter (which is illegal)◦ Cloner e.g. the IBM PC clones◦ Imitator e.g. car manufacturers imitate the
style of one another◦ Adapter e.g. many Japanese firms are excellent
adapters initially before developing into challengers and eventually leaders
Market-Nicher StrategiesMarket-Nicher Strategies
Smaller firms can avoid larger firms by targeting smaller markets or niches that are of little or no interest to the larger firmse.g. Logitech--mouse
Microbrewers--special beers
Market-Nicher Strategies Market-Nicher Strategies (cont’d)(cont’d)
Nichers must create niches, expand the niches and protect them◦ e.g. Nike constantly created new niches--
cycling, walking, hiking, cheerleading, etcWhat is the major risk faced by nichers?
◦ Market niche may be attacked by larger firms once they notice the niches are successful
Multiple NichingMultiple Niching
“A firm should `stick to its niching’ but not necessarily to its niche. That is why multiple niching is preferable to single niching. By developing strength in two or more niches the company increases its chances for survival.”
Philip Kotler
THANK YOU !!THANK YOU !!