Competitive Advantage

Session 3

Jan 21, 2010

Corporate Strategy Components and Issues

Strategy components Key issues

Scope, mission & intent • What business/es should the firm be in?• What customer needs, market segments and / or technologies should be focused on?

• What is the firm’s enduring strategic purpose?Objectives • Performance dimensions?

• Target level of performance to be achieved on each dimension?

• Time frame?Development strategy • How can a firm achieve a desired level of growth over

time?• Can desired growth be attained by expanding the firm’s current businesses? Or diversify into new businesses or product markets to achieve its future growth objectives?

Resource allocation • Firm’s limited financial resources allocation across its businesses to produce highest returns

• Of the alternative strategies that each business might pursue, which will produce the greatest returns for the money invested?

Sources of synergy • What competencies, knowledge and customer based intangibles might be developed and shared across the firm’s businesses?

• What operational resources, facilities or functions might the firm’s businesses share to increase their efficiency?

Competitive AdvantageCompetitive advantage grows out of value a firm is

able to create for its buyers that exceeds the firm's cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation.

Michael Porter, Competitive Advantage, 1985, p.3

A firm is said to have a (sustained) competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy.

(Barney, 1991 )

Core Competencies (Roots of CA)Expertise in a critical functional area or aspect of a

particular business that helps provide a company’s unique competitive advantage or simply put “what a company does best”.

Three tests to identify core competencies:1. Provides potential access to wide variety of

markets2. Makes significant contribution to end user value3. Difficult for competitors to imitate

Core CompetenciesExpertise in a critical functional area or aspect of a

particular business that helps provide a company’s unique competitive advantage or simply put “what a company does best”.

Total Customer SatisfactionCustomer ExpectationsDelivering High Customer Value Value proposition Value-delivery system

Measuring Satisfaction (Tools)

Defining Customer Value and Satisfaction

Competitive AdvantageThe Nature of High Performance Business

Sources of Competitive AdvantageCore CompetenciesValue Chain

Strategy and Coherence

Strategy(Positioning)

Resourcesand

CapabilitiesOrganization

Design

Competitive AdvantageFirms either:

Confront adversity and overcome it through innovation and application orDecline and decay as a result of self-satisfaction and complacency which dulls sensitivities and ability to recognize that change is inevitableExample, clogs to clogs in 4 generations.

Tools for Building Competitive Advantage

Resources are inputs into a firm’s production processes:Tangible Resources Intangible Resources Financial resources Technological

resources Physical resources Innovative

resources Human resources

Reputation Organizational resources

Capabilities are the capacity for a set of resources to perform a task or activity in an integrative manner

Competitive Advantage Core Competencies

Bundle of skills and technologies that enables a company to provide a particular benefit to customers.

(Hamel & Prahalad)

Competitive AdvantageA firm is said to have a (sustained) competitive

advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy.

(Barney, 1991 )

Core Competencies Require VRIS-O

Value – do a firm’s resources and capabilities allow a firm to respond to its environment?Rare – how many rival firms already possess this resource/capability?Inimitable – do firms face a cost disadvantage in obtaining this resource/capability compared to firms that already have it? Non-substitutable – are there strategic alternatives?Organization – is the firm organized to exploit the full potential of its resources/capabilities?

CRITICAL FACTORS FOR COMPETITIVE ADVANTAGE

COMPETITIVE ADVANTAGEVALUE RARENESS

INIMITABILITY

ORGANIZATIONAL CLIMATE

Non-substitutable

Cost Disadvantages of ImitationInimitability is critical for a resource/capability to become a core competenceFirms trying to imitate another firm’s core competence are at a cost disadvantage relative to rivals due to Unique historical conditions Casual ambiguity Social complexity Patents

Building Blocks of Competitive Advantage

Efficiency

Innovation Quality

CustomerResponsivene

ss

Lower Costs

Higher Prices

Competitive Advantage via Efficiency

Manufacturing Econ of scale/LearningFlexible manufacturing

MarketingBuild brand loyalty

Infrastructure Commitment to efficiency

Human Resources Train skills/teamsPerformance incentives

R&D Design for manufacturingProcess innovation

Materials mgt (Supply Chain). JIT etc.

Competitive Advantage via QualityManufacturing Trace defects to source

Input from employees

Marketing Focus on customerCustomer feedback on quality

Infrastructure Measure & commit to quality

Human Resources Train quality (TQM) Quality incentives

R&D Design for manufacturingProcess & product innovation

Materials mgt(supply Chain ). Help suppliers implement

TQM

Competitive Advantage via InnovationManufacturing Design for manufacturing

Inputs on process innovation

Marketing Customer focus for product innovation

Infrastructure Invest in R&D toolsOverall project management

Human Resources Hire talented innovatorsIncentives/opportunities for innovation

R&D Cooperate with other functions in process and product innovation

Materials mgt. No primary responsibility

Competitive Advantage via Customer ResponsivenessManufacturing Customization through flexible mfg

Marketing Know the customerCustomer feedback to functions

Infrastructure Commit to customer responsiveness

Information systems for feedbackHuman Resources “Customer focused” training

Employee incentives and securityR&D Customers in innovation process

Materials mgt. Build responsive logistics systems

First developed by McKinsey and Co. in 1960s as a tool to evaluate competition based on the view that business is a system which links raw materials (supply) with customers customers (demand) and comprising 6 basic elements or subsystems:

The Value Chain

Raw material

Consumer or user

Retail distribution

Production Wholesale distribution

After-sale service

Degree of competition Number of competitors Their profitability Their degree of integration Their cost structure The existence and nature of any barriers to

entry

Where, in the total system, value is added

Analysis of each subsystem

Where is the system’s marketing leverage? Control of a scarce resource e.g. patent,

brand name etc.

The location of economic leverage Fully integrated vs. owning one subsystem.

Analysis of each subsystem

WHO buys and who consumes? Demographics, socioeconomic criteriaWHAT do people buy? Variety, design, quality, performance, priceWHERE do people buy? Purchase channels, direct vs. indirect sellingWHEN do people buy? Seasonal, regular, irregular, associated with another activity HOW do people buy? Involvement (impulse etc.), quantity, sources

Analysis of consumer or user

Where in the system are company’s measurable strengths and weaknesses

Raw material Consumer or user

Retail distribution

Production Wholesale distribution

After-sale service

How does company compare in raw materials?• Do they have advantage in supply?• Degree of integration?

How does company compare in technology?• What is their rate of product, process improvement?• How good is process efficiency?• Advantages in location of facilities?

How does company compare incost and profit?• Raw material costs?• Processing costs? • Profit?• Return on investment?• Access to capital?

How does company compare in channels?• In which channels are company sales concentrated?• Do products reach point of sale faster or more efficiently?

How does company compare in distributors?• Have they more, larger or more effective distributors?• Share of channel’s sales?

How does company compare ineconomics?• Compensation of distributors ?• Distribution costs?• Service costs?

How does company compare in products?• Have they greater variety, better design or quality, lower prices, superior performance?• Share of market?

How does company compare in customers?• Who are core buyers; core customers?• Do these customers buy more frequently in larger quantities or more consistently?• How is company’s product used?• Who are core competitors?

How does company compare inservice?• Doe s company have a service advantage - type, quality, quantity?

Where in the system are company’s measurable strengths and weaknesses

Raw material Consumer or user

Retail distribution

Production Wholesale distribution

After-sale service

How does company compare in pricing?• Do they have price advantage (price/quality relationship)? • Are they price leaders?

How does company compare in economics?• Service costs?• Cost of consumer marketing?

The Value ChainThe concept was later firmly established by Michael Porter as an important diagnostic technique in Competitive Advantage (1985).

Hamel and Prahalad, and Bartlett and Ghoshal further elaborated on value improving activities.

Porter’s Value ChainFirm Infrastructure

Human Resource ManagementTechnology development(Innovation)

Materials ProcurementInboundLogistics

Operations

OutboundLogistics

Marketing& Sales

ServiceM

arginM

argin

Primary Activities

Supp

ort

Acti

viti

es

The Value ChainThe additional insights and work done by Senge on learning Organization led Norman and Remirez to expand the concept into one of value constellation; incorporating those activities which involve the entire organization for value improvement . These are called value enhancement Activities.

Porter’s Value Chain

Firm InfrastructureHuman Resource ManagementTechnology development(Innovation)Materials Procurement

InboundLogistics

Operations

OutboundLogistics

Marketing& Sales

ServiceM

arginM

argin

Primary Activities

Organizational entrepreneurship

Organizational Learning

Cross functional synergy

Core competence building

Organizational creativity, Innovation and imagination

Margin

Margin

Value Enhancement ActivitiesCentral Activities Support Activities

Learning OrganizationAccording to Peter Senge,

In future it is knowledge that will determine competitive performance and the organization with the greatest capacity to learn will dominate the chosen sphere of activity.

Learning OrganizationA learning organization is one skilled in

acquiring, creating, transferring and retaining knowledge – as well as transforming that knowledge into improved performance or innovative products and services

Learning Organization

Explicit

Knowledge

Tacit

Knowledge ManagementAccording to Arthur D. Little,Knowledge management could be through four

integrated dimensions:• Content• Culture• Process

• Define knowledge objectives, organizational core knowledge and describe future knowledge needs

• Identify available knowledge• Save knowledge• Disseminate knowledge• Use knowledge

Knowledge Management• Infrastructure

• Knowledge adapted to company’s needs should be:• Accessible• Flexible• Up-to-date• Strategically relevant information identified

through knowledge audit.