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8/3/2019 Competitive Advantage 1
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CompetitiveCompetitive Advantage 1Advantage 1
Prof. Rushen Chahal
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Learning OutcomesLearning Outcomes
y Review of Porters 5 Forces Model and its
link to Porters generic strategy
y Describe and evaluate Porters generic
strategy
y Resource-based framework for analysis
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Michael PorterMichael Porter
An industryAn industry
s profit potential iss profit potential is
largelydetermined by thelargelydetermined by the
intensity of competitive rivalryintensity of competitive rivalry
within that industry.within that industry.
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Porters Five ForcesPorters Five Forces
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Advantage of the ModelAdvantage of the Model
y According to Porter, businesses can use
the model to identify how to position
itself to take advantage ofopportunities
and overcome threats
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Threat of New EntrantsThreat of New Entrants
Barriers to
Entry
Barriers to
Entry
Expected RetaliationExpected Retaliation
Government PolicyGovernment Policy
Economies of ScaleEconomies of Scale
Product DifferentiationProduct Differentiation
Capital RequirementsCapital Requirements
Switching CostsSwitching Costs
Access to Distribution ChannelsAccess to Distribution Channels
Cost Disadvantages IndependentCost Disadvantages Independent
of Scaleof Scale
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Bargaining Power of SuppliersBargaining Power of Suppliers
Suppliers exert power
in the industry by:
Suppliers exert power
in the industry by:
* Threatening to raise* Threatening to raise
prices or to reduce qualityprices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:
Supplier industry is dominated by aSupplier industry is dominated by afew firmsfew firms
Suppliers products have few substitutesSuppliers products have few substitutes
Buyer is not an important customer toBuyer is not an important customer tosuppliersupplier
Suppliers product is an importantSuppliers product is an importantinput to buyers productinput to buyers product
Suppliers products are differentiatedSuppliers products are differentiated
Suppliers products have highSuppliers products have highswitching costsswitching costs
Supplier poses credible threat ofSupplier poses credible threat of
forward integrationforward integration
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Bargaining Power of BuyersBargaining Power of Buyers
Buyers compete
with the supplying
industry by:
Buyers compete
with the supplying
industry by:
* Bargaining down prices* Bargaining down prices
* Forcinghigherquality* Forcinghigherquality
* Playing firms off of* Playing firms off of
each othereach other
Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:
Buyers are concentrated or purchasesBuyers are concentrated or purchases
are large relative to sellers salesare large relative to sellers sales
Purchase accounts for a significantPurchase accounts for a significant
fraction of suppliers salesfraction of suppliers sales
Products are undifferentiatedProducts are undifferentiated
Buyers face few switching costsBuyers face few switching costs
Buyers industry earns low profitsBuyers industry earns low profitsBuyer presents a credible threat ofBuyer presents a credible threat of
backward integrationbackward integration
Product unimportant to qualityProduct unimportant to quality
Buyer has full informationBuyer has full information
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Threat of Substitute ProductsThreat of Substitute Products
Products
with similar
functionlimit the
prices firms
can charge
Products
with similar
functionlimit the
prices firms
can charge
Keys to evaluate substitute products:Keys to evaluate substitute products:
Products with improvingProducts with improving
price/performance tradeoffsprice/performance tradeoffs
relative to present industryrelative to present industryproductsproducts
Example:Example:
Electronic security systems inElectronic security systems in
place of security guardsplace of security guards
Fax machines in place ofFax machines in place of
overnight mail deliveryovernight mail delivery
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Threat of
Substitute
Products
Threat of
Substitute
Products
Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Rivalry Among
Competing Firms
in Industry
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Bargaining
Power of
Suppliers
Porters Five Forces
Model of Competition
Porters Five Forces
Model of Competition
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Rivalry Among Existing CompetitorsRivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:
Jockeying for strategic positionJockeying for strategic position
Using price competitionUsing price competition
Staging advertising battlesStaging advertising battles
Making new product introductionsMaking new product introductions
Increasing consumer warranties or serviceIncreasing consumer warranties or service
Occurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, butAdvertising battles may increase total industry demand, but
may be costly to smaller competitorsmay be costly to smaller competitors
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Porters 5 Forces and ProfitPorters 5 Forces and Profit
ForceForce Profitability willProfitability willbe higher if:be higher if:
Profitability willProfitability willbe lower if:be lower if:
Bargaining powerBargaining power
of suppliersof suppliers
Weak suppliersWeak suppliers Strong suppliersStrong suppliers
Bargaining powerBargaining power
of buyersof buyers
Weak buyersWeak buyers Strong buyersStrong buyers
Threat of newThreat of new
entrantsentrants
High entryHigh entry
barriersbarriers
Low entry barriersLow entry barriers
Threat ofThreat of
substitutessubstitutes
Few possibleFew possible
substitutessubstitutes
Many possibleMany possible
substitutessubstitutes
CompetitiveCompetitive
rivalryrivalry
Little rivalryLittle rivalry Intense rivalryIntense rivalry
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SummarySummaryAs rivalry among competingAs rivalry among competing
firmsfirms intensifiesintensifies, industry, industryprofitsprofits declinedecline, in some, in some
cases to the point where ancases to the point where an
industry becomesindustry becomes inherentlyinherently
unattractiveunattractive..
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Competitive Positioning School ofCompetitive Positioning School of
Thought (Outside In)Thought (Outside In)
y Based on Porters 5 Forces, generic strategy, and
value chain frameworks
In which industry should the organization compete?(Use Porters 5 Forces Model)
Which generic strategy to use? (Use Porters Generic
Strategy Framework)
How to configure the value chain to support the strategy?
(Use the value chain analysis framework)
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Generic StrategyGeneric Strategy
y According to Porter, competitive
advantage, and thus higher profits will
result either from:
y Differentiation of products (distinctive,
more product features) and selling them
at a premium price, OR
y Producing products at a lower pricethan competitors
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Generic Strategy (cont.)Generic Strategy (cont.)
y In association with choosingdifferentiation or cost leadership, theorganization must decide between:
y Targeting thewhole market with thechosen strategy, OR
y Targeting a specific segment of themarket
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Generic Strategy FrameworkGeneric Strategy Framework
Cost leadershipCost leadership DifferentiationDifferentiation
Cost focusCost focus DifferentiationDifferentiationfocusfocus
StrategicScope
Broad
Narrow
Low cost Differentiation
NOTE: If 2 or more competitors choose the same box, competition will increase
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Generic Strategy FrameworkGeneric Strategy Framework
Cost leadershipCost leadership DifferentiationDifferentiation
Cost focusCost focus DifferentiationDifferentiationfocusfocus
StrategicScope
Broad
Narrow
Low cost Differentiation
NOTE: If 2 or more competitors choose the same box, competition will increase
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Cost Leadership Strategy:Cost Leadership Strategy:
AdvantagesAdvantagesy Higher profits resulting from charging prices
below that of competitors, because unit costsare lower
y Increase market share and sales by reducingthe price below that charged by competitors(assuming price elasticity of demand)
y Ability to enter new markets by charging lowerprices
y Is a barrier to entry for competitors trying toenter the industry
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Cost Leadership and the ValueCost Leadership and the Value
ChainChainy Analysis of the value chain identifies
where cost savings can be made in the
various parts and links
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Cost Leadership and the ValueCost Leadership and the Value
ChainChainy With a cost leadership strategy, the value
chain must be organized to:
Reduce per unit costs by copying, rather than original
design, using cheaper resources, producing basicproducts, reducing labor costs and increasing labor
productivity
Achieve economies of scale by high-volume sales
Using high-volume purchasing to get discounts
Locating where costs are low
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Cost Leadership and Price ElasticityCost Leadership and Price Elasticity
of Demandof Demandy Cost leadership strategy is best used in a
market or segment when demand is price
elastic, OR
y When charging a similar price to
competitors at the same time as
increasing advertising to increase sales
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Generic Strategy FrameworkGeneric Strategy Framework
Cost leadershipCost leadership DifferentiationDifferentiation
Cost focusCost focus DifferentiationDifferentiationfocusfocus
StrategicScope
Broad
Narrow
Low cost Differentiation
NOTE: If 2 or more competitors choose the same box, competition will increase
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Differentiation Strategy: AdvantagesDifferentiation Strategy: Advantages
y Products will get a premium price
y Demand for products is less price elastic
than that for competitors products
y It is an additional barrier to entry for
competitors to enter the industry
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Differentiation Strategy and theDifferentiation Strategy and the
Value ChainValue Chainy 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 bechanged
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Differentiation Strategy and theDifferentiation Strategy and the
Value ChainValue Chainy With differentiation strategy, the value chain
must be organized to:
y Create products that are superior tocompetitors products in design, technology,performance, etc.
y Offer superior after-sales service
y Have superior distribution channels
y
Create a strong brand namey Create distinctive or superior packaging
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Differentiation Strategy and PriceDifferentiation Strategy and Price
Elasticity of DemandElasticity of Demand
y Differentiation strategy, properly used, can:
y reduce price elasticity of demand for the
product
y lead to the ability to charge higher prices thancompetitors, without reducing sales volume
y lead to above average profits compared to sales
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Generic Strategy: Focus StrategyGeneric Strategy: Focus Strategy
y Focus strategy targets a segment of the
product market, rather than the whole market
or many markets
ySegment is determined by the bases forsegmentation, i.e., geographic, psychographic,
demographic, behavioral characteristics
y Within the segment, eithercost leadership or
differentiation strategy is used
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Generic Strategy FrameworkGeneric Strategy Framework
Cost leadershipCost leadership DifferentiationDifferentiation
Cost focusCost focus DifferentiationDifferentiationfocusfocus
S
trategicScope
Broad
Narrow
Low cost Differentiation
NOTE: If 2 or more competitors choose the same box, competition will increase
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Focus Strategy: AdvantagesFocus Strategy: Advantages
y Lower investment costs required
compared to a strategy aimed at the
entire market or many markets
y It allows for specialization and greater
knowledge
y It makes entry into a new market more
simple
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Generic Strategy FrameworkGeneric Strategy Framework
Cost leadershipCost leadership
Ryan Air,Ryan Air,WalmartWalmart
DifferentiationDifferentiation
McDonalds,McDonalds,BMWBMW
Cost focusCost focus DifferentiationDifferentiationfocusfocus
Ferrari, RollsFerrari, Rolls
RoyceRoyce
S
trategicScope
Broad
Narrow
Low cost Differentiation
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Hybrid StrategyHybrid Strategy
y Based on the idea that a strategy can be
successful by using a mix of
differentiation, price and cost leadership
y Example: Toyota
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Alternative to 5 Forces Analysis:Alternative to 5 Forces Analysis:
ResourceResource--based Frameworkbased Framework
y Resource-based framework is designed to
compensate for disadvantages in
traditional models (like Porters 5 Forces)
y Emphasizes the importance of core
competence in achieving competitive
advantage
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ResourceResource--based Frameworkbased Framework
y Complicated and comprehensive
analysis
y Analysis of 5 inter-related areas:
Organization
Industry
Product markets
Resource markets Other industries
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ResourceResource--based Frameworkbased Framework
ResourceMarkets
ProductMarkets
Organization
CompanyIndustry
CompetenceRelatedIndustry
OrganizationsProducts
New Markets
Substitutes
SupplierPower
Competitive Rivalry
Threat of new entrants
BuyerPower
Threat ofSubstitutes
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ResourceResource--based Framework:based Framework:
OrganizationOrganization
y Focuses on competences, corecompetences, resources and value chain(as we discussed in detail in Chapter 2)
y This part of the analysis includes ananalysis of:
Resources
Organizational competences, core
competences and activities Value chain
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ResourceResource--based Framework: Industrybased Framework: Industry
y Focuses on analysis of competitors:
Skills and competences
Configuration of value-adding activities
Technology
Number and size
Performance (focus on financial performance)
Ease of entry and exit (barriers)
Strategic groupings
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A Note on Strategic GroupingsA Note on Strategic Groupings
y Strategic groups the group of competitorsrepresenting an organizations closestcompetitors
y Example: a group of branded clothes including
Polo (Ralph Lauren), Tommy Hilfiger, and Izod(Lacoste), among others, may be a strategicgroup, even though there are other lowerquality brands that are technically competitors
y Example 2: Rolex, Tag Heuer, Tissot may be part
of a strategic group that does not includeSwatch, Timex, Seiko, even though they are allwatchmakers
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ResourceResource--based Framework: Productbased Framework: Product
MarketsMarketsy Analysis is focused on:
Customer needs and satisfaction
Unmet customer needs
Market segments and profitability
Number of competitors to the market and relativemarket share
Number of customers and their purchasing power
Access to distribution channels
Ease of entry Potential for competence leveraging
Need for new competence building
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ProductProduct--based Framework: Resourcebased Framework: Resource
MarketsMarketsy Resource markets: where organizations obtain
finance, human resources, human resources,physical resources, technological resources
y Analysis focuses on:
Resource requirements
Number of actual and potential suppliers
Size of suppliers
Potential collaboration with suppliers (cooperation)
Access by competitors to suppliers
Nature of the resource and availability of substitutes
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ResourceResource--based Framework:based Framework:
CompetenceCompetence--related Industriesrelated Industries
y Focuses on analysis ofother industrieswith similar competences and which mayproduce products that can be substitutes
of the organizations productsy Analysis is useful to identify:
Potential threats
Other industries in which the organization
may be able to leverage their competences New markets