2. 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?
3. What is Competitive advantage?
What is Competitive 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
4. The main types of Competitive
The main types of Competitive
Advantage
Advantage
Cost
advantage
Cost
advantage
Differentiation
advantage
Differentiation
advantage
Competitive
advantage
Competitive
advantage
Similar
product
at lower cost
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5. Competitive strategies
Competitive strategies
by
by Porter
Porter
Types of competitive advantage
Types of competitive advantage
Low cost Differentiation
Cost leadershipDifferentiation
Industry-wide
Niche Focus with
low cost
Focus with
differentiation
Market
Market
7. Cost Leadership Strategy
Cost Leadership Strategy
An 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
8. Cost Leadership Strategy
Cost 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
9. How to Obtain a Cost Advantage
How to Obtain a Cost Advantage
Cost Drivers
Cost Drivers
Value Chain
Value Chain
Determine and
Determine and
control
control
Reconfigure, if
Reconfigure, if
needed
needed
• Alter production process
• Change in automation
• New distribution channel
• Direct sales in place
of indirect sales
• New advertising media
• New raw material
• Backward integration
• Forward integration
• Change location
relative to suppliers
or buyers
10. 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 Costs
Factors 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
11. Major Risks of Cost Leadership
Major Risks of Cost Leadership
Strategy
Strategy
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
12. Differentiation Strategy
Differentiation 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
13. Differentiation Strategy
Differentiation Strategy
A product differentiation strategy must meet the
VRIO 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.
14. Factors That Drive Differentiation
Factors That Drive Differentiation
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional design skill
Prestige and exclusivity
15. Differentiation Strategy
Differentiation Strategy
Differentiation 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.
16. Differentiation Strategy and Price
Differentiation Strategy and Price
Elasticity of Demand
Elasticity 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.
17. Major Risks of Differentiation
Major Risks of Differentiation
Strategy
Strategy
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.
18. Focused Business-Level Strategies
Focused Business-Level Strategies
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.
19. Factors That May Drive Focused
Factors That May Drive Focused
Strategies
Strategies
Large firms may overlook small
niches
Firm may lack resources to compete
in the broader market
May 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.
20. Major Risks of Focused Strategies
Major Risks of Focused Strategies
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
21. Integrated or Hybrid Strategy
Integrated or Hybrid Strategy
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.
22. Benefits of Integrated Strategy
Benefits of Integrated Strategy
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)
23. Major Risks of Integrated Strategy
Major Risks of Integrated Strategy
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
25. Examples of SCA
Examples 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
26. Warren Buffet's
Investment Criteria
Warren 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."
28. MARKET LEADER`S
MARKET LEADER`S
STRATEGY:
STRATEGY: Defense Strategy
Defense Strategy
A market leader should generally adopt a
defense strategy
5 commonly used defense strategies
◦ Position Defense
◦ Flanking Defense
◦ Contraction Defense
◦ Pre-emptive Defense
◦ Counter-Offensive Defense
29. 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
30. 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
31. Defense Strategy (cont’d)
Defense Strategy (cont’d)
Contraction Defense
Withdraw 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
32. Defense Strategy (cont’d)
Defense Strategy (cont’d)
Pre-emptive Defense
Detect potential attacks and attack the
enemies first
Let it be known how it will retaliate
Product or brand proliferation is a form of
pre-emptive defense e.g. Seiko has over
2,000 models
33. Defense Strategy (cont’d)
Defense Strategy (cont’d)
Counter-Offensive Defense
Responding 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
34. Market Challenger Strategies
Market Challenger Strategies
The market challengers’ strategic objective
is to gain market share and to become
the leader eventually
How?
By attacking the market leader
By attacking other firms of the same size
By attacking smaller firms
36. 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
37. Flank attack
Flank 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
38. Encirclement attack
Encirclement 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
39. Bypass attack
Bypass 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
40. Guerrilla attack
Guerrilla attack
By 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
41. Market-Follower Strategies
Market-Follower Strategies
Theodore Levitt in his article, “Innovative
Imitation” argued that a product imitation
strategy might be just as profitable as a
product innovation strategy
e.g. Product innovation--Sony
Product-imitation--Panasonic
42. Market-Follower Strategies (cont’d)
Market-Follower Strategies (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
44. Market-Nicher Strategies (cont’d)
Market-Nicher Strategies (cont’d)
Nichers must create niches, expand the niches
and protect them
◦ e.g. Nike constantly created new niches--cycling,
walking, hiking, cheerleading, etc
What is the major risk faced by nichers?
◦ Market niche may be attacked by larger firms once they
notice the niches are successful
45. Multiple Niching
Multiple 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
