Download The Nature and Sources of Competitive Advantage

The Nature and Sources of
Competitive Advantage
OUTLINE
• The emergence of competitive advantage
• Sustaining competitive advantage
• Competitive advantage in different market
settings
• Types of competitive advantage: cost and
differentiation
The Emergence of Competitive Advantage
How does competitive
advantage emerge?
External sources of
change e.g.:
•Changing customer demand
•Changing prices
•Technological change
Resource heterogeneity
among firms means
differential impact
Some firms faster
and more effective
in exploiting change
Internal sources
of change
Some firms
have greater creative
and innovative
capability
Competitive Advantage from InternallyGenerated Change: Strategic Innovation
Characteristics of innovatory strategies:
– Associated with new entrants to an industry (e.g. Nucor in
steel, IKEA in furniture, Home Depot in DIY, Dell in PCs, American
Apparel in casual clothing)
– Reconcile conflicting performance goals (e.g. Toyota’s lean
production system combines low cost, high quality, and flexibility.
Retailers Primark and Target combine low cost with stylishness.)
– Reconfiguring the value chain e.g.--• Nike’s system for manufacturing and distributing shoes totally
different from traditional shoe manufacturer
• Southwest Airlines simplification of the normal airline value chain
• Zara’s system of design, manufacture, and distribution
Sustaining Competitive Advantage Against Imitation
REQUIREMENT FOR IMITATION
Identification
Incentives for imitation
ISOLATING MECHANISM
- Obscure superior performance
- Deterrence--signal aggressive
intentions to imitators
- Pre-emption--exploit all available
investment opportunities
Diagnosis
- Rely upon multiple sources of
competitive advantage to create
“causal ambiguity”
Resource acquisition
- Base competitive advantage upon
resources and capabilities that are
immobile and difficult to replicate
Competitive Advantage in Different Industry Settings:
Trading Markets and Production Markets
MARKET
TYPE
SOURCE OF
IMPERFECTION OF
COMPETITION
TRADING
MARKETS
• None (efficient markets)
• Imperfect information
• Transactions costs
• Systematic behavioral trends
• Overshooting
• Barriers to imitation
PRODUCTION
MARKETS
• Barriers to innovation
OPPORTUNITY
FOR COMPETITIVE
ADVANTAGE
None
Insider trading
Cost minimization
Superior diagnosis
(e.g. chart analysis)
Contrarianism
Identify potential barriers to
imitation (e.g. deterrence,
preemption, causal ambiguity,
resource immobility, etc.) &
base strategy upon them.
Difficult to influence or
exploit.
Sources of Competitive Advantage
COST
ADVANTAGE
COMPETITIVE
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
Porter’s Generic Strategies
SOURCE OF COMPETITIVE ADVANTAGE
Low cost
Differentiation
Industry-wide
COMPETITIVE
COST
DIFFERENTIATION
LEADERSHIP
SCOPE
Single Segment
FOCUS
Features of Cost Leadership and
Differentiation Strategies
Generic strategy
Key strategy elements
Resource & organizational
requirements
COST
LEADERSHIP
Scale-efficient plants.
Design for manufacture.
Control of overheads &
R&D. Avoidance of
marginal customer
accounts.
Access to capital. Process
engineering skills. Frequent
reports. Tight cost control.
Specialization of jobs and
functions. Incentives for
quantitative targets.
DIFFERENTIATION
Emphasis on branding
and brand advertising,
design, service, and
quality.
Marketing. Product
engineering. Creativity.
Product R&D
Qualitative measurement
and incentives. Strong
cross-functional
coordination.