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STRATEGIC MANAGEMENT
COMPETITIVE ADVANTAGE AND
STRATEGY DEVELOPMENT
Professor Stefan Markowski
E-mail: [email protected]
WYŻSZA SZKOŁA
INFORMATYKI I ZARZĄDZANIA
z siedzibą w Rzeszowie
COMPETITIVE ADVANTAGE AND
STRATEGY DEVELOPMENT
Content
• The Nature and Sources of Competitive Advantage
• Sustaining Competitive Advantage
• Competitive Advantage in Production and Trade
• Cost- and product-based Competitive Advantage
– Cost-based Competitive Advantage
– Product-based Competitive Advantage
• Competitive Advantage - SWOT Integration
The Nature and Sources of Competitive
Advantage
Commercial strategy is “ the quest for
competitive advantage” (Kenichi Ohmae)
• If profitability is the primary business
objective, then competitive advantage of a
firm over its rivals may be defined as
consistently superior profitability
• Competitive advantage may be achieved as a
result of:
– changes in the external environment (favourable
opportunities); and
The Nature and Sources of Competitive
Advantage
– the firm’s ability to respond to the external
opportunities (strength), that is, its ability to:
• act entrepreneurially to spot and take advantage of
opportunities, especially in turbulent commercial
environments
• access and leverage resources (ie, focus on key
strengths/core competencies and divest itself of noncore activities)
• be agile in deploying resources to take advantage of
opportunities ie, the first mover advantage (flexibility
and agility make firms less dependent on long term
strategic planning)
• innovate rather than imitate (‘new game’ to replace
‘same game’) to form the basis of its own commercial
advantage
Sustaining Competitive Advantage
• To sustain its commercial advantage, the firm
must morph with its environment (continuous
adjustment and adaptation)
• It may also:
• conceal its superior performance/capability from
rivals (imitation is a direct form of competition)
• make it difficult for rivals to identify/diagnose the
sources of its advantage by creating ‘causal
ambiguity’ and by limiting the imitability of its
products and processes (create isolating
mechanisms and uncertain imitability)
• deter competition/entry/contestability by signalling
its willingness to protect its activities and by
creating disincentives to rivalry
Sustaining Competitive Advantage
• pre-empt rival actions through proactive
protectionist measures (predatory pricing, product
differentiation, intellectual property)
• increase the sunk cost of its activity
• use the first mover advantage and continuous
innovation to stay ahead of competition
• Competition provides an incentive to establish
competitive advantage but it also erodes it.
Thus strategic management must focus on
the relationship between the competitive
advantage and the competitive process
• Challenge to appropriate the return on CA
Competitive Advantage in Production
and Trade
• Competitive advantage can only be
developed if competition is ‘imperfect’, ie,
when markets are imperfect or inefficient
(In economics, an efficient market is one in which
prices capture and reveal all available information,
ie, there are no informational asymmetries)
• Operators in trading markets tend to
compete in terms of finance and information
and, thus, competitive advantage is more
transitory
Competitive Advantage in Production
and Trade
TRADING MARKETS
Market Conditions
•
information asymmetries
Competitive Advantage
insider trading
• high transaction costs
low cost
•
observed systematic
behavioural trends (eg, market
swings and demand surges)
superior diagnosis and
foresight, market sentiment
•
imitative behaviour
counter cyclical or
‘contrarian’ strategies
Competitive Advantage in Production
and Trade
• In production markets capabilities may require
longer lead times to be formed
• Competitive advantage may be created and
sustained through:
– setting barriers to entry and imitation (eg,
deterrence, pre-emption, high sunk costs,
professional/trade associations, causal ambiguity)
– setting barriers to innovation (eg, patents,
concealing knowledge/restricting information)
Cost- and Product-based Competitive
Advantage
Generic Strategy
Key Elements
Requirements
Cost leadership
Scale-economies
Scope-economies
Capacity utilisation
No waste
Cost-focused R&D
Technology
Capital
Lean production
Cost control
Cheap inputs
Product
differentiation
Brand loyalty
Advertising
Design & quality
After-sale service
Marketing skills
Design
Innovation
Agility
Superior
production
coordination
Cost-based Competitive Advantage
• Scale or experience economies
• Boston Consulting Group (BCG) Law of
Experience
Ci = Ci-a
i = 1, 2, .. N
where Ci is the unit value added to a standard
product
at level of output i
i is the level of cumulative output
a is the elasticity of cost with regard to output
Cost-based Competitive Advantage
The BCG Experience Curve
Unit Cost
C1
lnCi
t1
Cn
lnC1
tn
lnCn
i
1
n
i
1
n
Cost-based Competitive Advantage
• Sources of Cost Advantage
•
•
•
•
•
•
•
Volume of output (scale)
Output composition (scope)
Output scheduling (schedule)
Input costs
Process- and product-related technological change
Capacity utilisation
Organisational change
Cost-based Competitive Advantage
• Scale
Unit (Average) Cost
A
cost economies
cost diseconomies
constant returns
Minimum Efficient
Scale
Maximum Efficient
Scale
Output A
Cost-based Competitive Advantage
• Scope and Scheduling
Minimum total cost
Minimum total cost
A
C
A+B
B
C+D
D
Cost-based Competitive Advantage
• Technology
Unit Cost
Technology X
Technology Y
Output A
Cost-based Competitive Advantage
• Capacity utilisation
• Input costs
– pecuniary economies
• Organisational change
– X-efficiency
• Generalised economies of scale
Product-based Competitive Advantage
• Differentiation (how?) advantage
– tangible
– intangible
• Total relationship with the customer is
paramount
• Market segmentation (where?)
– niche markets
• Sustained differentiation advantage more
durable than cost advantage
Product-based Competitive Advantage
Scoping Demand for Product Differentiation
– experience (experience products)
– focus groups
– contingent valuation
– multi-dimensional scaling
– conjoint analysis
– hedonic pricing
Product-based Competitive Advantage
Scoping Supply Side of Customer Service/
Product Differentiation
– product internal integrity
– product external integrity
– image differentiation
– agility
– signalling and reputation building
Product-based Competitive Advantage
• Value Adding
– focus on the total customer service and identify
key elements of it
– combine cost and differentiation advantages
– develop value adding chain/web
– identify key components of competitive
advantage at each segment of the chain
– match supply attributes to demand
Product-based Competitive Advantage
Analyzing differentiation: The demand side
 Product attributes and positioning
 Customer perception mapping
 Strength of preference for different attributes
 Hedonic price analysis (combination of attributes)
 Value curve analysis (competitive benchmarking of values offered)
 Social and psychological factors
 Relations of customers’ lifestyle and aspiration with product
 Formulating differentiation strategy
 Product positioning in relation to product attributes
 Target customer groups
 Customer/ product compatibility
 Costs and benefits of differentiation
Product-based Competitive Advantage
Analyzing differentiation: The supply side
 Drivers of uniqueness (Porter)
 Product feature and product performance
 Complementary services
 Intensity of marketing activities
 Technology embodied in design and manufacturing
 The quality of purchase inputs
 Procedures influencing the conduct of each of the activities
 The skills and experience of employees
 Location
 Degree of vertical integration
 With increasing competition, offerings become ‘un-bundled’
Product-based Competitive Advantage
 Product integrity
 Internal and external
 Value embedded in the images with which its products are
associated
 Signaling and reputation
 Search goods vs experience goods
 Depends upon ease of performance assessment
 Brands
 Serves as guarantee
 Incentive to maintain quality and customer satisfaction
 Embodiment of identity and lifestyle
 Cost of differentiation
 Limits potential of economies of scale
 Hampers exploitation of learning economies
Competitive Advantage SWOT Integration
• Sustainable Competitive Advantage (SCA) is
achieved through a combination of capabilities that
allow the focal company to maintain superior
business performance relative to its rivals
• Competitive advantage may be achieved a result of:
– some favourable developments in the external
environment (new opportunities); or
– the firm’s superior ability to leverage its resources
(internal strengths); or
– some combination of the two
Competitive Advantage SWOT Integration
PRESENT ACTIVITY
FUTURE ACTIVITY
BUSINESS STRATEGY
SWOT Analysis
Future External OT
Future Internal SW
WHAT? HOW? WHO?
WHERE? WHEN? WHAT IF?
SCA
Business Vision and
Mission
Specific Objectives
Performance Measures
Competitive Advantage SWOT Integration
 As noted previously, the Resource-based Perspective
explains the creation, sustainment and renewal of
competitive advantage of firms in terms of their
access to and control over superior economic
resources (eg, unique core competencies or superior
dynamic capabilities)
 It stresses that differences in firms’ resource
endowments cause differences in economic
performance and that sustainable competitive
advantage (as demonstrated by the stream of
economic rents) results from the possession of
resources which are scarce (unique) and hard to
imitate or substitute
Competitive Advantage SWOT Integration
 Intangible resources that are often difficult to
understand and imitate (eg, skills, tacit product
and process knowledge, key competences,
entrepreneurship, business reputation) are more
likely to produce sustainable competitive
advantage than tangible physical resource
(knowledge-based SCA)
 However, superior returns may also be achieved
when an ‘average’ firm positions itself in a well
performing market/market segment/industry
 Conversely, a firm may perform well in a declining
market/industry (eg, a supplier of spare parts for
vintage cars)
Competitive Advantage SWOT Integration
 To benefit from the firm’s sustained competitive
advantage (to appropriate above average returns),
shareholders must acquire non-equity resources at
prices below their discounted net present values
(otherwise economic rents are fully captured by
non-equity resource-suppliers)
 Also, there need to be some constraints on
resource mobility between firms to prevent ‘holdup’ problems, ie, where some or all of the economic
rent may be appropriated by those resource owners
who are relatively footloose and free to take their
unique resources with them when they leave the
firm
Competitive Advantage SWOT Integration
• Ideally, the best position to achieve is to be a strong
business in a well performing business environment,
eg, to be a market leader in a fast growing, high
value market)
Strengths
Weaknesses
Good
Reasonable
Reasonable
Poor
Competitive Advantage SWOT Integration
Broad business strategy (What? Where? When?)
Cost and/or product competitiveness
Present markets
Market
penetration
Product
expansion
New markets
Market
expansion
Product and
market
expansion
Competitive Advantage SWOT Integration
Business Strategy
Functional Strategies (Who? What? How? When?)
Business Support Strategies: HRM, IT, Finance, Administration
Inbound and Outbound Logistics Strategies
Input
Markets
Inputs
Procurement
Strategy
Design, R&D
Operations
Strategies
Outputs
Customer Service,
Marketing & Sales,
Distribution and
After-sale Support
Strategies
Output
Markets
SESSION FIVE
THE NATURE AND SOURCES
OF COMPETITIVE ADVANTAGE
Reading
Grant, chs 7-9
Pearce& Robinson, ch. 7-8
Session 4a – Supplementary Notes
Questions for Discussion
• Select an industry of your choice. What
forces drive competition in that industry?
• How does the SWOT analysis fit into the
strategic management process?
• What key capabilities does a firm need to
develop to pursue a product-differentiation
strategy? Give examples.
There was a Midwestern phone company that was
going to hire a telephone pole installer but the boss
had to choose between two contractors, Mike and
Stan. So the boss, who studied Strat. Mgt, met with
both contractors and said: "Here's what I'll do. To
determine your competitive advantage, each one of
you will be installing poles out on the new road for a
day. The guy that puts the most phone poles in has a
competitive advantage and gets the job."
Both installers headed right out. At end of the shift,
Mike came back and the boss asked him how many
poles he had installed. He said that it was tough
going, but he'd put in twelve. Forty-five minutes
later, Stan, the other contractor came back and he
was totally exhausted. The boss asked, "Well, how
many poles did you install?” Stan wiped his brow
and sighed, ”I got three in.” The boss gasped,
“Three? The other guy put in twelve!" "Yeah," said
Stan, "but you should see how much he left stickin'
out of the ground.”
(Anonymous)