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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)