Competitive Advantage 2015-16

General Business Model Consistency Competitive Advantage Sustainability Threats for Sustainability Summary

Fundamentals of Strategy - CompetitiveAdvantage

Itai Ater

School of ManagementTel Aviv University

January 5, 2016


Business Model

The firm decides how to compete with its business modelA business model is the underlying logic of the firm, how itoperates and how it creates and captures value.Two fundamental strategic choices in a business model are:value proposition and target market.


Fit and Consistency

To be able to capture value, the business model mustinvolve a coherent set of choices:These choices/activities include: R&D, procurement,manufacturing, sales, HR, culture, etc.The business model needs to tie together these activities ina manner consistent with the value proposition and thetarget market.Simple consistency concerns the fit between the valueproposition and the business choices.For instance, BMW should look for high-quality engineersand we should not expect to buy high-end watches at RamiLevy.


Internal Consistency

Consistency also implies mutual reinforcement choices.By making mutual reinforcement choices of activities, thefirm can more easily reduce its costs or command apremium for its product.Internal consistency or strategic fit makes copying of only asubset of these organizational procedures by rivalsunproductiveThus, strategic fit is essential for long term competitiveadvantage


Trade-offs

Good strategy also implies what NOT to doStrategic fit also implies that some activities do not fit wellwith the business model.

Example 1: BMW (unlikely to sell low quality vehicles).Example 2: McDonalds (offering a wide-range of local manuofferings).Example 3: IKEA (tailored-selling experience).

Good strategy also implies what NOT to do


External ConsistencyPositioning on the Business Landscape

Firms try to maximize the wedge between their costs andtheir customers willingness-to-payFirms that achieve a larger wedge than their peers in theindustry are said to have a competitive advantageStrategic positioning implies occupying the areas (marketsegments) where the wedge is potentially largestStrategic positioning requires consistency between thebusiness model (value proposition, market segment) and theexternal environmente.g. Rami Levy choice to open its stores in low-cost areas,where the large retailers have lower presence


Competitive Advantage

Competitive advantage can be identified by the question:Why should the consumer use my services and not theservices of my competitors?The answers could vary: price, reliability, brand, availability,no-alternative..


Sources of Competitive AdvantagePositional Advantage

Positional advantage is usually based on one of thefollowing:

Market structure - oligopolistic markets (e.g. Aircraftmanufacturers), cheap production (e.g. subsidies, proximityto natural resources).Economies of scale in large markets (e.g. brand, networkeffect).First mover advantage (stronger brand name, installed base,network effects).


Sources of Competitive AdvantageCapability Advantage

Unique core competency.Harder to identify.Examples:

Cheap production due to idiosyncratic efficiency or learningcurve (e.g. Sonys miniaturization).Short-time to market (e.g. Japanese cars in the 1980s).Responsiveness to changes. Agility (Walmart after 9/11).


Core Competencies

Core competencies are capabilities/activities that a firmdoes especially well compared to its competitors:Core competency should be:

Generic valuable across multiple products or markets.Tacit difficult to translate into simple algorithms orprocedures.Impersonal embedded in the organizational routines anddo not depend on particular employees.


Management as Competitive Advantage

Is good management a competitive advantage?Is this advantage sustainable? What the source of thisadvantage?Does the Israeli ecosystem offer a competitive advantage forstart-ups?


Sustainability


Imitation

A new firm offers better value of the same dealBarriers to imitation:

Patents.Network externalities.Strategic fitTime to imitation.Complexity.Reputation.


Substitutes

Substitution reduces the demand for what a firm uniquelyprovides by shifting the demand elsewhereIntroduction of a superior substitute may take the edge off acompetitive advantage (e.g. digital photography, cellphones).Possible reactions for the introduction of new substitutes:

No reaction - e.g. there are doubts regarding the newsubstitute (Better Place).Increase the value (some sort of vertical integration) - e.g.increase entry costs (exclusivity).Move to the advanced technology while keeping corecompetencies (newspapers websites).


Hold-up

A firm may have a significant competitive advantage and atthe same time be susceptible to hold up.Hold-up diverts value to customers, suppliers, orcomplementors who have some bargaining leveragePossible ways to avoid potential hold-up:

Standard practices - vertical integration, long term contracts,etc.Use core competencies to support products that are notsusceptible to hold-up (diversify the product line).


Hold up in the PC industry


Slack

Slack, or waste within the firm, dissipates valuePlush carpets for their own sake are slackBut plush carpets to win customers and recruit talent mightbe wise investments

Slack tends to be worst under certain conditionsForgiving competitive environmentsSettings in which managers have wide discretion overproductive processes


Overview

Strategy is the firms answer to two fundamental questions:1 Where to compete?2 How to compete?

Topics:Introduction.External Analysis.Internal Analysis.Business Models and Competitive Advantage.

GeneralThe Goal

Business ModelConsistencyInternal ConsistencyTrade-offs and Compatible ActivitiesExternal Consistency

Competitive AdvantagePositional AdvantageCapability Advantage

SustainabilityImitation and Compatibility

Threats for SustainabilityImitationSubstitutesHold-upComplex compatibilitySlack

Summary

Competitive Advantage 2015-16

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