Competitive Advantage
Session 3
Jan 21, 2010
Corporate Strategy Components and Issues
Strategy components Key issues
Scope, mission & intent • What business/es should the firm be in?• What customer needs, market segments and / or technologies should be focused on?
• What is the firm’s enduring strategic purpose?Objectives • Performance dimensions?
• Target level of performance to be achieved on each dimension?
• Time frame?Development strategy • How can a firm achieve a desired level of growth over
time?• Can desired growth be attained by expanding the firm’s current businesses? Or diversify into new businesses or product markets to achieve its future growth objectives?
Resource allocation • Firm’s limited financial resources allocation across its businesses to produce highest returns
• Of the alternative strategies that each business might pursue, which will produce the greatest returns for the money invested?
Sources of synergy • What competencies, knowledge and customer based intangibles might be developed and shared across the firm’s businesses?
• What operational resources, facilities or functions might the firm’s businesses share to increase their efficiency?
Competitive AdvantageCompetitive advantage grows out of value a firm is
able to create for its buyers that exceeds the firm's cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation.
Michael Porter, Competitive Advantage, 1985, p.3
A firm is said to have a (sustained) competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy.
(Barney, 1991 )
Core Competencies (Roots of CA)Expertise in a critical functional area or aspect of a
particular business that helps provide a company’s unique competitive advantage or simply put “what a company does best”.
Three tests to identify core competencies:1. Provides potential access to wide variety of
markets2. Makes significant contribution to end user value3. Difficult for competitors to imitate
Core CompetenciesExpertise in a critical functional area or aspect of a
particular business that helps provide a company’s unique competitive advantage or simply put “what a company does best”.
Total Customer SatisfactionCustomer ExpectationsDelivering High Customer Value Value proposition Value-delivery system
Measuring Satisfaction (Tools)
Defining Customer Value and Satisfaction
Competitive AdvantageThe Nature of High Performance Business
Sources of Competitive AdvantageCore CompetenciesValue Chain
Strategy and Coherence
Strategy(Positioning)
Resourcesand
CapabilitiesOrganization
Design
Competitive AdvantageFirms either:
Confront adversity and overcome it through innovation and application orDecline and decay as a result of self-satisfaction and complacency which dulls sensitivities and ability to recognize that change is inevitableExample, clogs to clogs in 4 generations.
Tools for Building Competitive Advantage
Resources are inputs into a firm’s production processes:Tangible Resources Intangible Resources Financial resources Technological
resources Physical resources Innovative
resources Human resources
Reputation Organizational resources
Capabilities are the capacity for a set of resources to perform a task or activity in an integrative manner
Competitive Advantage Core Competencies
Bundle of skills and technologies that enables a company to provide a particular benefit to customers.
(Hamel & Prahalad)
Competitive AdvantageA firm is said to have a (sustained) competitive
advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy.
(Barney, 1991 )
Core Competencies Require VRIS-O
Value – do a firm’s resources and capabilities allow a firm to respond to its environment?Rare – how many rival firms already possess this resource/capability?Inimitable – do firms face a cost disadvantage in obtaining this resource/capability compared to firms that already have it? Non-substitutable – are there strategic alternatives?Organization – is the firm organized to exploit the full potential of its resources/capabilities?
CRITICAL FACTORS FOR COMPETITIVE ADVANTAGE
COMPETITIVE ADVANTAGEVALUE RARENESS
INIMITABILITY
ORGANIZATIONAL CLIMATE
Non-substitutable
Cost Disadvantages of ImitationInimitability is critical for a resource/capability to become a core competenceFirms trying to imitate another firm’s core competence are at a cost disadvantage relative to rivals due to Unique historical conditions Casual ambiguity Social complexity Patents
Building Blocks of Competitive Advantage
Efficiency
Innovation Quality
CustomerResponsivene
ss
Lower Costs
Higher Prices
Competitive Advantage via Efficiency
Manufacturing Econ of scale/LearningFlexible manufacturing
MarketingBuild brand loyalty
Infrastructure Commitment to efficiency
Human Resources Train skills/teamsPerformance incentives
R&D Design for manufacturingProcess innovation
Materials mgt (Supply Chain). JIT etc.
Competitive Advantage via QualityManufacturing Trace defects to source
Input from employees
Marketing Focus on customerCustomer feedback on quality
Infrastructure Measure & commit to quality
Human Resources Train quality (TQM) Quality incentives
R&D Design for manufacturingProcess & product innovation
Materials mgt(supply Chain ). Help suppliers implement
TQM
Competitive Advantage via InnovationManufacturing Design for manufacturing
Inputs on process innovation
Marketing Customer focus for product innovation
Infrastructure Invest in R&D toolsOverall project management
Human Resources Hire talented innovatorsIncentives/opportunities for innovation
R&D Cooperate with other functions in process and product innovation
Materials mgt. No primary responsibility
Competitive Advantage via Customer ResponsivenessManufacturing Customization through flexible mfg
Marketing Know the customerCustomer feedback to functions
Infrastructure Commit to customer responsiveness
Information systems for feedbackHuman Resources “Customer focused” training
Employee incentives and securityR&D Customers in innovation process
Materials mgt. Build responsive logistics systems
First developed by McKinsey and Co. in 1960s as a tool to evaluate competition based on the view that business is a system which links raw materials (supply) with customers customers (demand) and comprising 6 basic elements or subsystems:
The Value Chain
Raw material
Consumer or user
Retail distribution
Production Wholesale distribution
After-sale service
Degree of competition Number of competitors Their profitability Their degree of integration Their cost structure The existence and nature of any barriers to
entry
Where, in the total system, value is added
Analysis of each subsystem
Where is the system’s marketing leverage? Control of a scarce resource e.g. patent,
brand name etc.
The location of economic leverage Fully integrated vs. owning one subsystem.
Analysis of each subsystem
WHO buys and who consumes? Demographics, socioeconomic criteriaWHAT do people buy? Variety, design, quality, performance, priceWHERE do people buy? Purchase channels, direct vs. indirect sellingWHEN do people buy? Seasonal, regular, irregular, associated with another activity HOW do people buy? Involvement (impulse etc.), quantity, sources
Analysis of consumer or user
Where in the system are company’s measurable strengths and weaknesses
Raw material Consumer or user
Retail distribution
Production Wholesale distribution
After-sale service
How does company compare in raw materials?• Do they have advantage in supply?• Degree of integration?
How does company compare in technology?• What is their rate of product, process improvement?• How good is process efficiency?• Advantages in location of facilities?
How does company compare incost and profit?• Raw material costs?• Processing costs? • Profit?• Return on investment?• Access to capital?
How does company compare in channels?• In which channels are company sales concentrated?• Do products reach point of sale faster or more efficiently?
How does company compare in distributors?• Have they more, larger or more effective distributors?• Share of channel’s sales?
How does company compare ineconomics?• Compensation of distributors ?• Distribution costs?• Service costs?
How does company compare in products?• Have they greater variety, better design or quality, lower prices, superior performance?• Share of market?
How does company compare in customers?• Who are core buyers; core customers?• Do these customers buy more frequently in larger quantities or more consistently?• How is company’s product used?• Who are core competitors?
How does company compare inservice?• Doe s company have a service advantage - type, quality, quantity?
Where in the system are company’s measurable strengths and weaknesses
Raw material Consumer or user
Retail distribution
Production Wholesale distribution
After-sale service
How does company compare in pricing?• Do they have price advantage (price/quality relationship)? • Are they price leaders?
How does company compare in economics?• Service costs?• Cost of consumer marketing?
The Value ChainThe concept was later firmly established by Michael Porter as an important diagnostic technique in Competitive Advantage (1985).
Hamel and Prahalad, and Bartlett and Ghoshal further elaborated on value improving activities.
Porter’s Value ChainFirm Infrastructure
Human Resource ManagementTechnology development(Innovation)
Materials ProcurementInboundLogistics
Operations
OutboundLogistics
Marketing& Sales
ServiceM
arginM
argin
Primary Activities
Supp
ort
Acti
viti
es
The Value ChainThe additional insights and work done by Senge on learning Organization led Norman and Remirez to expand the concept into one of value constellation; incorporating those activities which involve the entire organization for value improvement . These are called value enhancement Activities.
Porter’s Value Chain
Firm InfrastructureHuman Resource ManagementTechnology development(Innovation)Materials Procurement
InboundLogistics
Operations
OutboundLogistics
Marketing& Sales
ServiceM
arginM
argin
Primary Activities
Organizational entrepreneurship
Organizational Learning
Cross functional synergy
Core competence building
Organizational creativity, Innovation and imagination
Margin
Margin
Value Enhancement ActivitiesCentral Activities Support Activities
Learning OrganizationAccording to Peter Senge,
In future it is knowledge that will determine competitive performance and the organization with the greatest capacity to learn will dominate the chosen sphere of activity.
Learning OrganizationA learning organization is one skilled in
acquiring, creating, transferring and retaining knowledge – as well as transforming that knowledge into improved performance or innovative products and services
Learning Organization
Explicit
Knowledge
Tacit
Knowledge ManagementAccording to Arthur D. Little,Knowledge management could be through four
integrated dimensions:• Content• Culture• Process
• Define knowledge objectives, organizational core knowledge and describe future knowledge needs
• Identify available knowledge• Save knowledge• Disseminate knowledge• Use knowledge
Knowledge Management• Infrastructure
• Knowledge adapted to company’s needs should be:• Accessible• Flexible• Up-to-date• Strategically relevant information identified
through knowledge audit.
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