Competitive Advantage: Concepts and Tools

Profitability Differences Between Industries

Profitability Differences within Industries

Calibrating Profit Drivers Industry Positioning Residual Corporate Source: Richard P. Rumelt, “How Much Does Industry Matter?,” Strategic Management Journal, 1991; 12:167-185 19 6

What makes an advantage sustainable? DeHavilland EMI Xerox Ampex RC Cola Bowmar Boeing GE IBM Matsushita Coca Cola Texas Instruments

Resources and Profits

VRIO Framework Is a resource or capability . . .

The Question of Value Do a firm’s resources and capabilities enable the firm to respond to environmental threats or opportunities?

Question of Rareness How many competing firms already possess particular valuable resources and capabilities? e.g. Telephone systems and IT hardware

Question of Imitability Do firms without a resource or capability face a disadvantage in obtaining it compared to firms that already possess it?

The Challenge of Imitation Cannot be imitated Patents Unique locations Difficult to imitate Brand loyalty Employee commitment Reputation Can be imitated - but may not be Capacity pre-emption Economies of scale Easy to imitate Cash Commodities

Sources of Disadvantage in Imitating Resources 1. Unique Historical Conditions (Caterpillar, Coca Cola) 1st mover advantages path dependence 2. Causal Ambiguity taken for granted multiple hypotheses complexity (interactions) 3. Social Complexity

Knowledge or Know-how as a Competitive Advantage Tacit vs. Explicit (or codified) knowledge Tacit knowledge is more difficult to imitate but also more difficult to replicate Collective vs. individual knowledge Knowledge embedded in teams and firms is more difficult to imitate

Question of Organization Is a firm organized to exploit the full competitive potential of its resources and capabilities? Complementary capabilities (EMI, Xerox)

Evolution of Honda: A Strategy Based Upon Resources and Capabilities 50cc 2-cycle engine Related products: ground tillers, marine engines, generators, pumps, chainsaws Founding of Honda motor company 405cc motor cycle 4 cycle engines 1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 First product: clip-on engine for bicycles The 50cc super -cub N360 mini car 1000cc Goldwing touring motor cycle Acura Car division 2 2

Canon: Products as Outgrowths of Technical Capabilities Precision Fine Micro- Precision Fine Micro- Mechanics Optics electronics Mechanics Optics electronics Basic camera XXXXX XXXXX Battery PPC XXXXX XXXXX XXXXX Compact fashion camera XXXXX XXXXX Color copier XXXXX XXXXX XXXXX Electronic camera XXXXX XXXXX Laser copier XXXXX XXXXX XXXXX EOS autofocus camera XXXXX XXXXX XXXXX Color laser copier XXXXX XXXXX XXXXX Video still camera XXXXX XXXXX XXXXX NAVI XXXXX XXXXX XXXXX Laser beam printer XXXXX XXXXX XXXXX Still video system XXXXX XXXXX XXXXX Color video printer XXXXX XXXXX Laser imager XXXXX XXXXX XXXXX Bubble jet printer XXXXX XXXXX Cell analyzer XXXXX XXXXX XXXXX Basic fax XXXXX XXXXX Mask aligners XXXXX XXXXX Laser fax XXXXX XXXXX Stepper Aligners XXXXX XXXXX Calculator XXXXX Excimer laser aligners XXXXX XXXXX XXXXX Plain-paper copier XXXXX XXXXX XXXXX 4 4

Types of Competitive Advantage

Porter’s Generic Strategies FOCUS OVERALL COST LEADERSHIP DIFFERENTIATION Low Cost Position Uniqueness Perceived by the Customer Industry wide Particular Segment only STRATEGIC ADVANTAGE STRATEGIC TARGET Source: Michael Porter, Competitive Strategy, 1980

Cost Leadership Strategy Deliver a GOOD product or service at the lowest possible cost Open a significant and sustainable cost gap over all competitors Create advantage through superior management of key cost drivers Translates into above-average profits with industry-average prices BUT Cost leaders must maintain parity or proximity in satisfying buyer needs Cost leadership often requires trade-offs with differentiation

What drives your costs? Integration Timing Policies Scale Learning Location Institutional factors Scale Learning Pattern of capacity utilization Linkages Interrelationships Source: Michael E. Porter, Competitive Advantage (New York: Free Press, 1985)

Common Pitfalls in Cost Leadership Misunderstanding of actual costs False perception of cost drivers Focus on manufacturing Failure to exploit linkages Inadequate proximity to differentiators Ignoring competitor behavior Poor implementation Acting incrementally No cost management program

The Differentiation Strategy Select one or more needs that are valued by buyer Achieve and sustain superior performance by meeting these needs uniquely Selectively add costs if necessary to do so Successful differentiation leads to premium prices Differentiators must pick cost-effective forms of differentiation Differentiation leads to above-average profitability provided the firm maintains cost parity or proximity to competitors

Common Pitfalls in Differentiation Creating differentiation that buyers do not value Over-fulfilling buyer needs Looking too narrowly at the sources of differentiation Charging an excessive price premium Failing to understand costs of differentiation Ignoring signals of value Failing to recognize buyer segments Creating differentiation that competitors can emulate quickly or cheaply

Tools

The Value Chain: The McKinsey Business System TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE 5 5

The Porter Value Chain FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT SUPPORT ACTIVITIES FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS LOGISTICS & SALES PRIMARY ACTIVITIES 6 6

Activity Analysis 1. Catalog activities 2. Assess activities to analyze costs 3. Assess activities to analyze differentiation 4. Explore options and make choices

Wal*Mart’s Activities Point of Sale Information System Satellite Communications Automation of Distribution Centers Saturation of Markets with Stores Incentive Systems Price Discretion Everyday Low Prices Limited Advertising Real-time Market Research at HQ Focus on Hard Goods Bursting at Seams Appearance In-store Warehouses Computerized Ordering & Inventory Management EDI With Suppliers Exhaustive Selection Within Target Categories

Summary

Comparison of Strategic Perspectives Adapted from Brown & Eisenhardt, Competing on the Edge