The Nature and Sources of Competitive Advantages Jessica Sorey, Vincent Conder, Miguel Valencia, Kylar Ferguson

Chapter Outline How competitive advantage emerges and is sustained Types of competitive advantage Cost Differentiation Porter’s generic strategies and being ‘stuck in the middle’

What is Competitive Advantage? When two or more firms compete within the same market, one firm advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit. We say potential because companies may choose to invest in new technologies or customer loyalty or executive perks as opposed to taking a larger profit.

There are external and internal sources of change that causes a competitive advantage to emerge in an industry.

External Sources of Change The extent to which external change creates a competitive advantage or disadvantage depends on the magnitude of the change and the extent of the firms’ strategic differences. The more unstable an industry is the wider an advantage will be. Ex. tabacco industry vs. toy industry ALL external change creates opportunity for larger profits and new business initiatives.

Responding to External Sources of Change Anticipate change Being able to prepare for competition Information is gathered from customers and supplier and competitors to create an ‘early warning system’ Speed The quicker a company reacts to demand the greater probability for profit - flexibility is key Short cycle times make it easier to act upon information gathered quickly

Internal Sources of Change Also called competitive advantage from innovation New approaches to doing business including new business models, not just new technologies Strategic innovation Creating value for customers through novel products, experiences or modes of product delivery Could take many forms - big-box stores with greater variety, augmented customer service, novel approaches to display or store layout Tends to involve pioneering through one or more dimensions of strategy “Change the rules of the game”

Dimensions of Strategy Used in Innovation New industries Create a new market New customer segments Producing an existing product for a new purpose ex. Apple New sources of competitive advantage Rebranding an existing market ex. Cirque du Soleil

Sustaining Competitive Advantage -Sustainability depends on the ability of its competitors to challenge each other by either imitating or by innovating. Ex: Netflix innovation on blockbuster. -In order to create sustainability, “Isolating mechanisms” must be implemented to hold off imitation.

Sustaining competitive advantage cont…. In order to identify these barriers we must understand the process competitive imitation: Identification: Identify that a rival firm does possess a competitive advantage. -Ex:George Stalk ( Boston Consulting Group) Incentive: The firm must believe it can have superior returns if it invests in imitation. Ex:Pre-emption Diagnosis: Understand what exactly gives the other firm a competitive advantage. -Ex: Walmart vs Kmart Resource Acquisition: the firm must be able to the resources and capabilities necessary to imitate the strategy.

Types of Competitive Advantage Cost Advantage Product or service at a lower cost than competitors Similar product at a lower cost Differentiation Advantage Product or service that is differentiated in such a way that the customer is willing to pay a price premium Price premium from a unique product

Cost advantage Cost Drivers Seven principal determinants of cost per unit of output relative to competitors Economies of scale Economies of learning Production Techniques Input costs Capacity Utilization Residual Efficiency Analyzing costs requires breaking down the firm's value chain To analyze a firm's cost position, we need to look at individual activities Value chain analysis of a firm’s cost position is comprised of six steps VJC

Cost Advantage Continued Value chain analysis of a firm’s cost position comprises the following six stages: Break down the firm into separate activities Establish the relative importance of different activities in the total cost of the product Compare cost by activity Identify cost drivers Identify linkages Identify opportunities for reducing costs VJC

Differentiation Advantage Product or service that is differentiated in such a way that the customer is willing to pay a price premium Stages of Value Chain Analysis: Construct a Value Chain for the firm and its customers Identify the drivers of uniqueness in each activity Firm selects the most promising differentiation variables Locate links between the value chain of the firm and its customers

Porter’s Generic Strategies Being ‘Stuck in the Middle’ Porter’s strategies- Cost Leadership, Differentiation, and Focus Porter views Cost Leadership and Differentiation as a choice, firms that choose both strategies get “stuck in the middle” Cost Leadership- often a standardized narrow line Ex: Southwest Airlines and IKEA Differentiation- Innovation is key Ex: Electronics, cars, motorcycles

Summary and Further Readings When two or more firms compete within the same market, one firm possess a competitive advantage over the other when it earns a higher profit. In the long run competition wears away differences in profitability between firms, but internal and external changes can create advantages. A firm can achieve a competitive advantage by either supplying an identical product or service at a lower cost or by supplying a product or service that is different and that a customer is willing to pay a premium price for. The value chain views firms as a series of linked activities and is an insightful tool to understand the sources of competitive advantage. Cost leadership and differentiation are mutually exclusive strategies. The most successful firms manage to differentiate themselves in a highly cost-effective manner.

Summary and Further Readings Cont... Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120 Porter, M. (1980). Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: Free Press. Cronshaw, M., Evans, D. and Kay, J. (1994). On being stuck in the middle: Or good food costs less at Sainsbury’s. British Journal of Management, 5(1), 19-32. Heracleous, L. and Wirtz, J. (2009) Strategy and Organization at Singapore Airlines: Achieving Sustainable advantage through dual strategy. Journal of Air Transport Management, 15, 274-9 Heracleous, L. and Wirtz, J. (2010). Singapore Airlines’ balancing act. Harvard Business Review, July-August, 145-9