The Nature and Sources of Competitive Advantage Dr Elif Bascavusoglu-Moreau Assistant Professor of Innovation and Entrepreneurship

The Nature and Sources of Competitive Advantage OUTLINE The emergence of competitive advantage Sustaining competitive advantage Competitive advantage in different market settings Types of competitive advantage: cost and differentiation 1

The Emergence of Competitive Advantage How does competitive advantage emerge? External sources of change e.g.: Changing customer demand Changing prices Technological change Internal sources of change Some firms have greater creative and innovative capability Resource heterogeneity among firms means differential impact Some firms faster and more effective in exploiting change 2

Competitive Advantage from Internally-Generated Change: Strategic Innovation Characteristics of innovatory strategies: Associated with new entrants to an industry (e.g. Nucor in steel, IKEA in furniture, Enron in energy, Home Depot in DIY, Dell in PCs) Reconcile conflicting performance goals (e.g. Toyota’s lean production system combines low cost, high quality, and flexibility. Richardson Sheffield in kitchen knives is low cost, innovative and customer responsive.) Reconfiguring the value chain e.g.--- Nike’s system for manufacturing and distributing shoes totally different from traditional shoe manufacturer Southwest Airlines simplification of the normal airline value chain Zara’s system of design, manufacture, and distribution 3

Sustaining Competitive Advantage Against Imitation REQUIREMENT FOR IMITATION ISOLATING MECHANISM Identification - Obscure superior performance - Deterrence--signal aggressive Incentives for imitation intentions to imitators - Pre-emption--exploit all available investment opportunities - Rely upon multiple sources of Diagnosis competitive advantage to create “causal ambiguity” - Base competitive advantage upon Resource acquisition resources and capabilities that are immobile and difficult to replicate 4

Competitive Advantage in Different Market Settings MARKET TYPE SOURCE OF IMPERFECTION OF COMPETITION OPPORTUNITY FOR COMPETITIVE ADVANTAGE TRADING MARKETS None (efficient markets) Imperfect information availability Transactions costs Systematic behavioral trends Overshooting None Insider trading Cost minimization Superior diagnosis (e.g.... chart analysis) Contrarianism Barriers to imitation Barriers to innovation Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility,barriers to resource replication) & base strategy upon them. Difficult to influence or exploit. PRODUCTION MARKETS 5

Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets SOURCE OF IMPERFECTION OF COMPETITION OPPORTUNITY FOR COMPETITIVE ADVANTAGE MARKET TYPE TRADING MARKETS None (efficient markets) Imperfect information availability Transactions costs Systematic behavioral trends Overshooting None Insider trading Cost minimization Superior diagnosis (e.g.... chart analysis) Contrarianism Barriers to imitation Barriers to innovation Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility,barriers to resource replication) & base strategy upon them. Difficult to influence or exploit. PRODUCTION MARKETS 5

Sources of Competitive Advantage COST ADVANTAGE Similar product at lower cost COMPETITIVE ADVANTAGE Price premium from unique product DIFFERENTIATION ADVANTAGE 6

Porter’s Generic Strategies SOURCE OF COMPETITIVE ADVANTAGE Low cost Differentiation Industry-wide COST DIFFERENTIATION COMPETITIVE LEADERSHIP SCOPE Single Segment F O C U S 8

Features of Cost Leadership and Differentiation Strategies Generic strategy Key strategy elements Resource & organizational requirements COST Scale-efficient plants. Access to capital. Process LEADERSHIP Design for manufacture. engineering skills. Frequent Control of overheads & reports. Tight cost control. R&D. Avoidance of Specialization of jobs and marginal customer functions. Incentives for accounts. quantitative targets. DIFFERENTIATION Emphasis on branding Marketing. Product and brand advertising, engineering. Creativity. design, service, and Product R&D quality. Qualitative measurement and incentives. Strong cross-functional coordination. 7