Strategy & Competitive Advantage The importance and sources of c.ad Types of competitive strategy Vertical Integration strategies Cooperative Strategies Offensive & Defensive moves to build / defend c.ad Competitive nb of timing strategic moves

“Strategies for taking the hill won’t necessarily hold it.” (Amar Bhide) “Successful business strategy is about actively shaping the game you play, not just playing the game you find.” (Brandenburger & Nalebuff) “Investing aggressively in creating sustainable competitive advantage is a company’s single most dependable contributer to above-average profitability.” (Thompson & Strickland) “The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today.” (Hamel & Prahalad)

Strategy & Competitive Advantage Competitive advantage is what allows a firm to gain an edge over its rivals in attracting customers and defending against competitive forces. Key challenges of competitive advantage: 1. build advantage 2. extend advantage 3. organise for advantage 4. sustain and renew advantage

Many routes to Competitive Advantage NPD Quality Superior customer service Achieving lower costs Better geographic location Technical expertise Supply chain management Brand image / reputation

5 Generic Competitive Strategies TYPE OF COMPETITIVE ADVANTAGE BEING PURSUED Lower CostDifferentiation MARKET TARGET Broad buyer segment Narrow buyer segment OVERALL COST LEADERSHIP STRATEGY BROAD DIFFERENTIATION STRATEGY FOCUSED DIFF. STRATEGY FOCUSED LOW-COST STRATEGY BEST COST PROVIDER STRATEGY PORTER, 1980.

Low Cost Leadership Price sensitive commodity goods Relative not absolute Sustainability issue Include key features Ease of imitation

Low Cost Leadership Profitability through volume Profitability through margin Cumulative costs across value chain must be lower 2 overall ways: Control cost drivers of internal value chain activities Re-vamp value chain to bypass some cost-producing activities

Controlling the Cost Drivers Economies of scale eg Category Mgt, Salesforce mgt, Simplifying pdt design Learning / experience curve effects Costs of key resources Manage linked costs Vertical integration Cross-functional coordination Timing of strategic moves % Capacity utilisation

Low Cost Leadership Strategy - Re-vamping the Value Chain Simplify product design (reduce no. of parts) Cut out extra benefits / services Sell direct to end-user Relocate closer to supplier / customer Reengineer core business processes Use electronic communication eg. , video conferencing Engender a cost-conscious culture

Low Cost Leadership Strategy - In what situations? Consumers are price sensitive Standard product Few ways to achieve differentiation Common use Buyers incur low switching costs Buyers are large and powerful

Cost Leadership - Caution! Profitability Sustainability Over fixation

Broad Differentiation Strategy Buyer preferences too diverse for standard product. Understanding consumer needs very nb. Differentiation yields a longer-lasting and more profitable edge when based on technological superiority,quality, reliability and customer service - highly valued.

Broad Differentiation Strategy Many ways to differentiate eg: Lower buyer’s costs of using pdt Raise performance / service buyer gets Intangible / noneconomic benefits Premium price Brand loyalty

Differentiation & the Value Chain Opportunities all along value chain. Purchasing Product R&D Production R&D Outbound distribution / logistics Marketing, sales, customer service

Differentiation & Value Real value v. perceived value Value Signals: Price Packaging Advertising Brochures Seller’s facilities, appearance etc

Differentiation - Caution! Costs & pricing Over differentiating Perceived value Importance of building loyalty Ease of imitation Satisfaction

Best Cost Provider Creating superior value by meeting or exceeding expectations on key service/quality features and beating expectations on price. Emphasis on low cost and more than minimally acceptable quality, service, features, performance.

Best Cost Provider Mkts with pdt diversity & price/value sensitivity eg car industry, electrical appliances Importance of having capabilities for upscale pdt/service attributes at low cost Attracts price conscious quality buyers & quality conscious value buyers

Focus / Niche Strategies Concentrate attention on narrow segment of total market. Target may be defined by: geographic location; specialised use requirements; special product attributes Meeting specialised needs costly or difficult Firm doesn’t have resources/capabilities for wider mkt Many niches / segments untapped

Focus / Niche Strategies Attractive? Niche big enough to be profitable Good growth potential Not crucial to success of competitors Capable of serving niche well Caution! Easily imitated Change in buyer preferences Segment becomes too attractive

Vertical Integration & Competitive Advantage The only good reason to invest in vertical integration is to strengthen competitive position through either cost savings or a differentiation- based advantage.

Vertical Integration & Competitive Advantage Backward Same economies as suppliers Suppliers are too powerful Supply/quality/quantity/price is uncertain Co. is low priority for supplier Where item is a major cost component When technology is easily mastered

Vertical Integration & Competitive Advantage Forward eg. co. owned distribution, franchised dealer networks Undependable distribution High retailer margins

Vertical Integration & Competitive Advantage Caution! Capital investment Risk Decreased flexibility Balancing capacity at each stage - under/over supply Getting the right skills right Lead times

Vertical De-integration Outsourcing as many activities in the value chain as possible. + specialised skills outside + decreased risk of changing technology + concentrate on core business ? does it create c. advantage - lower costs or aid differentiation ? impact on flexibility, response times, admin ? can these activities be safely delegated to suppliers

Cooperative Strategies Cooperative agreements between companies eg. Joint research, Production facility sharing Strategic Benefits? Improved / Faster NPD More efficient SCM Economies of scale in production / mkg Gain expertise Gain / improve mkt access

Offensive Strategies Time Size of C. Ad. Build Up Benefit Period Erosion Moves calculated to yield a competitive advantage

Types of Strategic Offensive 1. Match / exceed competitive strengths 2. Capitalise on Weaknesses 3. Simultaneous initiatives on many fronts 4. End-run offensives 5. Guerilla offensives 6. Preemptive strikes

Choosing who to attack? Market leaders? Runner-up firms? Weakest firms?

Defensive Strategies Purpose? Lower risk of attack Weaken impact of attacks that occur

Timing of Strategic Moves Advantages / disadvantages of First Mover + if pioneering helps build brand image + if early contracts with suppliers etc advantageous + first time customer loyalty + makes imitation harder - expense - rapid change may lead to obsoletion - weak customer loyalty - easily imitated