Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li1 Lecture #10: The Nature and Sources of Competitive Advantage Sources of competitive advantage Cost leadership Differentiation

Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li2 Sources of Competitive Advantage COST ADVANTAGE COST ADVANTAGE DIFFERENTIATION ADVANTAGE DIFFERENTIATION ADVANTAGE COMPETITIVE ADVANTAGE COMPETITIVE ADVANTAGE Similar product at lower cost Price premium from unique product

Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li3 Porter’s Generic Strategies SOURCE OF COMPETITIVE ADVANTAGE Low cost Differentiation Industry-wide COST DIFFERENTIATION COMPETITIVE LEADERSHIP SCOPE Single Segment FOCUS

Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li4 Cost & Differentiation

Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li5 Drivers of Cost Advantage PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS CAPACITY UTILIZATION MANAGERIAL/ ORGANIZATIONAL EFFICIENCY ECONOMIES OF LEARNING ECONOMIES OF SCALE Organizational slack Ratio of fixed to variable costs Costs of installing and closing capacity Location advantages Ownership of low-cost inputs Bargaining power Supplier cooperation Design to facilitate automation Economize on costs and materials Automization Effiecient utilization of materials Few defects Increased dexterity Improved coordination Minimum efficiency scale Specilaization

Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li6 Economies of Scale: The Long-Run Cost Curve for a Plant Units of output per period Minimum Efficient Plant Size Cost per unit of output Sources of scale economies: - technical input/output relationships - specialization

Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li7 Scale Economies in Advertising: U.S. Soft Drinks Despite the massive advertising by brand leaders Coca Cola and Pepsi Cola, it is the smaller brands which incur the highest advertising costs per unit of sales: ,000 Annual sales volume (millions of cases) Advertising Expenditure ($ per case) CokePepsi Seven up Dr. Pepper Sprite Diet Pepsi Tab Fresca Diet Rite Diet 7-Up Schweppes SF Dr. Pepper

Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li8 Static Drivers of Differentiation Product features and performance Complementary services Intensity of marketing Technology Quality of inputs Organizational procedures Location Vertical integration

Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li9 Dynamic Cost and Differentiation Total Quality movement (TQM) Business Process Reengineering Restructuring

Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li10 Recent Approaches to Cost Reduction Key elements: Plant closures Outsourcing Delayering and cuts in administrative staff Fundamental rethinking and redesign of business processes to achieve improvements in performance. e.g.:- Several jobs combined into one Steps of a process combined in natural order Minimizing steps, controls, and reconciliation Hybrid centralization/ decentralization CORPORATE RESTRUCTURING BUSINESS PROCESS REENGINEERING

Fall 2000MGTO321 (L1 & L2) -- Dr. JT Li11 Summary Generic strategies Managing cost and differentiation strategies Static and dynamic drivers of cost and differentiation Value chain