Chapter 6. Competitive strategy: The analysis of strategic position

Outline The market positioning school The nature and source of cost advantage The nature and source of differentiation advantage The concept of competitive advantage Three major routes to competitive advantage Market segmentation analysis Value creation and value analysis Strategic group analysis Industry transformation Business models

The Market Positioning School Competitive advantage is based on the positioning of the firm in its markets versus competitors

The Sources of Cost Advantage Economies of Scale Indivisibilities and the spreading of fixed costs (costs per unit diminish after the initial investment until a new block of investment is needed) The engineering characteristics of production (eg. the cube square rule) The Experience Curve Unit cost reductions arising from experience of production Benefits accrue to first movers and those who facilitate learning Vertical Integration Enhances buying power

Economies of Scale

The learning curve

The Sources of Differentiation Advantage Risks of investment in differentiation Product quality may fail to improve A competitor may do it better Customers may fail to respond to the new proposition Costs may outweigh the gains Reputation is easily lost

Cost Leadership & Differentiation Comparison

Identifying Differentiation Potential

Competitive Advantage The delivering of superior value to customers and, in doing so, earning an above average return for the company and its stakeholders. Requires a firm to be sustainably different from its competitors in a way that customers are prepared to purchase at a sufficiently high price.

Bases of ‘Unfair’ Advantage

Sustainable Competitive Advantage Power – maintaining resource commitments relative to competitors Catching-up – ease of copying & nullifying the advantage Keeping ahead – productivity of search for new advantages The changing game – rate of change of customer requirements The virtuous circle –mutual reinforcement of existing advantages.

Three Major Routes to Competitive Advantage

Is More than one Generic Strategy Possible?

The Differentiation Strategy

The Cost Leadership Strategy

The Focus Strategy

How Industry Dynamics Shape Competitive Threats

Industry Dynamics and Competitive Advantage

Market Segmentation Analysis A market can be divided into strategic segments on the basis of product and price differentials.

Bases for Segmentation

Value Creation and Value Analysis Key B – perceived gross benefit, P – price paid, C – cost price, RM – cost of raw materials

Du Pont’s calculation of its cost advantage capital charge = investment requirements per lb multiplied by hurdle rate (say 15%) learning effect =79% learning curve and double the experience scale effect = 85% doubling effect and twice the scale capacity effect = differences in capacity utilisation Source: Du Pont in Titanium Dioxide (A), Harvard Business School case 9-385-40 (1984) exhibits 2 and 3.

Pricing, Advantage and Profits

Strategic Group Analysis Strategic groups – supply side cost and product similarities leading to similar strategies Mobility barriers – factors which deter movement of a firm from one strategic position to another; a limitation on replicability or imitation

Mobility Barriers in the European Food Processing Industry

Strategic Space Analysis of the European Food Processing Industry

Mapping strategic groups over time

Industry Transformation

Business Models

The 2G Business Model

Achieving a Sustainable and Defensible Strategic Position The Five Forces model indicates the attractiveness of the industry. Sustainability involves protection of cash flows from responses of competitors and new entrants. Isolating mechanisms limit the extent to which competitive advantage can be neutralized or duplicated. Legal restrictions Superior access to inputs or to customers Intangible barriers Early mover advantages promote scale economies & market share creating entry barriers for latecomers

Concluding Remarks Establishing and defending strategic position in the marketplace requires an understanding of: Economic drivers of the firm Cost position Approach to differentiation Ability to exploit economies of scale and scope Firms can analyse their position in terms of: Strategic market segments (demand side) Strategic groups (supply side) These underpin pricing, value and the sustainability of value over time. A business model provides the means to turn competitive strategy into sustained cash flow.