DEVELOPING STRATEGIES FOR COMPETITIVE ADVANATGE. Session 5 The Nature and Sources of Competitive Advantage Session 5 The Nature and Sources of Competitive Advantage 1

The emergence of competitive advantage Sustaining competitive advantage Competitive advantage in different market settings Types of competitive advantage: cost and differentiation OUTLINE The Nature and Sources of Competitive Advantage 2

How does competitive advantage emerge? External sources of change e.g.: Changing customer demand Changing prices Technological change Internal sources of change Resource heterogeneity among firms means differential impact Some firms faster and more effective in exploiting change Some firms have greater creative and innovative capability 3 The Emergence of Competitive Advantage

Innovatory strategies may involve: –Creating whole new markets/industries (e.g. Craig McCaw and wireless telephony services; Atari and home video games) –Creating new customer segments (e.g. Freddy Laker in budget air travel; Nintendo with its Wii games console;) Toyota’s lean production system combines low cost, high quality, and flexibility. Retailers Primark and Target combine low cost with stylishness.) –New sources of competitive advantage Reconfiguring the value chain: Zara in fashion clothing; Canon in plain-paper copiers; Southwest and Ryanair in airlines Rethinking the product: Cirque du Soleil in circuses Offering customers new combinations of performance: e.g. Low prices with quality (Richardson); low prices and style (H&M) STRATEGIC INNOVATION: creating customer value from new products,experiences, or modes of product delivery Competitive Advantage from Internally- Generated Change: Strategic Innovation 4

5 REQUIREMENT FOR IMITATION ISOLATING MECHANISM IdentificationObscure superior performance Incentives for imitationDeterrence: signal aggressive intentions to imitators Pre-emption: exploit all available investments opportunities DiagnosisRely upon multiple sources of competitive advantages to create “causal ambiguity” Resource acquisitionBase competitive advantage upon resources and capabilities that are immobile and difficult to replicate Sustaining Competitive Advantage Against Imitation

Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets MARKET TYPESOURCE OF IMPERFECTION OF COMPETITION OPPORTUNITY FOR COMPETITIVE ADVANTAGE TRADING MARKETS None (efficient markets) Imperfect information Transactions costs Systematic behavioral trends Overshooting None Insider trading Cost minimization Superior diagnosis (e.g. chart analysis) Contrarianism PRODUCTION MARKETS Barriers to imitation Barriers to innovation Identify potential barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, etc.) & base strategy upon them. Difficult to influence or exploit. 6

COST ADVANTAGE COST ADVANTAGE DIFFERENTIATION ADVANTAGE DIFFERENTIATION ADVANTAGE COMPETITIVE ADVANTAGE COMPETITIVE ADVANTAGE Similar product at lower cost Price premium from unique product 7 Sources of Competitive Advantage

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

9 Features of Cost Leadership and Differentiation Strategies Generic strategyKey strategy elementsResource and organizational requirements Cost Leadership Scale-efficient plants Design for manufacture Control of overheads and R&D Process innovation Outsourcing (especially overseas) Avoidance of marginal customer accounts Access to capital Process of engineering skills Frequent reports Tight cost control Specialization of jobs and functions Incentives linked to quantitative targets Differentiation Emphasis on branding advertising, design, service, quality, and new product development Marketing abilities Product engineering skills Cross-functional coordination Research capability Incentives linked to qualitative performance targets