Building Competitive Advantage Chapter 4 Building Competitive Advantage

The Value Chain Idea that a company is a chain of activities for transforming inputs into outputs that customers value Consists of primary and support activities

Figure 4.5: The Value Chain

Another Illustration of the Value Chain Support Activities Material Management (logistics) Human Resources Information Systems Company Infrastructure Primary Activities Research and Development Production Marketing and Sales Customer Service

The Value Chain Exhibit 3.6 Source: M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985. Used with permission of The Free Press, a division of Simon & Schuster, Inc. © 1985, 1988 by Michael E. Porter. All rights reserved. Exhibit 3.6

The Value Network Exhibit 3.7 Source: M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985. Used with permission of The Free Press, a division of Simon & Schuster Inc. © 1985, 1988 by Michael E. Porter. All rights reserved. Exhibit 3.7

Functional Level Strategies Managers pursue improvement in business functions by: Increasing efficiency Increasing quality Increasing innovation Achieving superior customer responsiveness

Functional Level Strategies (Cont’d) Increasing efficiency R&D efficiency Production efficiency (economies of scale, lean production, marketing efficiency, customer defection rate, material management, human resources strategy- self managing teams, information systems) See the next slide

Functional Level Strategies (Cont’d) Increasing quality TQM and six sigma approach Requires mgt commitment Employees (black belt) Quality improvement methodologies to detect flaws Developing a metric to measure quality Employee participation in quality improvement Suppliers quality perspective Organization-wide approach of quality approach

Functional Level Strategies (Cont’d) Increasing innovation Innovation and failures How to overcome failures? Product development based on customer needs Development costs are kept in check Time to market is minimized Availing the services of heavy weight managers

Functional Level Strategies (Cont’d) Increasing customer responsiveness Customer focus approach Wal-mart, four season hotel Satisfying customer needs Customization

Distinctive Competencies A unique firm-specific strength that allows a company to better differentiate or achieve lower cost than rivals Arise from Resources and Capabilities

Resources Financial, physical, social or human, technological, and organizational factors that create value to customers. Can be Tangible or Intangible Example: Tangible = land, building, equipment Intangible = brand names, reputations

Capabilities A company’s skills at coordinating its resources and putting them into productive use. Capacities are needed to utilize resources

Durability When a company has superior profitability, other companies are inclined to imitate the successful strategy. Durability of competitive advantage depends on the ease or difficulty to copy distinctive competencies. Barriers of Imitation are the factors that make copying difficult for competitors. Even if a company’s distinctive competencies are protected by higher barriers to imitation, it should act as if rivals are continually trying to nullify its source of advantage

Resource-Based View of Competitive Advantage Suggests that competitive advantage is attained through firm resources that are: Valuable - they enable a firm to implement strategies that improve its efficiency and effectiveness Rare - not available to other competitors Imperfectly imitable - not easily implemented by others Non-substitutable - not able to be replaced by some other non-rare resource Source: Barney, Jay B. (1991), "Firm Resources and Sustained Competitive Advantage". Journal of Management, Vol. 17, No. 1, pp. 99-120

Figure 4.6: Strategy, Resources, Capabilities, and Competencies