Competitive Advantage The Value of Winning © 2008, James H. Biteman, DBA

Market Economics Price elasticity of demand Lower price  greater demand Competition may drive lower price without greater demand (“inelastic demand”) Different costs of production Some more efficient Competition may drive efficiency improvements to where no competitor has a cost advantage. Pressure to consolidate  fewer competitors Smaller ones leave or find “niches”

The Marketplace Customers Competitors Regulators Others Market: The “Playing Field”

Competition Competitors strive to sell Customers seek best value for price Regulators shape competition Others support or add in some way

Economic Rules of Competition Customers choose Discretionary choice Want highest value at lowest price Decide which to buy or whether to buy Competitors try to maximize profit Best return on invested resources Highest price at lowest cost

Describe Competition Intense and chaotic vs. mild and orderly Basis: price, extra benefits, innovation Stable or changing Drivers of change: innovation or regulation? Speed of change Direction and magnitude of change Inherent profitability – high or low Better or worse in the future Individual competitors’ strategies

Intensity of Competition More intense leads to lower return for competitors, better deal for customers Less intense means higher return for competitors, worse deal for customers Intensity also affects stability Competition is good for customers, difficult for competitors

Some Factors Affect Intensity Greater forces lead to greater intensity 5 Forces Buyer Power Supplier Power Threat of new entrants Availability of substitutes Rivalry

Porter’s Five Forces Model Suppliers Buyers New Entrants Substitutes Rivalry Forces Intensify Competition Government Chance

Competitive Pressure New Entrants Lower prices or new offerings Deterred by entry barriers Buyer-supplier bargaining power Price pressure or higher demands Fragmented industry Drives to consolidation (exit barriers)

Attempts to Counteract Forces Entrants: Create/reinforce barriers to entry Costly Uncertain Brand (advertising), distribution Buyer/supplier power: Consolidation Fewer competitors More power Lower costs Rival: Market segmentation Specialized Greater value to smaller customer base

Some Key Ideas Substitutes set price ceiling Entry Barriers keep out new entrants (unless large) Exit Barriers may keep sick competitors from leaving Segmentation benefits smaller competitors, consolidation benefits larger ones