1. Competitive Advantage: Concepts and Tools

2. Profitability Differences Between Industries

3. Profitability Differences within Industries

4. Calibrating Profit Drivers
Industry
Positioning
Residual
Corporate
Source: Richard P. Rumelt, “How Much Does Industry Matter?,”
Strategic Management Journal, 1991; 12: 19 6

5. What makes an advantage sustainable?
DeHavilland
EMI
Xerox
Ampex
RC Cola
Bowmar
Boeing GE
IBM
Matsushita
Coca Cola
Texas Instruments

6. Resources and Profits

7. VRIO Framework
Is a resource or capability . . .

8. The Question of Value
Do a firm’s resources and capabilities enable the firm to respond to environmental threats or opportunities?

9. Question of Rareness
How many competing firms already possess particular valuable resources and capabilities?
e.g. Telephone systems and IT hardware

10. Question of Imitability
Do firms without a resource or capability face a disadvantage in obtaining it compared to firms that already possess it?

11. The Challenge of Imitation
Cannot be imitated
Patents
Unique locations
Difficult to imitate
Brand loyalty
Employee commitment
Reputation
Can be imitated - but may not be
Capacity pre-emption
Economies of scale
Easy to imitate
Cash
Commodities

12. Sources of Disadvantage in Imitating Resources
1. Unique Historical Conditions
(Caterpillar, Coca Cola)
1st mover advantages
path dependence
2. Causal Ambiguity
taken for granted
multiple hypotheses
complexity (interactions)
3. Social Complexity

13. Knowledge or Know-how as a Competitive Advantage
Tacit vs. Explicit (or codified) knowledge
Tacit knowledge is more difficult to imitate but also more difficult to replicate
Collective vs. individual knowledge
Knowledge embedded in teams and firms is more difficult to imitate

14. Question of Organization
Is a firm organized to exploit the full competitive potential of its resources and capabilities?
Complementary capabilities (EMI, Xerox)

15. Evolution of Honda: A Strategy Based Upon Resources and Capabilities
50cc 2-cycle engine
Related products:
ground tillers, marine
engines, generators,
pumps, chainsaws
Founding of
Honda motor
company
405cc
motor
cycle
4 cycle
engines
First product:
clip-on engine
for bicycles
The 50cc
super
-cub
N360 mini
car
1000cc
Goldwing
touring
motor cycle
Acura Car
division 2 2

16. Canon: Products as Outgrowths of Technical Capabilities
Precision Fine Micro- Precision Fine Micro-
Mechanics Optics electronics Mechanics Optics electronics
Basic camera XXXXX XXXXX Battery PPC XXXXX XXXXX XXXXX
Compact fashion camera XXXXX XXXXX Color copier XXXXX XXXXX XXXXX
Electronic camera XXXXX XXXXX Laser copier XXXXX XXXXX XXXXX
EOS autofocus camera XXXXX XXXXX XXXXX Color laser copier XXXXX XXXXX XXXXX
Video still camera XXXXX XXXXX XXXXX NAVI XXXXX XXXXX XXXXX
Laser beam printer XXXXX XXXXX XXXXX Still video system XXXXX XXXXX XXXXX
Color video printer XXXXX XXXXX Laser imager XXXXX XXXXX XXXXX
Bubble jet printer XXXXX XXXXX Cell analyzer XXXXX XXXXX XXXXX
Basic fax XXXXX XXXXX Mask aligners XXXXX XXXXX
Laser fax XXXXX XXXXX Stepper Aligners XXXXX XXXXX
Calculator XXXXX Excimer laser aligners XXXXX XXXXX XXXXX
Plain-paper copier XXXXX XXXXX XXXXX 4 4

17. Types of Competitive Advantage

18. Porter’s Generic Strategies
FOCUS
OVERALL
COST LEADERSHIP
DIFFERENTIATION
Low Cost Position
Uniqueness Perceived
by the Customer
Industry wide
Particular
Segment only
STRATEGIC ADVANTAGE
STRATEGIC TARGET
Source: Michael Porter, Competitive Strategy, 1980

19. Cost Leadership Strategy
Deliver a GOOD product or service at the lowest possible cost
Open a significant and sustainable cost gap over all competitors
Create advantage through superior management of key cost drivers
Translates into above-average profits with industry-average prices
BUT
Cost leaders must maintain parity or proximity in satisfying buyer needs
Cost leadership often requires trade-offs with differentiation

20. What drives your costs? Integration Timing Policies Scale Learning
Location
Institutional factors
Scale
Learning
Pattern of capacity utilization
Linkages
Interrelationships
Source: Michael E. Porter, Competitive Advantage
(New York: Free Press, 1985)

21. Common Pitfalls in Cost Leadership
Misunderstanding of actual costs
False perception of cost drivers
Focus on manufacturing
Failure to exploit linkages
Inadequate proximity to differentiators
Ignoring competitor behavior
Poor implementation
Acting incrementally
No cost management program

22. The Differentiation Strategy
Select one or more needs that are valued by buyer
Achieve and sustain superior performance by meeting these needs uniquely
Selectively add costs if necessary to do so
Successful differentiation leads to premium prices
Differentiators must pick cost-effective forms of differentiation
Differentiation leads to above-average profitability provided the firm maintains cost parity or proximity to competitors

23. Common Pitfalls in Differentiation
Creating differentiation that buyers do not value
Over-fulfilling buyer needs
Looking too narrowly at the sources of differentiation
Charging an excessive price premium
Failing to understand costs of differentiation
Ignoring signals of value
Failing to recognize buyer segments
Creating differentiation that competitors can emulate quickly or cheaply

24. Tools

25. The Value Chain: The McKinsey Business System
TECHNOLOGY
PRODUCT DESIGN
MANUFACTURING
MARKETING
DISTRIBUTION
SERVICE 5 5

26. The Porter Value Chain FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT
SUPPORT
ACTIVITIES
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
PRIMARY ACTIVITIES 6 6

27. Activity Analysis 1. Catalog activities
2. Assess activities to analyze costs
3. Assess activities to analyze differentiation
4. Explore options and make choices

28. Wal*Mart’s Activities
Point of Sale Information System
Satellite Communications
Automation of Distribution Centers
Saturation of Markets with Stores
Incentive Systems
Price Discretion
Everyday Low Prices
Limited Advertising
Real-time Market Research at HQ
Focus on Hard Goods
Bursting at Seams Appearance
In-store Warehouses
Computerized Ordering & Inventory Management
EDI With Suppliers
Exhaustive Selection Within Target Categories

29. Summary

30. Comparison of Strategic Perspectives
Adapted from Brown & Eisenhardt, Competing on the Edge