1. 5: Competitive Advantage
Prof. Ravi Sarathy

2. Why Competition matters
Firm earns profit through creating value for consumers.
How much of this value is captured by the firm as profit depends on
How much value is created for the consumer and
How much demand consumers express for such value.
i.e. how much they are prepared to pay for it;
In turn, how much they will pay for the firm’s product is influenced by what products the competitors have on offer
Competition can reduce value captured by the firm by driving down prices charged
By offering similar products at lower prices
By offering better products at the same price

3. The Value Chain Technology & Design Inbound Logistics Manufacturing
Upstream
Technology & Design
Inbound Logistics
Manufacturing
Downstream
Outbound Logistics
Marketing/
Distribution
Complementers
Service

4. The role of complementers
Some of profit or value obtained from consumers has to be shared with suppliers and complementers.
Complementers help the firm create value
i.e. game software that makes a video game system desirable.
Thus Halo 3 increases demand for the XBox
How much of the value created the firm shares with complementers depends on their relative contribution to value creation
Complementers are more likely to be found in downstream value chain areas
They generally spring up after the firm’s products are available in the marketplace
The firm can also encourage development of complementers as part of new product rollout

5. A closer look at Porter’s Five Forces.
Buyer Power:
Price sensitivity;
product differentiation,
number of buyers relative to sellers, and
cost of product in relation to their total costs;
Bargaining Power;
Switching costs, commodities vs differentiated products
Ability to vertically integrate backwards and produce for themselves, and
Extent of information available to buyer about suppliers prices and costs
Supplier power factors are similar to those affecting buyer power , except that
the firm is now the buyer in relation to the suppler

6. A closer look at Porter’s Five Forces; 2
Barriers to Entry, influenced by
Patent protection of IP,
Capital intensity,
Product differentiation,
Control of distribution channels,
Threat of retaliation,
Regulatory, government and legal barriers,
Low returns and
Scale economies and absolute cost advantages of incumbents

7. A closer look at Porter’s Five Forces; 3
Substitutes affected by
Relative price-performance of the substitute And
buyer’s desire to seek substitutes
Industry rivalry
Level of concentration: monopoly to full competition;
Nature of costs, how fixed and variable costs are incurred; with low variable costs, profitless sales can occur, with rivals competing by covering variable costs but making losses overall as in the airline industry
Existence of excess capacity and difficulty of exit;
Differences between competitors, over goals, resources

8. An industry’s attractiveness
Thus, an industry’s attractiveness is determined by
Value captured by the firm; which is influenced by:
Total value created for consumers,
strength of competition and
the power of suppliers and complementers
Together these affect how much of the value created can be captured by the firm
Industry attractiveness is also affected by the industry's growth rate

9. An industry’s attractiveness; 2
Longer term industry attractiveness is determined by
the growth of demand from consumers
Fast growing industries at early stages of the product life-cycle are more attractive than slower growing mature industries
Changes in competition (exit, entry and intensity of rivalry)
Changes in supplier power; and
The impact of Technological Change and the emergence of substitutes

10. How to gain competitive advantage
Competitive advantage is about positioning the firm relative to its competitors and relative to its customers
How to satisfy customers- how do they define value;
How are competitors attempting to create value for the customer?
How to out-do competition in creating value for customers?
How are competitors competing? What are their key success factors?
How to change the rules of the game?
Develop new ways of competing, new key success factors, that are linked to the firm’s unique and sustainable capabilities and resources

11. Key Success Factors How does a firm succeed in the industry?
The answer to this question points to key success factors for the industry.
Success factors could include
superior technology,
wide distribution,
low costs,
high quality
a strong reputation for dependability and customer service.
Once the KSF have been identified,
The firm has to Link the various Success factors to resources, capabilities, resulting strategies, and profitability
which success factors are essential?
which success factors most contribute to profitability?

12. SWOT Analysis SWOT: strengths, weaknesses, opportunities and threats
Ideas for strategic action from SWOT analysis
Focus on strengths or reduce weaknesses?
Some difficulties:
Prioritization?
Subjective
Implementation?
Ambiguity?
Dynamics? SWOT changes as the environment & Competition change

13. Generating alternative strategies
Strengths
Weaknesses
Opportunities
SO:
strategies that use strengths to take advantage of opportunities
WO:
strategies that reduce/overcome weaknesses in order to take advantage of opportunities
Threats
ST:
Strategies that use strengths to avoid or nullify threats
WT:
Strategies that minimize weaknesses to avoid threats

14. Generic Strategies
A firm can choose between three broad strategy directions:
A) Cost-based strategy; focus on low costs
B) Differentiation; product, value chain choices, customer value
C) Focus, on cost or differentiation, but within narrower segments of the industry
The strategy choice influenced by industry growth and by stage of industry
Some problems
Competitors can also reduce costs, technology can change rendering low cost product obsolete
Competitors can imitate and reduce differentiation, difficult to sustain over time, buyers change and care less about differentiating factors
Customers imitate focus, the segments focused on becomes unattractive, competitors targeting broader markets enjoy scale and scope economies