1. Chapter 4.The nature and sources of competitive advantage
Foundations of Strategy
Chapter 4.The nature and sources of competitive advantage
Yetunde Oyinwola, Eric Carstens, Alex Kollaritsch, Laura Padilla, Taylor Mullings

2. Objectives Understand the term “Competitive Advantage”
Predict potential for competition to wear away competitive advantage
Recognize how resource conditions create imperfections in the competitive process that offer opportunities for competitive advantage
Distinguish the two primary types: cost advantage and differentiation advantage
Use value chain framework to analyse potential sources of cost and differentiation advantage to recommend strategies for enhancing competitiveness
Appreciate the pitfalls of being ‘stuck in the middle’ and the challenge of achieving effective differentiation and low cost

3. Opening Case: Singapore Airlines
‘World’s Best Airline’ by Conde Nast Traveler
Ranked 27th in Fortune Magazine’s ‘World’s Most Admired Companies’ 2010
Based on two main strategies: its planes and its people
Planes
‘Young’ fleets
First airline to launch Airbus A380
Cost Advantage
People
Attracts first class university graduates
110 hours of retraining for every employee annually
Focus on customer service
Differentiation Advantage
Maintaining both is difficult!!

4. Emergence of Competitive Advantage
How does competitive advantage emerge?
External sources of change
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

5. C.A From Responsiveness to Change
Involves one of two key capabilities:
The ability to anticipate changes in the external environment
Speed
Markets have become turbulent and unpredictable, so speed of response through greater flexibility has become increasingly important
Two requirements for quick response:
Information
Short cycle times

6. Competitive Advantage from Innovation
Innovation generates changes that create competitive advantage.
Overturns other firms competitive advantages
Strategic innovation: a new approach to doing business including new business models
Novel products
Experiences
Modes of product delivery

7. Novel Organisational Designs
Southwest Airlines
Point-to-point
No frills airlines service
Single type plane
Flexible non-union employees.
Apple
Reinvention of record music
iTunes
New product launch

8. Pioneering Dimensions of Strategy
New industries
Xerox: plain-paper copier industry
New customer segments
VCRs and video cassette
Xbox
New sources of competitive advantage
Cirque du soleil
Dell

9. Sustaining Competitive Advantage
Imitation is the most direct form of competition; for long term sustainability barriers to imitation must exist.
Sources of isolating mechanisms
Identification
Incentive
Diagnosis
Resource acquisition

10. Identification: Obscuring Superior Performance
According to George Stalk of BCG, “one way to throw competitors off balance is to mask high performance so rivals fail to see your success until its too late”.
Dominate a niche market
Remain private: avoid disclosing financial performance

11. PepsiCo “Power of One” Introduced in September, 2011
Full coordination across the food and beverage operating systems.
Unlock opportunities and create value across the business.
Long-term strategy to strengthen and extend global leadership position in snacks and leverage the power of PepsiCo combined food and beverage businesses.
Help extend competitive advantage around the world

12. Deterrence and Pre-emption
If a firm can persuade rivals that imitation will be unprofitable, it may be able to avoid competitive challenges.
• Proliferation of product varieties by a market leader
• Large investments in production capacity ahead of growth of demand
• Patent proliferation

13. Diagnosing Competitive Advantage
If a firm is to imitate the competitive advantage of another, it must understand the basis of its rival’s success.
• Causal Ambiguity: The more multidimensional a firm’s competitive advantage, the more difficult it is to diagnose the determinants for success
• Uncertain Imitability: Where there is ambiguity, imitation leads to uncertain success

14. Acquiring Resources and Capabilities
•The imitator can mount a competitive challenge only if they can assemble the required resources
•Imitation is fast when the competitive advantage does not require complex, firm-specific resources
•First-mover advantage: Where the initial occupant of a strategic position gains access to resources and capabilities that a follower cannot match

15. Ex: Urban Outfitters
•Self description: “Targeting well-educated, urban-minded, young adults aged through its unique merchandise mix and compelling store environment.”
•Each store has a unique design
•Store layouts are changed every two weeks to provide a new shopping experience for returning customers
•Emphasizes community with its customers through blogs and word-of-mouth transmissions for advertising
•Attempts to imitate would likely fail because of the difficulty of replicating every aspect of the strategy then integrating them in the right manner.

16. Is SIA’s Competitive Advantage Sustainable?
• Other airlines could invest in new aircraft, staff training, and ticketing and check-in technologies
• Culture of cost-effective services is ingrained in the company
• They want to be the most profitable rather than the largest airline
• Cabin crew members work together for significant periods of time
• All of these things put together with the new fleet makes it tough to imitate

17. Sources of Competitive Advantage

18. Strategy and Cost Advantage
Cost Drivers
Economies of Scale
Economies of Learning
Production Techniques
Product Design
Input Costs
Capacity Utilization
Residual Efficiency

19. Value Chain Analysis Break down the firm into separate activities.
Establish the relative importance of different activities in the total cost of the product.
Compare costs by activity.
Identify cost drivers.
Identify linkages.
Identify opportunities for reducing costs.

20. Strategy and Differentiation Advantage
Differentiation- capturing a price premium in the market that exceeds the cost of providing the differentiation.

21. Stages of Value Chain Analysis for Differentiation Advantage
Construct a value chain for the firm and the customer
Identify the drivers of uniqueness in each activity
Examine each activity in the firms value chain
Identify variables that contribute to uniqueness

22. Stages of Value Chain Analysis...
3. Selecting the most promising differentiation variables for the firm
a. Greatest potential for differentiation
b. Identify linkages between activities
c. Sustainability

23. Stages of Value Chain Analysis...
4. Locate linkages between the value chain of the firm and that of the buyer
a. Create value for the consumer
b. Reorganize product distribution
i. Proctor and Gamble

24. Singapore Airlines’ Value Chain Analysis
Porter’s Generic Category
Example
Differentiation Initiatives
Operations
Ticketing, Flight Scheduling
Employs more cabin crew than other airlines = more personal attention
Outbound Logistics
Flight connections, partnerships
Introduced non-stop business class only service between Singapore and NY
Service
Pre and post flight service
Loyalty marketing

25. Summary
Making money in business requires establishing and sustaining competitive advantage
Recognise how resource conditions create imperfection in the competitive process
Distinguish two types of competitive advantage: cost advantage & differentiation
Use value chain framework to analyse potential sources of cost and differentiation advantage