1. Chapter 15 Strategic Elements of Competitive Advantage
PowerPoint By
Kristopher Blanchard
North Central University
© 2005 Prentice Hall

2. Industry Analysis: Forces Influencing Competition
Industry – group of firms that produce products that are close substitutes for each other
Five forces influence competition in an industry
In any industry, competition works to drive down the rate of return on invested capital toward the rate that would be earned in the economist’s “perfectly competitive” industry. Rates of return that are greater than this so-called competitive rate will stimulate an inflow of capital either from new entrants or from existing competitors making additional investment. Rates of return below this competitive rate will result in withdrawal from the industry and a decline in the levels of activity and competition.
According to Michael E. Porter of Harvard University, a leading theorist of competitive strategy, there are five forces influencing competition in an industry: the threat of new entrants, the threat of substitute products or services, the bargaining power of buyers, the bargaining power of suppliers, and the competitive rivalry among current members of the industry.
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3. Threat of New Entrants
New entrants mean downward pressure on prices and reduced profitability
Barriers to entry determines the extent of threat of new industry entrants
New entrants to an industry bring new capacity, a desire to gain market share and position, and, quite often, new approaches to serving customer needs. The decision to become a new entrant in an industry is often accompanied by a major commitment of resources. New players mean prices will be pushed downward and margins squeezed, resulting in reduced industry profitability in the long run. Porter describes eight major sources of barriers to entry, the presence or absence of which determines the extent of threat of new industry entrants. These barriers will be discussed in the next two slides
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4. Barriers to Entry Economies of Scale Product differentiation
Refers to the decline in per-unit product costs as the absolute volume of production per period increases
Product differentiation
The extent of a product’s perceived uniqueness
Capital requirements
Required investment for manufacturing, R&D, advertising, field sales and service, etc.
Switching costs
Costs related to making a change in suppliers or products
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5. Barriers to Entry Distribution channels Government policy
Are there current distribution channels available with capacity
Government policy
Are there regulations in place that restrict competitive entry?
Cost advantages independent of scale economies
Access to raw materials, large pool of low-cost labor, favorable locations, and government subsidies
Competitor response
How will the market react in anticipation of increased competition within a given market
Since Porter first introduced his theory regarding the barriers to entry the competitive environment has changed. The digital revolution appears to have altered the entry barriers in many industries. First and foremost, technology has lowered the cost for new entrants. For example, Barnes & Noble watched an entrepreneurial upstart, Amazon.com, storm the barriers protecting traditional “brick-and-mortar” booksellers. Amazon.com founder Jeff Bezos identified and exploited a glaring inefficiency in book distribution: Bookstores ship unsold copies of books back to publishers to be shredded and turned into pulp. Amazon’s centralized operations and increasingly personalized online service enable customers to select from millions of different titles at discount prices and have them delivered to their homes within days. For a growing number of book-buying consumers, Amazon.com eclipses the value proposition of local bookstores that offer “only” a few thousand titles and gourmet coffee bars.
Chapter 17 will offer a full discussion on the digital revolution.
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6. Threat of Substitute Products
Availability of substitute products places limits on the prices market leaders can charge
High prices induce buyers to switch to the substitute
The availability of substitute products places limits on the prices market leaders can charge in an industry; high prices may induce buyers to switch to the substitute. Once again, the digital revolution is dramatically altering industry structures. In addition to lowering entry barriers, the digital era means that certain types of products can be converted to bits and distributed in pure digital form. For example, the development of the MP3 file format for music was accompanied by the increased popularity of peer-to-peer (p-to-p) file swapping among music fans.
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7. Bargaining Power of Buyers
Buyers seek to pay the lowest possible price
Buyers have leverage over suppliers when
They purchase in large quantities (enhances supplier dependence on buyer)
Suppliers’ products are commodities
Product represents significant portion of buyer’s costs
Buyer is willing and able to achieve backward integration
Because it purchases massive quantities of goods for resale, Wal-Mart is in a position to dictate terms to any vendor wishing to distribute its products at the retail giant’s stores. This includes the recorded music industry; Wal-Mart accounts for approximately 10 percent of the market for CD sales. Wal-Mart refuses to stock CDs stickered with parental advisories for explicit lyrics or violent imagery. Artists who want their recordings available at Wal-Mart have the option of altering lyrics and song titles or deleting offending tracks. Likewise, artists are sometimes asked to change album cover art if Wal-Mart deems it offensive.
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8. Bargaining Power of Buyers
“We do not quibble or argue with anyone’s right to sing what they want, to print what they want, and say what they want. But we reserve the right to sell what we want.”
- Wal-Mart’s response to the accusation that it is using its financial power to dictate what is appropriate music and art
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9. Bargaining Power of Suppliers
When suppliers have leverage, they can raise prices high enough to affect the profitability of their customers
Leverage accrues when
Suppliers are large and few in number
Supplier’s products are critical inputs, are highly differentiated, or carry switching costs
Few substitutes exist
Suppliers are willing and able to sell product themselves
Supplier power in an industry is the converse of buyer power. Microsoft and Intel are two excellent examples of companies with substantial supplier power. Because about 90 percent of the world’s nearly 600 million PCs use Microsoft’s operating systems and Intel’s microprocessors, the two companies enjoy a great deal of leverage relative to Dell, Compaq, and other computer manufacturers. In fact, it was precisely because Microsoft became so powerful that the U.S. government and the European Union launched separate antitrust investigations.
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10. Rivalry among Competitors
Refers to all actions taken by firms in the industry to improve their positions and gain advantage over each other
Price competition
Advertising battles
Product positioning
Differentiation
Several factors can create intense rivalry. Once an industry becomes mature, firms focus on market share and how it can be gained at the expense of others. Second, industries characterized by high fixed costs are always under pressure to keep production at full capacity to cover the fixed costs. Once the industry accumulates excess capacity, the drive to fill capacity will push prices—and profitability— down. A third factor affecting rivalry is lack of differentiation or an absence of switching costs, which encourages buyers to treat the products or services as commodities and shop for the best prices. Again, there is downward pressure on prices and profitability. Fourth, firms with high strategic stakes in achieving success in an industry generally are destabilizing because they may be willing to accept below-average profit margins to establish themselves, hold position, or expand.
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11. Competitive Advantage
Achieved when there is a match between a firm’s distinctive competencies and the factors critical for success within its industry
Two ways to achieve competitive advantage
Low-cost strategy
Product differentiation
Any superior match between company competencies and customers needs permits the firm to outperform competitors. There are two basic ways to achieve competitive advantage. First, a firm can pursue a low-cost strategy that enables it to offer products at lower prices than competitors. Competitive advantage may also be gained by a strategy of differentiating products so that customers perceive unique benefits, often accompanied by a premium price. Note that both strategies have the same effect: They both contribute to the firm’s overall value proposition.
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12. Competitive Advantage
“The only way to gain lasting competitive advantage is to leverage your capabilities around the world so that the company as a whole is greater than the sum of its parts. Being an international company - selling globally, having global brands or operations in different countries—isn’t enough.”
- David Witwam, CEO, Whirlpool
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13. Generic Strategies for Creating Competitive Advantage
Cost Leadership
Product Differentiation
Cost Focus
Focused Differentiation
In addition to the “five forces” model of industry competition, Michael Porter has developed a framework of so-called generic business strategies based on the two types or sources of competitive advantage. The relationship of these two sources with the scope of the target market served (narrow or broad) or product mix width (narrow or wide) yields four generic strategies: cost leadership, product differentiation, cost focus, and focused differentiation. Generic strategies aiming at the achievement of competitive advantage or superior marketing strategy demand that the firm make choices. The choices concern the type of competitive advantage it seeks to attain (based on cost or differentiation) and the market scope or product mix width within which competitive advantage will be attained.
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14. The Flagship Firm: The Business Network with Five Partners
According to Professors Alan Rugman and Joseph D’Cruz, Porter’s model is too simplistic given the complexity of today’s global environment. Rugman and D’Cruz have developed an alternative framework based on business networks that they call the flagship model. The flagship firm is at the center of a collection of five partners; together, they form a business system that consists of two types of relationships. The flagship firm provides the leadership, vision, and resources to “lead the network in a successful global strategy.” Key suppliers are those
that perform some value-creating activities, such as manufacturing of critical components, better than the flagship. The double-headed arrows that penetrate the flagship and key suppliers in the figure indicate that this is a network relationship, with a sharing of strategies, resources, and responsibility for the success of the network. Other suppliers are kept at “arm’s length”; these traditional commercial relationships are depicted diagrammatically by arrows that stop at the border of the flagship. Likewise, the flagship has network relationships with key customers and more traditional, arm’s length commercial relationships with key consumers. Key competitors are companies with which the flagship develops alliances such as those described at the end of Chapter 9. The fifth partner is the nonbusiness infrastructure (NBI), comprised of universities, governments, trade unions, and other entities that can supply the network with intangible inputs such as intellectual property and technology. In the flagship model, flagship firms often play a role in the development of a country’s industrial policy.
Commercial Relationship
Network Relationship
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15. Creating Competitive Advantage via Strategic Intent
Few competitive advantages are long lasting. Keeping score of existing advantages is not the same as building new advantages. The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today. An organization’s capacity to improve existing skills and learn new ones is the most defensible competitive advantage of all.
- Gary Hamel and C.K. Prahalad
An alternative framework for understanding competitive advantage focuses on competitiveness as a function of the pace at which a company implants new advantages deep within its organization. This framework identifies strategic intent, growing out of ambition and obsession with winning, as the means for achieving competitive advantage. This approach is founded on the principles of W. E. Deming, who stressed that a company must commit itself to continuing improvement in order to be a winner in a competitive struggle.
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16. Creating Competitive Advantage via Strategic Intent
Building layers of advantage
Searching for loose bricks
Changing the rules of engagement
Collaborating
The book discusses the Komatsu/Caterpillar saga, and this is just one example of how global competitive battles are shaped by more than the pursuit of generic strategies. Many firms have gained competitive advantage by disadvantaging rivals through “competitive innovation.” Hamel and Prahalad define competitive innovation as “the art of containing competitive risks within manageable proportions” and identify four successful approaches utilized by Japanese competitors. These are: building layers of advantage, searching for loose bricks, changing the rules of engagement, and collaborating.
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17. Global Competition and National Competitive Advantage
Global competition occurs when a firm takes a global view of competition and sets about maximizing profits worldwide
The effect is beneficial to consumers because prices generally fall as a result of global competition
While creating value for consumers it can destroy the potential for jobs and profits
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18. Global Competition and National Competitive Advantage
According to Porter, the presence or absence of particular attributes in individual countries influences industry development, not just the ability of individual firms to create core competences and competitive advantage. Porter describes these attributes—factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry—in terms of a national “diamond” which is illustrated on this slide. The diamond shapes the environment in which firms compete. Activity in any one of the four points of the diamond impacts on all the others and vice versa. The following slides will discuss the various subsections of the model.
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19. Factor Conditions
Human Resources – the quantity of workers available, skills possessed by these workers, wage levels and work ethic
Physical Resources – the availability, quantity, quality, and cost of land, water, minerals and other natural resources
Knowledge Resources – the availability within a nation of a significant population having scientific, technical, and market-related knowledge
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20. Factor Conditions
Capital Resources – the availability, amount, cost, and types of capital available; also includes savings rate, interest rates, tax laws and government deficit
Infrastructure Resources – this includes a nation’s banking, health care, transportation, and communication systems
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21. Demand Conditions
Composition of Home Demand – determines how firms perceive, interpret and respond to buyer needs
Size and Pattern of Growth of Home Demand – large home markets offer opportunities to achieve economies of scale and learning in familiar, comfortable markets
The nature of home demand conditions for the firm’s or industry’s products and services is important because it determines the rate and nature of improvement and innovation by the firms in the nation. These are the factors that either train firms for world-class competition or that fail to adequately prepare them to compete in the global marketplace. Three characteristics of home demand are particularly important to creation of competitive advantage: the composition of home demand, the size and pattern of growth of home demand, rapid home market growth, and the means by which a nation’s home demand pulls the nation’s products and services into foreign markets.
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22. Demand Conditions
Rapid Home Market Growth – another incentive to invest in and adopt new technologies faster and to build large, efficient facilities
Products being pushed or pulled – do a nation’s people and businesses go abroad and then demand the nation’s products and services in those second countries
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23. Related and Supporting Industries
The advantage that a nation gains by being home to internationally competitive industries in fields that are related to, or in direct support of, other industries
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24. Firm Strategy, Structure, and Rivalry
Domestic rivalry in a single national market is a powerful influence on competitive advantage
The absence of significant domestic rivalry can lead to complacency in the home firms and eventually cause them to become noncompetitive in the world markets
Differences in management styles, organizational skills, and strategic perspectives create also advantages and disadvantages for firms competing in different types of industries
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25. Firm Strategy, Structure, and Rivalry
Capital markets and attitudes toward investments are important components of the national environments.
Chance events are occurrences that are beyond control; they create major discontinuities
Government is also an influence on determinants by virtue of its roles as a: consumer, policy maker, and commerce regulator
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26. Current Issues in Competitive Advantage
Today’s business environment, market stability is undermined by:
short product life cycles
Short product design cycles
New technologies
Globalization
Result is an escalation and acceleration of competitive forces
Dartmouth College professor Richard D’Aveni suggests that the Porter strategy frameworks fail to adequately address the dynamics of competition in the 1990s. In light of the information shared on this slide D’Aveni believes the goal of strategy has shifted from sustaining to disrupting advantages. The limitation of the Porter models, D’Aveni argues, is that they are static; that is, they provide a snapshot of competition at a given point in time. Acknowledging that Hamel and Prahalad broke new ground in recognizing that few advantages are sustainable, D’Aveni aims to build upon their work in order to shape “a truly dynamic approach to the creation and destruction of traditional advantages.” The next several slides will discuss his theory.
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27. Current Issues in Competitive Advantage
Hyper-competition is a term used to describe a dynamic competitive world in which no action or advantage can be sustained for long
Competition unfolds in a series of dynamic strategic interactions in four areas: cost quality, timing and know-how, entry barriers, and deep pockets
The only source of a truly sustainable competitive advantage is a company’s ability to manage its dynamic strategic interactions with competitors by means of frequent movements and counter movements that maintain a relative position of strength in each of the four arenas.
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28. Current Issues in Competitive Advantage
In today’s world, in order to achieve a sustainable advantage, companies must seek a series of unsustainable advantages
The role of marketing is innovation and the creation of new markets
Innovation begins with abandonment of the old and obsolete
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29. Current Issues in Competitive Advantage
“Innovative organizations spend neither time nor resources on defending yesterday. Systematic abandonment of yesterday alone can transfer the resources…for work on the new.”
-Peter Drucker
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30. Looking Ahead
Chapter 16 Leading, Organizing, and Controlling the Global Marketing Effort
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31. Cost Leadership
Based on a firm’s position as the industry’s low-cost producer
Must construct the most efficient facilities
Must obtain the largest market share so that its per unit cost is the lowest in the industry
Only works if barriers exist that prevent competitors from achieving the same low costs
Return
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32. Product Differentiation
Product that has an actual or perceived uniqueness in a broad market has a differentiation advantage
Extremely effective for defending market position
Extremely effective for obtaining above-average financial returns; unique products command a premium price.
Return
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33. Cost Focus
Firm’s lower cost position enables it to offer a narrow target market and lower prices than the competition
Sustainability is the central issue for this strategy
Works if competitors define their target market more broadly
Works if competitors cannot define the segment even more narrowly
Return
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34. Focused Differentiation
The product only has actual uniqueness but it also has a very narrow target market
Results from a better understanding of customer’s wants and desires
Example – High-end audio equipment
Return
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35. Building Layers of advantage
A company faces less risk if it has a wide portfolio of advantages
Successful companies build portfolios by establishing layers of advantage on top of one another
Illustrates how a company can move along the value chain to strengthen competitive advantage
Return
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36. Searching for Loose Bricks
Search for opportunities in the defensive walls of competitors whose attention is narrowly focused
Focused on a market segment
Focused on a geographic are to the exclusion of others
Return
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37. Changing the Rules of Engagement
Refuse to play by the rules set by industry leaders
Example Xerox and Canon
Xerox employed a huge direct sales force; Canon chose to use product dealers
Xerox built a wide range of copiers; Canon standardized machines and components
Xerox leased machines; Canon sold machines
Return
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38. Collaborating Use the know-how developed by other companies
Licensing agreements, joint ventures, or partnerships
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