1. Foundations of Strategy Chapter 4
The Nature and Sources of Competitive Advantage
By: Jakeb, Cedric, David, & Cody
October 5, 2014

2. Overview
Understand ‘competitive advantage’ and identify the circumstances firms can create a competitive advantage over a rival.
Distinguish two primary types of competitive advantage:
Cost advantage
Differentiation advantage
Sustaining competitive advantage
How firms utilize the value chain framework to analyze potential sources of cost and dedifferentiation

3. Forming an Understanding
What is Competitive Advantage?
Defined as:
When two or more firms compete within the same market, one firm posses a competitive advantage over its rival when it earns (or has the potential to earn) a persistently higher rate of profit.
Examples:
Toyota’s competitive advantage in making mass produced cars
Wal-Mart’s competitive advantage in discount retailing within the U.S.
SAP in enterprise resource planning (ERP) software.

4. External vs. Internal
Figure 4.1 The emergence of competitive advantage
How does competitive advantage emerge?
External sources of change e.g.,
Changing customer demand
Changing prices
Technological change
Internal sources of change
Some firms have greater creative and innovative capability
Resources heterogeneity among firms means differential impact
Some firms faster and more effective in exploiting change

5. External | Responsiveness
Extent to which external change creates competitive advantage (or disadvantage) depends on magnitude of the change and extend of firms' strategic differences.
More turbulent an industry =
The greater the number of sources of change,
The greater the differences in firms’ resources and capabilities
The greater dispersion of profitability within the industry

6. External | Responsiveness
Responsiveness to external sources involves one of two capabilities:
Ability to anticipate changes in the external environment
Speed
Example:
An unexpected rain shower creates an upsurge in the demand for umbrellas. Those street vendor who are quickest to position themselves outside a busy train station will benefit most.

7. External vs. Internal
Figure 4.1 The emergence of competitive advantage
How does competitive advantage emerge?
External sources of change e.g.,
Changing customer demand
Changing prices
Technological change
Internal sources of change
Some firms have greater creative and innovative capability
Resources heterogeneity among firms means differential impact
Some firms faster and more effective in exploiting change

8. Internal | Innovation
Competitive advantage may also be generated internally through innovation.
Innovation can provide a basis for overturning the competitive advantage of other firms.
Strategic innovation- new approaches to doing business including new business models; may also be based on redesigned process and novel organizational designs.
Examples
Southwest Airlines’ point-to-point system instead of the hub and spoke system.
Apple’s resurgences during was a result of its reinvention of the recorded music business by combining iconic MPS player with its iTunes music download service.

9. Internal | Innovation
Strategic Innovation tend to involve pioneering along one or more dimensions of strategy:
New industries
Launching products which create new markets; creating new markets can potentially be the purest form of blue ocean strategy- the creation of uncontested market space.
New customer segments
Creating new customer segments for existing products concepts can also open up vast new markets spaces.
New sources of competitive advantage
Most successful blue ocean strategies do not launch whole new industries, but rather introduce novel approaches

10. External vs. Internal
Figure 4.1 The emergence of competitive advantage
How does competitive advantage emerge?
External sources of change e.g.,
Changing customer demand
Changing prices
Technological change
Internal sources of change
Some firms have greater creative and innovative capability
Resources heterogeneity among firms means differential impact
Some firms faster and more effective in exploiting change

11. Sustaining Competitive Advantage
Once established, competitive advantage is subject to erosion by competition. The speed with which competitive advantage is undermined depends on the ability of competitors to challenge either by imitation or innovation.
Imitation is the most direct from of competition thus barriers to imitation must exist for competitive advantage to be sustained.
Isolating Mechanisms
– Barriers that protect a firm’s profits from being driven down by the competitive process.

12. Competitive Imitation
To identify sources of isolating mechanisms we first need to examine the process of competitive imitation.
For a firm to successfully imitate the strategy of another, it must meet four conditions:
Identification
Incentive
Diagnosis
Resources acquisition

13. Identification
A simple barrier to imitation is to obscure the firm’s superior profitability.
According to George Stalk of the Boston Consulting Group, one way to throw competitors off balance is to mask high performance so rivals fail to see your success until it’s to late.
Example
Avoiding disclosure of a firms financial performance [much easier for a private company than a public one]

14. Incentive
Firm may undermine the incentives for imitation by persuading rivals that imitation will be unprofitable.
Reputation here is critically important.
Examples
NutraSweet’s aggressive price war against the Holland Sweetener Company deterred other would-be entrants.
Proliferation in products; between 1950 and 1972, the six leading suppliers of breakfast cereals introduces 80 new brands into the US market
Proliferation in patent;1974 Xerox dominant market position was protected by a wall of over 2000 patents. When IBM introduced its first copier in 1970, Xerox sued it for infringing 22 of these patents.

15. Diagnosis
If a firm is to imitate the competitive advantage of another, it must understand the basis of its rival’s success.
This proves difficult the more multidimensional a firm’s competitive advantage becomes.
This leads to uncertain imitability – because there is ambiguity in causes of success of a competitor, any attempt to imitate the strategy is subject to uncertain success.

16. Resource acquisition
To succeed in competitive imitation, the imitator can mount a competitive challenge only by assembling the resources and capabilities necessary for imitation: buy them or build them.
Time is critical
Examples
In financial services, most new products are copied quickly by competitors; Collateralized debt obligations (CDO’s) developed by the firm Drexel Burnham Lambert which lead to the 2008 financial crisis.

17. Competitive Imitation
Figure 4.2 Sustaining competitive advantage: types of isolating mechanisms
Competitive Imitation
Isolating Mechanism
Identification
Obscure performance
Incentives for imitation
Deterrence: signal aggressive intentions to imitators
Preemption: exploit all available investment opportunities
Diagnosis
Casual ambiguity; rely on multiple sources of competitive advantage
Resource acquisition
Base competitive advantage on resources and capabilities that are immobile and difficult to replicate

18. Types of Competitive Advantage: Cost and Differentiation
Figure 4.3 Sources of competitive advantage
Cost Advantage
Similar product
Lower cost
Competitive Advantage
Price premium
From unique product
Differentiation Advantage

19. Types of Competitive Advantage: Cost and Differentiation
Cost advantage
Similar products, lower cost
Quantitative emphasis
Differentiation advantage (Chipotle)
Differentiated + price premium
Qualitative emphasis

20. Strategy and Cost Advantage
How to compete in cost advantage
Cost drivers
All the small things
Cost drivers through value chain analysis
Activities
Choose and rank
Benchmark
Links
Reduce cost

21. Strategy and Differentiation Advantage
Obtaining this requires a price premium in the market that exceeds the cost of providing the differentiation
Commodities and differentiation
Cemex – Cement Company
Amazon – Online book selling

22. How do you differentiate?
It’s all about identifying and understanding every possible interaction between the firm and the customers
Then, learn how those interactions can be enhanced or changed to create value to the customer

23. Stages of Value Chain - Differentiation
Construct a value chain for the firm and its customers
Identify the drivers of uniqueness in each activity
Select the most promising differentiation variable for the firm
Locate linkages between the value chain of the firm and that of the buyer

24. Case Studies in Differentiation
Singapore Airlines – not only reducing costs but also differentiating in various services for the customers
Personalization through meals
Inbound and Outbound logistics
Technology Development (check-in services)
Procurement (e.g. A380)

25. Case Studies in Differentiation
Chipotle – by focusing on differentiation and not cost leadership, they have grown their profitability
Quality of life for customers through organic foods
Creating an atmosphere different from competitors
Selling alcohol (versus that of McDonald’s and Taco Bell, encourages customers to sit and linger)

26. Differentiation or Low Cost?
“The firm stuck in the middle is almost guaranteed low profitability.” – Porter
But… there is a way to reconcile differentiation advantage with low cost strategies
SIA – speedy check-in technology not only increases value for customers, but also lowers the cost of delays
Chipotle – price advantage of fast customer turnover (assembly line) with the combined selection of quality ingredients

27. The Beginning of Starbucks
March 30,1971- Starbucks Opens
Jerry Baldwin
Zev Siegl
Gordon Bowker
1982- Howard Schulz becomes the CEO
1987- Starbucks founders sold the company to Howard Schulz, who previously owned Giornale coffee outlets

28. The Tenets of Starbucks
Welcoming Customer Service
Premium Products
Slightly Exclusive

29. Starbuck’s Baristas vs. McDonald’s Employees
Employees Morality isn’t high
Low pay, benefits such as healthcare and dental are not provided to all employees working over 20 hours
Employees are in process of unionizing
When was the last time you went to McD’s and saw an employee excited to be at work?
Master of coffee making techniques and encouraged to be knowledgeable about coffee in general
Generous health care benefits and participation in equity holdings
Offers scholarships to college students

30. Starbucks: The Victim Of Its Success
Revenue went up from $160 million in 1993 to $10 billion by 2009
After Howard Schulz resigned in 2000, SB had stores in 150 countries
Expansion without proper management, cause the company to compromise its principles
Example: Starbucks went away from hand-pulled espresso machines to the automatic variety which sped up service but diminished the spectacle of coffee making

31. Growing Pains Incompetent Management
McDonald and DD’s provide value, some people want to support the local companies, and there’s Starbucks struggling to get its foothold
Liberals are arguing that SB isn’t as environment-friendly as it portrays itself

32. Four Bucks is Dumb

33. Unsnobbycoffee.com

34. Starbucks’ Response
“We get a lot of questions on the competition and that everyone seems to be picking on Starbucks through their advertising and try to reposition Starbucks as expensive or snobby …We're not going to get sucked into the, 'My coffee is better than your coffee,' price point type of coffee conversation. We're going to play at a much higher level."
Terry Davenport, Chief Marketing Officer of Starbucks

35. Breaking Point Jim Donald, CEO since 2000, is fired
SB’s stock price declined 50%
Operational Income greatly diminished
Howard Schulz is Back

36. The Return of Starbucks
Closed down 600 stores
In 2008, 12,000 employees were layoff
Temporary closed all 7,100 domestic stores for employee training (135,000 US employees)
November 21, 2008: The SP was $7.83
As of October 6, 2014: The SP was $75.23

37. Foundations of Strategy Chapter 4
The Nature and Sources of Competitive Advantage
By: Jakeb, Cedric, David, & Cody
October 5, 2014