1. Chapter 12 Competitive factors

2. Chapter Outline COMPETITIVE FACTORS COMPETITIVE ADVANTAGE PORTER’S 5 FORCES PROTER’S VALUE CHAIN

3. Environmental analysis Part of a firm’s environmental analysis will involve assessing the degree and sources of competition within the industry Key issue whether the firm has a sustainable competitive advantage Different ways in which a firm can achieve a competitive advantage Main competitive forces in an industry How different activities and departments within the firm contribute to its competitiveness

4. Competitive advantage Michael Porter stated that a firm wishing to obtain a competitive advantage over its rivals is faced with two choices: 1. Cost leadership vs. differentiation 2. Degree of focus 3 generic strategies: Cost leadership, e.g. Nissan, Ford, Honda Differentiation, e.g. BMW, Jaguar, Mercedes Focus, e.g. Ferrari, Rolls Royce

5. Competitive advantage 1.Cost leadership vs. differentiation Is the company seeking to compete by achieving lower costs than its rivals for similar p/s? If so, then it can either undercut competitors on price, or charge similar prices and enjoy superior margins. OR Is the company wishing to differentiate itself by offering a better product than competitors? Here the customer is prepared to pay a premium price for added value which the customer perceives in the product. The firm thus enjoys a greater margin than the undifferentiated product.

6. Competitive advantage 2.Degree of focus What is the scope of the area in which the company wishes to obtain competitive advantage? Is it industry-wide or is it restricted to a specific niche? Porter argues that trying to be both a cost leader and a differentiator usually results in the firm becoming ‘stuck in the middle’ with no clear competitive advantage – a recipe for disaster.

7. Competitive advantage Cost leadershipDifferentiation Cost focusDifferentiation focus Lower CostDifferentiation BASIS OF COMPETITION Broad target Narrow target COMPETITIVE SCOPE

8. Competitive strategies Cost leadership strategy Seeking to attain the lowest total overall costs relative to other industry competitors. Differentiation strategy Attempting to create a unique and distinctive product or service for which customers will pay a premium. Focus strategy Using a cost or differentiation advantage to exploit a particular market segment rather a larger market. WA SALVAGE

9. Cost leadership Low-cost producer in an industry for a given level of quality Products are sold either at average industry prices to earn a profit higher than that of rivals, or below average industry prices to gain market share In case of price war, firm can maintain some profitability while competitors suffer losses Usually targets a broad market Ways to acquire cost advantages: improve process efficiencies, unique access to a large source of lower cost materials, outsourcing, vertical integration

10. Differentiation Development of a p/s that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the product of the competition Differentiation focus: business aims to differentiate within just one or a small number of target market segments (important – there must be a valid basis for differentiation) May be successful if a company can Reduce the ongoing cost to the customer of using the product (cheaper to run) Increase customer satisfaction with the product (better product) Modify the customer’s perception of value (brand names)

11. Focus Concentrates on a narrow segment (a particular buyer group, market segment, geographical region, service need, product feature or section of the product range) Within that segment is attempted to achieve either a cost advantage or differentiation Premise is that needs of the group can be better serviced by focusing entirely on it Firm with focus strategy often enjoy high customer loyalty May be the only way into a market for a small company competing against larger companies

12. Porter’s five forces analysis

13. Porter’s five forces model

14. Porter’s value chain Porter developed his value chain to determine whether and how a firm’s activities contribute towards its competitive advantage Approach involves breaking the firm down into 5 ‘primary’ and 4 ‘support’ activities, and then looking at each to see if they give a cost advantage or quality advantage

15. ‘Primary’ activities ActivityDescriptionExample Inbound logistics Receiving, storing and handling raw material inputs A just-in-time stock system could give a cost advantage OperationsTransformation of the raw material into finished p/s Using skilled craftsmen could give a quality advantage Outbound logistics Storing, distributing & delivering finished goods to customers Outsourcing deliveries could give a cost advantage Marketing and sales Market research + 4PsSponsorship of a sports celebrity could enhance the image of the product ServiceAll activities that occur after the point of sale, such as installation, training, repair Marks & Spencer’s friendly approach to returns gives it a perceived quality advantage

16. ‘Support’ activities ActivityDescriptionExample Firm infrastructure How the firm is organised Centralised buying could result in cost savings due to bulk discounts Technology development How the firm uses technology The latest computer- controlled machinery gives a greater flexibility to tailor products to individual customer specifications. HR development How people contribute to competitive advantage Employing expert buyers could enable a supermarket to purchase better wines than competitors ProcurementPurchasing, but not just limited to materials Buying a building out of town could give a cost advantage over High Street competitors

17. Results of analysis

18. How different departments contribute to competitive adv Purchasing Cost advantages – sourcing cheaper materials, bulk discounts, centralised buying Quality adv – sourcing higher quality materials, employing expert buyers Production Cost adv – mass production lines, standardisation, employing workers just above the minimum wage, keeping stock levels low Quality adv – using better quality materials, more quality control procedures, employing highly-skilled staff, flexible manufacturing systems, use of technology to ensure better consistency, ongoing training of staff

19. How different departments contribute to competitive adv Marketing Cost adv – word-of-mouth promotion, sell direct to cut distribution costs Quality adv – market research can help tailor product to meet customer needs, large promotional budgets, sponsorship, perceived quality pricing, brand development Service Cost adv – outsourcing (?), not offering service provision, low paid staff Quality adv – outsourcing (?), highly-skilled staff

20. Chapter Summary Competitive factors Part of external analysis Complements PEST analysis Competitive advantage - Cost leadership - Differentiation - Focus Porter’s value chain - Primary activities (inbound logistics, operations, outbound logistics, marketing, service) - Support activities (procurement, infrastructure, technology) Porter’s 5 forces - Competitive rivalry - Threat of entry - Threat of substitutes - Power of suppliers - Power of buyers