1. What determines a firm’s competitiveness? – Business strategy How to compete – looks at how a firm competes within an industry or market. Also known as competitive strategy – Corporate strategy Where to compete – defines the scope of the firm in terms of – The industry it is in – The customer groups it targets – The countries and localities in which it operates – The vertical range of activities it undertakes 1

2. Business Strategy Sources of competitive advantage: External – Examples include: changing customer demand, changing prices, technological change – How a firm takes advantage of changes in its external environment depends on its ability to anticipate the changes and the speed by which it can react to the changes Internal – Firms can create competitive advantage through innovation of products and processes – Examples include: creating new industries, new customer segments 2

3. Two ways firms create competitive advantage: – Cost leadership Broadly defined as supplying the same product or service at a lower cost Characteristics: – Existence of economies of scale and scope – Efficient production – Simpler product design – Lower input costs – Low-cost distribution – Little R&D or brand advertising – Tight cost control system 3

4. 4 Two ways firms create competitive advantage: – Differentiation Broadly defined as supplying a unique product or service at a cost lower than the price premium customers are willing to pay Characteristics: –Superior product quality –Superior product variety –Superior customer service –More flexible delivery –Investment in brand image –Investment in R&D and advertising

5. Corporate Strategy – Product scope Many different products in many different industries – the tools of competitive strategy analysis above can be used to analyze how the firm can compete in each industry – Geographical scope The firm sells (or produces, or both) its products in many different countries. – Vertical scope Backward – the firm produces its own components or other inputs Forward – the firm takes over activities previously undertaken by its customers 5

6. Sources: – Palepu and Healy, Business Analysis and Valuation Using Financial Statements, 4 th ed. – Grant, Contemporary Strategy Analysis, 7 th ed. 6