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Analysing Competitive AdvantageChristopher McKenna

Executive MBAMay 2013

WWW.SBS.OXFORD.EDUEDUCATING LEADERS FOR 800 YEARS

What’s So Special About the iPhone?

Apple Software Samsung Applications Processor Samsung SDRAM Memory (10% of the total

cost to manufacture) Samsung NAND Flash (15% of total cost) Broadcom GPS Texas Instruments Touchscreen Controller ST Micro Gyroscope LG LCD Display Infineon Transceiver (Quad Band)

1. Resource-Based View

2. Core Competence

3. Business Designs

4. Generic Competitive Strategies

Key Concepts from this Session

American RailwaysWhat Business Is It In?

Rail

Transport

Goods Passengers

Distribution Tourism

Business Services Consumer Services

“The Customer-Defined Business”

Source: Ted Levitt, Marketing Myopia, HBR, July, 1960

Looking Outside

Cameras Copiers Faxes Printers

Precis. Fine Micro- Mech. Optics Electron

Micro- Optronics

“Core Competence”

Source: Prahalad and Hamel, HBR, May, 1990

Core Competences at Canon

Looking Inside the Firm

Core Competence: the firm’s central dynamo of strategic advantage over time (typically integrativeand specific)

Many firms have none.

Capabilities/Competences: the firm’s ability to put resourcesto profitable use (verbs) Most firms will have some.

Resources: e.g. the firm’s equipment, patents, people, brands, money (nouns)

All firms have these.

The key question from the RBV is: what are you best at?

The Resource-Based View

RBV = Superior performance stems from within the firm – its resources and capabilities

Core Competence Statements

CitiCorp: Systematising and exploiting real-time financial information

Honda: Designing and manufacturing petrol-poweredengines, especially for mobile devices

Sony: Using miniaturisation to create and market innovative electronic products for consumer markets

Based on Prahalad and Hamel, The Core Competence of the Corporation, HBR, 1990

Key question: Are there activities others can do better?

Profitability

Distance from Core

A Question of Focus

Core

1. Map products and services

2. Identify underlying technologies, skills, processes and resources

3. Synthesise common technologies, skills, processes and resources

4. Check that common technologies, skills, processes and resources are extendable

5. Keep Testing!

Identifying Core Competence

· is it valued by customers will they pay you more than it costs?

· is it superior you command a premium over competitors?

· is it imitable your competitors cannot copy?

· is it substitutable your competitors cannot out-trump you?

· is it durable are you managing and building it?

· is it core is it the base of (nearly) everything you do?

Testing Resources and Competences

It is Probably NOT a “Core Competence” if ...

it’s based on a particular product or service (not “our core competence is coffee”)

it’s based on a person or small group of people (not “our core competence is our emerging markets team”)

it’s simply what you haven’t yet divested or outsourced (not “we have divested these businesses to focus on our core”)

it’s something many others could say (not “our core competence is service excellence”)

Business Designs

Competition is no longer about ‘silver bullets’ but about competing ‘business designs’.

Business Design: a mutually reinforcing (complementary) configuration of business choices

on key value adding dimensions, underpinned by fundamentalassumptions about business drivers

Examples: Wal-Mart, EasyJet, Nucor, and Amazon

Fundamental Assumptions:What business are you in?

What are your customers going to want?What drives profits in the chain?

Competing on Business Design

‘Big Steel’ Mini-Mills

Fundamental Quality at a Price Right quality, right priceAssumptions: Volume Key Low Volumes

Design Elements:

Customers Broad Regional Focus

Scope Vertical Integration Scrap

Operating System Basic Oxygen Electric Arc

Capital Intensity High Low

R&D In-house Suppliers

Organization Unionized Lean, Green

Electric Arc

Low Volume

LowQuality

GreenWorkers

RegionalMarkets

Low R&D

KeyPlant

Suppliers

LowOverheads

HighIncentives

Low Prices

No Unions

Nucor’s Business Design (“activity system map”)

Low Capital

List Prices

LimitedProducts

Porter, 1996, Harvard Business Review

Key Business Drivers Shaded; Reinforcing Links Indicated

1. Identify functional elements of overall strategy (e.g. HR, Ops etc)2. Identify complementary links, potential links – and conflicting ones3. Build complements, and minimise conflicts4. Which element most at risk of change?

Technology Strategy

Supplier Strategy

OperationsStrategy

FinancingStrategy

Human ResourceStrategy

MarketingStrategy

Mapping Complementarities in Business Design

The Activity System Map

At the level of the business unit, there are just two ways of achieving superior performance, the ‘generic strategies’ of:

· cost leadership· differentiation

The scope of cost leadership and differentiation can be broad or narrow. But Porter warns that the two strategies can’t be mixed. His message is:

· identify your advantage - your ‘reason for being’· know your competence· don’t get ‘stuck-in-the-middle’

Porter’s Generic Competitive Strategies

Costs Costs

Average PriceProfit Profit

Profit

Costs

Competence Competence

Advantage from Generic Strategies

Apply competences for either cost or differentiation advantages

Profitability Profitability

Low Cost Differentiation

1. Does the business really know where it is?

2. Is the business in too many positions?3. Is the business in danger of compromising its position?

Generic Strategy Choices

Maintain ‘parity’ on each dimension – but don’t get stuck-in-the-middle

Cost Leadership and Differentiation

Cost leader Differentiator

• Higher prices• More extras• Quality features• Service• Snob appeal

• Lower costs• Fewer extras• Efficiency• Scale economies• Budget appeal

“Stuck in the Middle”

• Unclear value proposition• High costs, low prices?

Some Cautionary Warnings

Are Core Competences too Subjective?

Are Resources Inherently Tautological?

Are Generic Strategies too Dichotomous?

Your Strategy Statement?

For a business with which you are familiar:

1. Explain the goals of the business

2. Define its scope

3. Explain how competitive advantage supports goals and scope

4. Is competitive advantage adequate, all across the business?

In 35 words or less ....

1. Resource-Based View

2. Core Competences

3. Business Designs and Activity Systems

4. Generic Competitive Strategies

Key Concepts from this Session