Chapter 3 An Introduction to Competitive Advantage Copyright © 1999 by Harcourt Brace & Company All...

Chapter 3Chapter 3

An Introduction to An Introduction to Competitive AdvantageCompetitive Advantage

Chapter 3Chapter 3

An Introduction to An Introduction to Competitive AdvantageCompetitive Advantage

Copyright © 1999 by Harcourt Brace & Company

All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

Bourgeois, Duhaime,

& Stimpert

Copyright © 1999 by Harcourt Brace & CompanyAll rights reserved

PrefacePrefacePrefacePreface

The model shown in Exhibit 3.1 suggests that managers must make four types of strategic decisions: Define or position their firms in their competitive

environments based on their understandings of industry structure and dynamics.

Develop a business strategy based on their beliefs about how to compete in their firms’ industries.


Preface Preface (cont.)(cont.)Preface Preface (cont.)(cont.)

Develop a corporate strategy based on their beliefs about the appropriate scale and scope for their firms, their understandings of how their firms’ businesses are related, and the beliefs about how diversification should be managed.

Create an organizational structure based on their beliefs about how to organize a business firm that will allow them to implement their firms’ strategies.


Exhibit 3.1:Exhibit 3.1: Model of Model of Strategic ManagementStrategic ManagementExhibit 3.1:Exhibit 3.1: Model of Model of Strategic ManagementStrategic Management

Feedbackreinforces or

suggests changes

in managers'

mental models

Managers' Mental Models

+ Industry environments + How to compete

+ Appropriate size/diversity,

how businesses are related,

how diversification should

be managed

+ How to organize

Decisions about Business Definition

Decisions about

Organizational

Structure

Decisions about

Business Strategy

Decisions aboutCorporate Strategyand Diversification

Market Position,Resources, and

Capabilities

Performanceand

CompetitiveAdvantage


Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter Objectives

Provide definition and describe characteristics associated with competitive advantage.

Describe how organizations develop and maintain competitive advantage.

Distinguish between content and process. Emphasize importance of organizational processes

in developing and maintaining competitive advantage.


Chapter Objectives Chapter Objectives (cont.)(cont.)Chapter Objectives Chapter Objectives (cont.)(cont.)

Introduce concept of value chain and describe its usefulness as tool for assessing organizational capabilities.

Emphasize importance of socially complex resources. For example, trust, culture, and reputation --

based on interpersonal relationships among managers, employees, customers, and suppliers.


Chapter Objectives Chapter Objectives (cont.)(cont.)Chapter Objectives Chapter Objectives (cont.)(cont.)

Emphasize that any source of competitive advantage can be rendered obsolete very quickly by changes in firms’ competitive environments.


IntroductionIntroductionIntroductionIntroduction What is competitive advantage?

Set of factors or capabilities that allows firms to consistently outperform their rivals.

Second objective is to allow firms to enjoy sustained levels of high performance.

How is firm performance assessed? Financial performance

• Net income

• Gross margin

• Various ratios: return on sales, return on assets, and return on equity.


Introduction Introduction (cont.)(cont.)Introduction Introduction (cont.)(cont.)

Stock market performance measures• One- and five-year market returns.

• Earnings per share (EPS)

• Price/earnings ratio (P/E) Market share Others

• Retailing: sales per square foot of retailing space.

• Banking: net interest earned.

• “Cycle time” and “time to market”– Time it takes to get new product ideas into production and

available for consumer purchase.



Others (cont.)• Customer perceptions of quality and business reputation.

Certain accounting items, such as “extraordinary items” or a series of restructuring charges over a period of several years can have positive or negative impact on a firm’s performance.

Source of performance measurement data.• Annual reports.

• Company 10Ks

• S&P’s Industry Surveys and Moody’s Manuals.



Competitive advantage: importance of firm-specific factors and capabilities. Strategies affect performance through the

development of firm-specific factors, capabilities, and competencies that are sources of competitive advantage.

• Business definitions or market positions.

• Strategies.

• Organizational structures.



Two studies reported that firms in the same industry pursuing the same strategies had widely varying levels of performance.

One way to explore the firm-specific factors through the “resource-based view of the firm.”

• Suggests firms can be viewed as collections of productive resources.

• Competitive advantage will be determined by capabilities firms bring to their competitive arenas.

– More important than industry-specific factors.


Criteria which Determine whether Criteria which Determine whether Resources and Capabilities Can Resources and Capabilities Can Provide Firms with Competitive Provide Firms with Competitive AdvantageAdvantage

Criteria which Determine whether Criteria which Determine whether Resources and Capabilities Can Resources and Capabilities Can Provide Firms with Competitive Provide Firms with Competitive AdvantageAdvantage

Resource-based theory suggests that firms will enjoy a sustained competitive advantage only if their capabilities are valuable and rare, lack substitutes, and are difficult to imitate.

SeeExhibit

3.2


Asymmetric Nature of Asymmetric Nature of Competitive Competitive AdvantageAdvantage

Asymmetric Nature of Asymmetric Nature of Competitive Competitive AdvantageAdvantage

Asymmetry is essential characteristic of competitive advantage. To enjoy a competitive advantage, a firm must do

what its rivals cannot do, or alternatively, if it does what its rivals can do, then it must do it better.

Any resource or capability will only contribute to development of competitive advantage if it is associated with “barriers” that prevent its acquisition or replication by competitors.


Challenge of Challenge of Defending Against Defending Against ImitationImitation

Challenge of Challenge of Defending Against Defending Against ImitationImitation

More difficult in our society due to accessibility of information.

Studies have shown that ideas and innovation are diffused through the economy in the “S-shaped curve” as illustrated in Exhibit 3.3 on following slide. For a relatively brief time, from t0 to t1, innovations

may be proprietary to one or just a few firms.• The value of innovation will contribute to competitive

advantage only until the diffusion process begins (at t1 in this case).


Exhibit 3.3:Exhibit 3.3: Diffusion of Diffusion of InnovationsInnovationsExhibit 3.3:Exhibit 3.3: Diffusion of Diffusion of InnovationsInnovations

t1 t2 Time0

100

Percentage of Firms Adopting

the Innovation


Preventing ImitationPreventing ImitationPreventing ImitationPreventing Imitation

Patents. Exclusive rights for 17 years. Risk of competitor engineering around patent.

Exclusive access to key resources or assets. Litigation


Developing Developing Competitive Competitive AdvantageAdvantage

Developing Developing Competitive Competitive AdvantageAdvantage

Competitive advantage most likely to result from development of unique capabilities that are acquired through an on-going process of resource accumulation. Five factors contribute to resource accumulation

process:• Time

• Building on past success

• Interconnectedness of capabilities

• Investment

• Casual ambiguity


TimeTimeTimeTime

Firm that builds a resource or capability through investments over many years may enjoy significant advantage over firms that attempt to replicate that capability through larger investments made over a shorter period of time. Value of time is directly related to extent of

learning that occurs.


Building on Past Building on Past SuccessSuccessBuilding on Past Building on Past SuccessSuccess

“Success breeds success.” History of accomplishments makes it easier for

firms to enjoy future success.• Will have more discretionary resources which can

be reinvested to expand their businesses.

• Their reputations for success will also help them attract more assets and resources.

• Venture capital tends to flow to start-up firms that have managers with proven track records.

• Firms on more successful paths will almost always have better array of options.


Interconnectedness of Interconnectedness of Asset StocksAsset StocksInterconnectedness of Interconnectedness of Asset StocksAsset Stocks

Ability to augment a particular resource or capability may be tied to or depend on the strength or value of other capabilities. Customer service and information from field

regarding future product requirements. R&D capabilities and marketing skills (in

pharmaceutical industry). Computer operating systems and software

program sales (Microsoft).


InvestmentInvestmentInvestmentInvestment

Important for two reasons: Investments are primary method for developing

capabilities. Resources and capabilities must be replenished if

they are to continue to serve as sources of competitive advantage.


Casual AmbiguityCasual AmbiguityCasual AmbiguityCasual Ambiguity

Likelihood of maintaining sustained competitive advantage is greatly enhanced if resources and capabilities are shrouded in casual ambiguity. If competitors are unable to determine how or why

another firm is enjoying a competitive advantage, this will greatly complicate their efforts to imitate the high-performing firm’s success.


How Firms Develop How Firms Develop Competitive Advantage - Competitive Advantage - SummarySummary

How Firms Develop How Firms Develop Competitive Advantage - Competitive Advantage - SummarySummary

Exhibit 3.4 on following slide contains a conceptual flow chart with questions each firm should ask itself when assessing competitive advantage.

U.S. automakers have imitated techniques of their Japanese competitors, yet the Big Three continue to lag behind Toyota and Honda in many capabilities. Imitation did not result in gaining a competitive

advantage.


Exhibit 3.4:Exhibit 3.4: Competitive Competitive Advantage: A Flow ChartAdvantage: A Flow ChartExhibit 3.4:Exhibit 3.4: Competitive Competitive Advantage: A Flow ChartAdvantage: A Flow Chart

Does the firm do what other firms cannot

do?

Does the firm do what other firms can do, but does it do

better?

Asymmetry

Valuable? Rare? Lack substitutes?

+ Developed over time + Based on past success + Interconnectedness + Investment + Causal ambiguity

Difficult to imitate?

Competitive Advantage


Specific Routes to Specific Routes to Developing Competitive Developing Competitive AdvantageAdvantage

Specific Routes to Specific Routes to Developing Competitive Developing Competitive AdvantageAdvantage

Competitive advantage will not happen without a strategy. Four ways a firm may gain competitive advantage:

• Business definition and positioning.

• Business strategy.

• Corporate strategy.

• Organizational structure.


Business DefinitionBusiness DefinitionBusiness DefinitionBusiness Definition

Will be covered in further detail in Chapter 6. Business definition answers the “Who,” “What,” and

“How” questions. Describes the customer preferences that the firm

aims to meet, the specific products/services it will provide, and the technologies it will employ to deliver those products/services.

Competitive advantage can be achieved if one’s definition allows it to occupy a unique position in its industry.

• Harley -Davidson.


Business StrategyBusiness StrategyBusiness StrategyBusiness Strategy

For most firms, competitive advantage depends on being able to to do what other firms also do, but doing it better than they do. Gap Jeans has developed certain firm-specific

capabilities that allow it to be more successful than competitors pursuing similar strategies.

Will be covered in more detail in Chapter 7.


Corporate StrategyCorporate StrategyCorporate StrategyCorporate Strategy

Chapter 9 will deal with corporate strategies and how they can be sources of competitive advantage.

Corporate strategy addresses several important questions: “What is the appropriate scale and scope of the

enterprise?” “How are the businesses of the diversified firm

related?” “How should the diversified firm be managed?”


Organizational Organizational StructureStructureOrganizational Organizational StructureStructure

Chapter 10 will examine organizational structure. Importance of routines and standard operating

procedures. Information flows and systems. Organizational culture.

These components of organizational structure can contribute to development of competitive advantage.


Distinction between Distinction between Content and ProcessContent and ProcessDistinction between Distinction between Content and ProcessContent and Process

Strategy content: What a firm does. Process: How a firm does or decides what it does. Organizational processes not only complement, but

also have distinct advantages over strategy content elements in managers’ efforts to develop competitive advantage. These processes are less amenable to imitation,

because internal organizational processes are much less visible to outsiders.


Distinction between Distinction between Content and ProcessContent and Process (cont.)(cont.)

Distinction between Distinction between Content and ProcessContent and Process (cont.)(cont.)

Exhibits 3.5 and 3.6 suggest that Merck’s high performance is not due to the content of its R&D strategy, but more likely is due to the processes the firm uses to implement and manage its R&D program in order to yield so many new blockbuster drug products.

SeeExhibits3.5 & 3.6


Value Chain AnalysisValue Chain AnalysisValue Chain AnalysisValue Chain Analysis

Can be very helpful tool for evaluating the capabilities embedded in organizational processes. Simply a diagram illustrating the various value-

adding processes that occur inside a business (see Exhibit 3.7 on following slide).

Analyzing the various links in the value chain helps managers evaluate the extent to which their organization’s processes contribute to competitive advantage.


Exhibit 3.7:Exhibit 3.7: Value Chain for Value Chain for

Hypothetical Hypothetical Manufacturing Manufacturing

FirmFirm

Exhibit 3.7:Exhibit 3.7: Value Chain for Value Chain for

Hypothetical Hypothetical Manufacturing Manufacturing

FirmFirm

Engineeringand Design

Purchasing

Assembly andProduction

After-SaleService


Importance of Socially Importance of Socially Complex ResourcesComplex ResourcesImportance of Socially Importance of Socially Complex ResourcesComplex Resources

Defined as: Resources that enable an organization to conceive,

choose, and implement strategies because of the values, beliefs, symbols, and interpersonal relationships possessed by individuals or groups in a firm.

• Examples: Organizational culture; trust and friendship among managers in an organization; reputation of an organization among its customers; teamwork among managers and workers.


ConclusionsConclusionsConclusionsConclusions

Asymmetric nature of competitive advantage described. Firms enjoy competitive advantage by doing what

other firms cannot do, or by doing what other firms do but do it better.

Firms can enjoy sustainable competitive advantage by possessing capabilities that are causally ambiguous and difficult to imitate.


Conclusions Conclusions (cont.)(cont.)Conclusions Conclusions (cont.)(cont.)

An organization’s internal processes are more likely than strategy content variables to be sources of sustained competitive advantage.

Factors which contribute to the development of unique and valuable capabilities: Time Past success Interconnectedness Investment Causal ambiguity


Conclusions Conclusions (cont.)(cont.)Conclusions Conclusions (cont.)(cont.)

A particular internal process can quickly be rendered obsolete due to environmental shifts, such as changes in regulations or technologies. Therefore, managers need to acquire and develop

resources that enhance their firm’s current position, while being mindful of the kinds of resources and capabilities that will be needed in the future.


Key Points Key Points Introduced in Introduced in Chapter 3Chapter 3

Key Points Key Points Introduced in Introduced in Chapter 3Chapter 3

Definition for competitive advantage: Set of factors or capabilities that allows firms to

consistently outperform their rivals. Without resource “mobility barriers” to prevent the

transfer of resources and skills across firms, capabilities and other sources of competitive advantage tend to be quickly diffused through an industry and the entire economy.


Key Points Introduced Key Points Introduced in Chapter 3 in Chapter 3 (cont.)(cont.)


Firms that enjoy a sustained competitive advantage possess factors, capabilities, or competencies that are valuable, rare, lack substitutes, and are difficult to imitate. As a result, a key characteristic of competitive

advantage is asymmetry.• Firms enjoy a competitive advantage by either doing

what other firms cannot do, or if they do what other firms can also do they must do it better.




Five factors that contribute to the development of sustained competitive advantage are: Time Past success Interconnectedness of resources Investment Casual ambiguity




Because they tend to be casually ambiguous and difficult to imitate, a firm’s internal processes are more likely than the content of its strategies to be sources of sustained competitive advantage.

Socially complex resources such as reputation and organizational culture can also be important sources of competitive advantage They are so difficult to imitate.




The value chain can be a very useful tool for analyzing organizational capabilities and processes and to assess competitive advantage.

A source of competitive advantage in one time period can become dated and useless in a later time period, so a key management responsibility is to be mindful of how vulnerable resources and capabilities are to imitation and obsolescence and to anticipate the kinds of resources and capabilities that will be needed to compete effectively in the future.

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