Competitive AdvantageCompetitive Advantage

Chapter 7 & 8 (Part One)Chapter 7 & 8 (Part One)

Learning OutcomesLearning Outcomes

Review of Porter’s 5 Forces Model and it’s Review of Porter’s 5 Forces Model and it’s link to Porter’s generic strategylink to Porter’s generic strategy

Describe and evaluate Porter’s generic Describe and evaluate Porter’s generic strategy strategy

Resource-based framework for analysisResource-based framework for analysis

Michael Porter Michael Porter ……

““An industry’s profit potential An industry’s profit potential is largely determined by the is largely determined by the intensity of competitive intensity of competitive rivalryrivalry within that industry.” within that industry.”

Porter’s Five ForcesPorter’s Five Forces

Advantage of the ModelAdvantage of the Model

According to Porter, businesses can use According to Porter, businesses can use the model to identify how to position itself the model to identify how to position itself to take advantage of to take advantage of opportunitiesopportunities and and overcome overcome threatsthreats

Threat of New EntrantsThreat of New Entrants

Barriers to Entry

Barriers to Entry

Expected RetaliationExpected Retaliation

Government PolicyGovernment Policy

Economies of ScaleEconomies of Scale

Product DifferentiationProduct Differentiation

Capital RequirementsCapital Requirements

Switching CostsSwitching Costs

Access to Distribution ChannelsAccess to Distribution Channels

Cost Disadvantages Independent Cost Disadvantages Independent of Scaleof Scale

Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power in the industry by:Suppliers exert power in the industry by:

* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:

Supplier industry is dominated by a Supplier industry is dominated by a few firmsfew firms

Suppliers’ products have few substitutesSuppliers’ products have few substitutes

Buyer is not an important customer to Buyer is not an important customer to suppliersupplier

Suppliers’ product is an important Suppliers’ product is an important input to buyers’ productinput to buyers’ product

Suppliers’ products are differentiatedSuppliers’ products are differentiated

Suppliers’ products have high Suppliers’ products have high switching costsswitching costs

Supplier poses credible threat of Supplier poses credible threat of forward integrationforward integration

Bargaining Power of BuyersBargaining Power of Buyers

Buyers compete with the supplying

industry by:

Buyers compete with the supplying

industry by:

* Bargaining down prices* Bargaining down prices

* Forcing higher quality* Forcing higher quality

* Playing firms off of* Playing firms off ofeach othereach other

Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases Buyers are concentrated or purchases are large relative to seller’s salesare large relative to seller’s sales

Purchase accounts for a significant Purchase accounts for a significant fraction of supplier’s salesfraction of supplier’s sales

Products are undifferentiatedProducts are undifferentiated

Buyers face few switching costsBuyers face few switching costs

Buyers’ industry earns low profitsBuyers’ industry earns low profits

Buyer presents a credible threat of Buyer presents a credible threat of backward integrationbackward integration

Product unimportant to qualityProduct unimportant to quality

Buyer has full informationBuyer has full information

Threat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge

Keys to evaluate substitute products:Keys to evaluate substitute products:

Products with improving Products with improving price/performance tradeoffs price/performance tradeoffs relative to present industry relative to present industry productsproducts

Example:Example:

Electronic security systems in Electronic security systems in place of security guardsplace of security guards

Fax machines in place of Fax machines in place of overnight mail deliveryovernight mail delivery

Threat of Substitute Products

Threat of Substitute Products

Threat of New

Entrants

Threat of New

Entrants

Threat of New

Entrants

Rivalry Among Competing Firms

in Industry

Rivalry Among Competing Firms

in Industry

Bargaining Power of Buyers

Bargaining Power of Buyers

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:

Jockeying for strategic positionJockeying for strategic position

Using price competitionUsing price competition

Staging advertising battlesStaging advertising battles

Making new product introductionsMaking new product introductions

Increasing consumer warranties or serviceIncreasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but Advertising battles may increase total industry demand, but may be costly to smaller competitorsmay be costly to smaller competitors

Porter’s 5 Forces and ProfitPorter’s 5 Forces and Profit

ForceForce Profitability will Profitability will be higher if:be higher if:

Profitability will Profitability will be lower if:be lower if:

Bargaining power Bargaining power of suppliersof suppliers

Weak suppliersWeak suppliers Strong suppliersStrong suppliers

Bargaining power Bargaining power of buyersof buyers

Weak buyersWeak buyers Strong buyersStrong buyers

Threat of new Threat of new entrantsentrants

High entry barriersHigh entry barriers Low entry barriersLow entry barriers

Threat of Threat of substitutessubstitutes

Few possible Few possible substitutessubstitutes

Many possible Many possible substitutessubstitutes

Competitive rivalryCompetitive rivalry Little rivalryLittle rivalry Intense rivalryIntense rivalry

SummarySummary ……

As rivalry among As rivalry among competing firms competing firms intensifiesintensifies, industry , industry profits profits declinedecline, in some , in some cases to the point where cases to the point where an industry becomes an industry becomes inherently unattractiveinherently unattractive..

Competitive Positioning School of Competitive Positioning School of Thought (“Outside In”)Thought (“Outside In”)

Based on Porter’s 5 Forces, generic strategy, Based on Porter’s 5 Forces, generic strategy, and value chain frameworksand value chain frameworks

In which industry should the organization compete?(Use Porter’s 5 Forces Model)

Which generic strategy to use? (Use Porter’s Generic Strategy Framework)

How to configure the value chain to support the strategy?(Use the value chain analysis framework)

Generic StrategyGeneric Strategy

According to Porter, According to Porter, competitive competitive advantageadvantage, and thus , and thus higher profitshigher profits will will result either from:result either from:

DifferentiationDifferentiation of products (distinctive, of products (distinctive, more product features) and selling them at more product features) and selling them at a a premium pricepremium price, OR, OR

ProducingProducing products at a products at a lower price lower price than than competitorscompetitors

Generic Strategy (cont.)Generic Strategy (cont.)

In association with choosing In association with choosing differentiationdifferentiation or or cost leadershipcost leadership, the , the organization must decide between:organization must decide between:

Targeting the Targeting the whole marketwhole market with the with the chosen strategy, ORchosen strategy, OR

Targeting a specific Targeting a specific segmentsegment of the of the marketmarket

Generic Strategy FrameworkGeneric Strategy Framework

Cost leadershipCost leadership DifferentiationDifferentiation

Cost focusCost focus Differentiation Differentiation focusfocus

Strategic

Scope

Broa

d

Narro

w

Low cost Differentiation

NOTE: If 2 or more competitors choose the same box, competition will increase

Generic Strategy FrameworkGeneric Strategy Framework

Cost leadershipCost leadership DifferentiationDifferentiation

Cost focusCost focus Differentiation Differentiation focusfocus

Strategic

Scope

Broa

d

Narro

w

Low cost Differentiation

NOTE: If 2 or more competitors choose the same box, competition will increase

Cost Leadership Strategy: Cost Leadership Strategy: AdvantagesAdvantages

Higher profits resulting from charging prices Higher profits resulting from charging prices below that of competitors, because unit costs below that of competitors, because unit costs are lowerare lower

Increase Increase market sharemarket share and and salessales by reducing by reducing the price below that charged by competitors the price below that charged by competitors (assuming price elasticity of demand)(assuming price elasticity of demand)

Ability to enter new markets by charging lower Ability to enter new markets by charging lower pricesprices

Is a barrier to entry for competitors trying to Is a barrier to entry for competitors trying to enter the industry enter the industry

Cost Leadership and the Value Cost Leadership and the Value ChainChain

Analysis of the value chain identifies Analysis of the value chain identifies where cost savings can be made in the where cost savings can be made in the various parts and linksvarious parts and links

Cost Leadership and the Value Cost Leadership and the Value ChainChain

With a With a cost leadership strategycost leadership strategy, the value , the value chain must be organized to:chain must be organized to: Reduce per unit costsReduce per unit costs by copying, rather than original by copying, rather than original

design, using cheaper resources, producing basic design, using cheaper resources, producing basic products, reducing labor costs and increasing labor products, reducing labor costs and increasing labor productivityproductivity

Achieve Achieve economies of scaleeconomies of scale by high-volume sales by high-volume sales Using high-volume purchasing to get discountsUsing high-volume purchasing to get discounts Locating where costs are lowLocating where costs are low

Cost Leadership and Price Cost Leadership and Price Elasticity of DemandElasticity of Demand

Cost leadership strategy is best used in a Cost leadership strategy is best used in a market or segment market or segment when demand is price when demand is price elasticelastic, OR, OR

When charging a similar price to When charging a similar price to competitors at the same time as competitors at the same time as increasing advertising to increase salesincreasing advertising to increase sales

Generic Strategy FrameworkGeneric Strategy Framework

Cost leadershipCost leadership DifferentiationDifferentiation

Cost focusCost focus Differentiation Differentiation focusfocus

Strategic

Scope

Broa

d

Narro

w

Low cost Differentiation

NOTE: If 2 or more competitors choose the same box, competition will increase

Differentiation Strategy: Differentiation Strategy: AdvantagesAdvantages

Products will get a premium priceProducts will get a premium priceDemand for products is less price elastic Demand for products is less price elastic

than that for competitor’s productsthan that for competitor’s products It is an additional barrier to entry for It is an additional barrier to entry for

competitors to enter the industrycompetitors to enter the industry

Differentiation Strategy and the Differentiation Strategy and the Value ChainValue Chain

Analysis of the value chain identifies in Analysis of the value chain identifies in what parts of the chain and through which what parts of the chain and through which links links superior products can be createdsuperior products can be created and and customer perception may be changedcustomer perception may be changed

Differentiation Strategy and the Differentiation Strategy and the Value ChainValue Chain

With With differentiation strategydifferentiation strategy, the value chain , the value chain must be organized to:must be organized to:

Create products that are superior to competitors’ Create products that are superior to competitors’ products in products in design, technology, performance, design, technology, performance, etc.etc.

Offer superior after-sales serviceOffer superior after-sales service Have superior distribution channelsHave superior distribution channels Create a strong brand nameCreate a strong brand name Create distinctive or superior packagingCreate distinctive or superior packaging

Differentiation Strategy and Price Differentiation Strategy and Price Elasticity of DemandElasticity of Demand

Differentiation strategy, properly used, can:Differentiation strategy, properly used, can: reduce price elasticity of demandreduce price elasticity of demand for the for the

productproduct lead to the ability to charge higher prices than lead to the ability to charge higher prices than

competitors, without reducing sales volumecompetitors, without reducing sales volume lead to above average profits compared to saleslead to above average profits compared to sales

Generic Strategy: Focus Generic Strategy: Focus StrategyStrategy

Focus strategy – targets a Focus strategy – targets a segmentsegment of the of the product market, rather than the whole market or product market, rather than the whole market or many marketsmany markets

Segment is determined by the bases for Segment is determined by the bases for segmentation, i.e., geographic, psychographic, segmentation, i.e., geographic, psychographic, demographic, behavioral characteristicsdemographic, behavioral characteristics

Within the segment, Within the segment, eithereither cost leadership or cost leadership or differentiation strategy is useddifferentiation strategy is used

Generic Strategy FrameworkGeneric Strategy Framework

Cost leadershipCost leadership DifferentiationDifferentiation

Cost focusCost focus Differentiation Differentiation focusfocus

Strategic

Scope

Broa

d

Narro

w

Low cost Differentiation

NOTE: If 2 or more competitors choose the same box, competition will increase

Focus Strategy: AdvantagesFocus Strategy: Advantages

Lower investment costs required Lower investment costs required compared to a strategy aimed at the entire compared to a strategy aimed at the entire market or many marketsmarket or many markets

It allows for specialization and greater It allows for specialization and greater knowledgeknowledge

It makes entry into a new market more It makes entry into a new market more simple simple

Generic Strategy FrameworkGeneric Strategy Framework

Cost leadershipCost leadership

Ryan Air, Ryan Air, WalmartWalmart

DifferentiationDifferentiation

McDonalds, McDonalds, BMWBMW

Cost focusCost focus

Differentiation Differentiation focusfocus

Ferrari, Rolls Ferrari, Rolls RoyceRoyce

Strategic

Scope

Broa

d

Narro

w

Low cost Differentiation

Hybrid StrategyHybrid Strategy

Based on the idea that a strategy can be Based on the idea that a strategy can be successful by using a successful by using a mixmix of of differentiation, price and cost leadershipdifferentiation, price and cost leadership

Example: ToyotaExample: Toyota

Alternative to 5 Forces Analysis: Alternative to 5 Forces Analysis: Resource-based FrameworkResource-based Framework

Resource-based framework is designed to Resource-based framework is designed to compensate for disadvantages in compensate for disadvantages in traditional models (like Porter’s 5 Forces)traditional models (like Porter’s 5 Forces)

Emphasizes the importance of core Emphasizes the importance of core competence in achieving competitive competence in achieving competitive advantageadvantage

Resource-based FrameworkResource-based Framework

Complicated and Complicated and comprehensivecomprehensive analysisanalysis

Analysis of 5 inter-related areas:Analysis of 5 inter-related areas:OrganizationOrganization IndustryIndustryProduct marketsProduct marketsResource marketsResource marketsOther industriesOther industries

Resource-based FrameworkResource-based Framework

ResourceMarkets

Product Markets

Organization

CompanyIndustry

CompetenceRelatedIndustry

Organization’sProducts

New Markets

Substitutes

SupplierPower

Competitive Rivalry

Threat of new entrants

BuyerPower

Threat ofSubstitutes

Resource-based Framework: Resource-based Framework: OrganizationOrganization

Focuses on competences, core Focuses on competences, core competences, resources and value chain competences, resources and value chain (as we discussed in detail in Chapter 2)(as we discussed in detail in Chapter 2)

This part of the analysis includes an This part of the analysis includes an analysis of:analysis of:ResourcesResourcesOrganizational competences, core Organizational competences, core

competences and activitiescompetences and activitiesValue chain Value chain

Resource-based Framework: Resource-based Framework: IndustryIndustry

Focuses on analysis of competitors’:Focuses on analysis of competitors’:Skills and competencesSkills and competencesConfiguration of value-adding activitiesConfiguration of value-adding activitiesTechnologyTechnologyNumber and sizeNumber and sizePerformance (focus on financial performance)Performance (focus on financial performance)Ease of entry and exit (Ease of entry and exit (barriersbarriers))Strategic groupingsStrategic groupings

A Note on Strategic GroupingsA Note on Strategic Groupings Strategic groups – the group of competitors Strategic groups – the group of competitors

representing an organization’s representing an organization’s closestclosest competitorscompetitors

Example: a group of branded clothes including Example: a group of branded clothes including Polo (Ralph Lauren), Tommy Hilfiger, and Izod Polo (Ralph Lauren), Tommy Hilfiger, and Izod (Lacoste), among others, may be a strategic (Lacoste), among others, may be a strategic group, even though there are other lower quality group, even though there are other lower quality brands that are technically competitorsbrands that are technically competitors

Example 2: Rolex, Tag Heuer, Tissot may be Example 2: Rolex, Tag Heuer, Tissot may be part of a strategic group that does not include part of a strategic group that does not include Swatch, Timex, Seiko, even though they are all Swatch, Timex, Seiko, even though they are all watchmakerswatchmakers

Resource-based Framework: Resource-based Framework: Product MarketsProduct Markets

Analysis is focused on:Analysis is focused on: Customer needs and satisfactionCustomer needs and satisfaction Unmet customer needsUnmet customer needs Market segments and profitabilityMarket segments and profitability Number of competitors to the market and relative Number of competitors to the market and relative

market sharemarket share Number of customers and their purchasing powerNumber of customers and their purchasing power Access to distribution channelsAccess to distribution channels Ease of entryEase of entry Potential for competence leveragingPotential for competence leveraging Need for new competence buildingNeed for new competence building

Product-based Framework: Product-based Framework: Resource MarketsResource Markets

Resource markets: where organizations obtain Resource markets: where organizations obtain finance, human resources, human resources, finance, human resources, human resources, physical resources, technological resourcesphysical resources, technological resources

Analysis focuses on: Analysis focuses on: Resource requirementsResource requirements Number of actual and potential suppliersNumber of actual and potential suppliers Size of suppliersSize of suppliers Potential collaboration with suppliers (cooperation)Potential collaboration with suppliers (cooperation) Access by competitors to suppliersAccess by competitors to suppliers Nature of the resource and availability of substitutesNature of the resource and availability of substitutes

Resource-based Framework: Resource-based Framework: Competence-related IndustriesCompetence-related Industries

Focuses on analysis of Focuses on analysis of otherother industriesindustries with similar competences and which may with similar competences and which may produce products that can be substitutes produce products that can be substitutes of the organization’s productsof the organization’s products

Analysis is useful to identify:Analysis is useful to identify:Potential threatsPotential threatsOther industries in which the organization may Other industries in which the organization may

be able to leverage their competencesbe able to leverage their competencesNew marketsNew markets