CompetitiveStrategy

David J. Collis

QUIZ

�What is a Strategy?

Levels of Strategy

� How to compete in a distinct business

“Competitive” or “Business” Strategy

Corporate StrategyCorporate Strategy

• Overall strategy of a diversified firm that involves

two essential questions• What businesses the company should be in

• How strategically distinct business units should be

managed at the corporate level

Strategy is critical to performance

�External Positioning�Match internal resources and capabilities to the

external environment to achieve a sustainable competitive advantage

WINNING IN THE MARKETPLACE

� Internal alignment�Consistency of delegated functional decisions and

policies with the chosen competitive advantage

�WINNING THROUGH EXECUTION

EXTERNAL POSITIONING:Strategic Sweet Spot

CUSTOMERS-needs

COMPETITORS-offerings

CONTEXT

CAPABILITIES-companywide

GOALS

GENERICSTRATEGY

THE

OBJECTIVES

PROFITABILITY,

Internal Alignment

Marketing

Functions

Finance Finance Finance Finance

& & & &

Research & Research & Research & Research &

DevelopmenDevelopmenDevelopmenDevelopmen

tttt

Product Product Product Product

LineLineLineLine

Target Target Target Target

MarketsMarketsMarketsMarkets

AdvertisinAdvertisinAdvertisinAdvertisin

g & g & g & g &

PromotionPromotionPromotionPromotion

Sales Sales Sales Sales

ForceForceForceForceTHECOMPETITIVEADVANTAGETO BEACHIEVED

GROWTH,MARKETSHARE,ETC.

Operations

& Finance

& & & &

ControlControlControlControl

DistributiDistributiDistributiDistributi

on on on on

ChannelsChannelsChannelsChannels

CustomeCustomeCustomeCustome

r Servicer Servicer Servicer Service

Physical Physical Physical Physical

DistributiDistributiDistributiDistributi

onononon

ManufacturManufacturManufacturManufactur

inginginging

ProcuremeProcuremeProcuremeProcureme

ntntntnt

Human Human Human Human

Resource Resource Resource Resource

ManagemenManagemenManagemenManagemen

tttt

Elements of a Strategy

� Objective� The primary goal(s) that motivate behaviour in the

organisation

� Advantage�Description of what the firm does differently, �Description of what the firm does differently,

better, or uniquely compared to all other competitors� The value proposition that encourages customers to purchase

� The drivers or sources of that advantage including the functional policies and activities that support the advantage

� Scope�Definition of the domain in which we will operate

Strategy

�Strategy is about choice�strive for maximum performance,

but ultimately

�inherent tradeoffs�inherent tradeoffs

�Strategy is about consistency�across functions

�over time

Strategy Development Process

Sources of Competitive Advantage

Competitor Analysis(Prediction)

Internal Strengths and Weaknesses(Relative Position)(Prediction) (Relative Position)

Options(Sustainability and Timing)

Options(Sustainability and Timing)

Proposed Strategy

Organization StructureActionable Function Programs

Purposes of Industry Analysis

� Industry structural attractiveness

� Industry dynamics

�check list

� Strategic implications

� forces to overcome and exploit

Differences in Profitability Across Selected Industries

Petroleum / natural gas

Drug stores

Eating places

Dental equipment

Women's clothing stores

Semiconductors

Prepackaged software

Pharmaceuticals

-5 0 5 10 15 20 25

Scheduled air transport

Motor vehicles

Cable television service

Computer system design

Engineering services

Trucking except local

Race track operations

Petroleum / natural gas

Operating income / assets, 1988-95 (%)

Source: Pankaj Ghemawat and Jan W. Rivkin, “Creating Competitive Advantage”

Distribution ofIndustry Profitability

15

20

25

Percentage of Industries

Note: Return on equity is defined as net income divided by end of year shareholders’ equity: Labels on

horizontal axis represent lower boundaries of bins of two percentage points of return on equity.

Source: Dun & Bradstreet

0

5

10

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Return on Equity (Percent)

Percentage of Industries

Differences in ProfitabilityWithin Selected Industries

Motorola

Texas Instruments

Intel

Delta

United

American

Southwest

Semiconductor Industry Airline Industry

-5 0 5 10 15 20 25

National Semiconductor

Analog Devices

AMD

-5 0 5 10

TWA

Continental

US Airways

Delta

Source: Pankaj Ghemawat and Jan W. Rivkin, “Creating Competitive Advantage”

Operating income / assets, 1988-95 (%) Operating income / assets, 1988-95 (%)

Warren Buffet

� “When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its usually the industry that keeps its reputation intact”

Competitive StrategyDeterminants of Industry Profitability

Threat of New Entrants

Rivalry AmongExisting Competitors

Threat of SubstituteProducts or Services

BargainingPower ofBuyers

BargainingPower ofSuppliers

Industry Analysis – The Five Forces

Threat of New Entry

Rivalry Among

Existing Competitors

Bargaining Power

of Customers

Bargaining Power

of Suppliers

• Economies of scale

• Proprietary product

differences

• Brand identity

• Switching costs

• Capital requirements

• Access to distribution

• Absolute cost advantages

• Government policy

• Expected retaliation

• Differentiation of inputs

• Switching costs

• Presence of substitute

• Buyer concentration

• Buyer volume

• Buyer switching costsExisting Competitors

Threat of Substitutes• Relative price performance of substitutes

• Switching costs

• Buyer propensity to substitute

• Industry growth

• Fixed costs / value

added

• Overcapacity

• Product differences

• Brand identity

• Switching costs

• Concentration and balance

• Informational complexity

• Diversity of competitors

• Corporate stakes

• Exit barriers

• Presence of substitute

inputs

• Supplier concentration

• Importance of volume to

supplier

• Cost relative to total

purchases

• Impact of inputs on cost or

differentiation

• Threat of forward

integration

• Buyer switching costs

• Buyer information

• Ability to integrate

backward

• Substitute products

• Price / total purchases

• Product differences

• Brand identity

• Impact of quality /

performance

• Buyer profits

Source: Porter, 1985

An Augmented Framework: Six Forces

RIVALRY AMONGBARGAINING BARGAINING

THREAT OFNEW ENTRANTS

RIVALRY AMONGEXISTING

COMPETITORS

BARGAINING POWER OF SUPPLIERS

BARGAINING POWER OF

CUSTOMERS

THREAT OFSUBSTITUTES

AVAILABILITY OF COMPLEMENTS

Three Phases inIndustry Structure Evolution

•Conception

– imagination

•Determination

– shape

– standard setting

– resources

•Competition

– static

– market share

– resources

Executive time spent

Ability to influencefuture profitability

Competitive Strategy

�Two key questions

1 How structurally attractive is the industry?

2 What is the firm’s relative position within the industry

Steel IndustryPerformance Differential, 1981-1990

$4.50

Industry

$0.07$0.26

$0.76

$1.29 $1.38

LTV Amoco Bethlehem Inland U.S. Steel Nucor

Industry

Average

Returns

Average

$1.38

Superior Performance isAchieved in Two Ways

Margin

MarginIndustry Average

Price

Sustainable Competitive AdvantageSustainable Competitive Advantage

CostCost

Cost Leadership Strategy

� Deliver a GOOD product or service at the lowest possible cost

� Create advantage through superior management of key cost drivers

� Make the volume-margin tradeoff

BUT

� Cost leaders must maintain parity or proximity in satisfying buyer needs

� Cost leadership often requires tradeoffswith differentiation

Differentiation Strategy

� Uniquely satisfy one or more widely valued customer needs�additional costs incurred

�premium price

BUTBUT

� Remain cost competitive in providing basic features�selectively add cost

�choose differentiation features that yield a cost advantage

What Differentiation Means

Gratuitous Services

Add Cost toDifferentiate

Recover Costs ofDifferentiation

Plus a Premium

Meet MinimumRequirements

Realize IndustryAveragePrices

CostCost PricePrice

Generic Strategies

Overall CostDifferentiationBroad Target

Lower Cost Differentiation

Competitive Advantage

Overall CostLeadership

Focus Low Cost

Differentiation

Focus Differentiation

Broad Target

Narrow Target

CompetitiveScope

Competitive Advantage

�Two critical aspects to competitive advantage�Unique value proposition

�Why customers should buy from us�Why customers should buy from us

- Increase willingness to pay

- Decrease supplier opportunity cost

�Distinctive configuration of activities

�Why we alone can deliver that source of value

- Choices and tradeoffs

- Structural determinants

Low prices

Selection across categories

Rural convenience

Reliable prices

Wal-Mart Stores: Competitive Positioning

Wal-Mart

• A value proposition diagram is a simple tool for recording how a company performs relative to competition on the attributes that Reliable prices

Merchandise quality

Suburban convenience

Selection within categories

Sales help

Ambiance

1 2 3 4 5

Mom & Pop

Sears

on the attributes that customers consider as they choose among rivals

• Successful companies rarely are (or try to be) superior on all attributes

Configuring Activities throughout the Value Chain

�Strong competitive advantages are typically supported by distinctive activities that pervade the value chain and reinforce one another

�The activity map (blob chart) capture the key differences in the firm’s choices of activities

� Not a laundry list of everything the firm does

30

� Not a laundry list of everything the firm does

� Clearly identifying what the firm does differently from competitors, and what it does not do that competitors do

�Description should be adequate to allow every function in the organization to understand how they must be configured to contribute to the chosen source of competitive advantage

Southwest AirlinesActivity System

Limited

Passenger

Service

Limited use

No seat

assignments

No meals

No

baggage

transfers

No

connections

with other

airlines

Very Low

Ticket Prices

Short-haul, point-

to-point routes between

medium-sized cities &

secondary airports

High

Aircraft

Utilization

Lean, Highly

Productive

Ground & Gate

Crews

Frequent,

Reliable

Departures

Limited use

of travel

agents

Automatic

Ticket

Machines

15 minute

Gate Turns

Standardized

fleet of 737

aircraft

High

employee

compensation

Flexible

union

contracts

High

employee

stock

ownership

“Southwest

the low-fare

airline”

Elements of a Strategy

� Objective� The primary goal(s) that motivate behaviour in the

organisation

� Advantage�Description of what the firm does differently, �Description of what the firm does differently,

better, or uniquely compared to all other competitors� The value proposition that encourages customers to purchase

� The drivers or sources of that advantage including the functional policies and activities that support the advantage

� Scope�Definition of the domain in which we will operate

Southwest Airlines Strategy Statement

�To grow at 12-15% per annum

�By providing low price air travel

�On point to point routes between �On point to point routes between second tier airports

�With simple, frequent service that allows for rapid gate turns

Objective

� The primary goal(s) that motivate behavior in the organization and that will be rewarded�Simple, stretch, proximate, measurable

� Dimensions can be chosen from a wide range of targets�Profitability, size, market share….�Profitability, size, market share….

�Can be defined in absolute or relative terms

� Involve a time horizon

� Ideally should be a single target�Multiple targets confuse the organization

� If there is more than one goal, the hierarchy should be clear

Objective

�Choice of objective can have dramatic impact on the firm�Boeing commercial aircraft redefines its objective

from being #1 to being the most profitable firmfrom being #1 to being the most profitable firm

�Objective selection addresses the fundamental long / short term tradeoff

Scope

� Definition of the domain in which we will operate

�Can be defined in multiple dimensions

�Customers, channels, technologies, geographies, products and services, value chain activities

�Not a precise statement of what we will do

�A delineation of the boundaries we will not go beyond

Scope

�Three dimensions

Product/Customer

Valuechain

Southwest Airlines: Business Scope

Excluded Activities Major

Airports

Non-stop long haul flights

Interconnections

FIRM

International flights

Hub and spoke

Continuous price changes

OAS

�The combination defines �What we are trying to achieve, and how we measure

our progress

�What sandbox we will operate in

�What means we have to realize our goals�What means we have to realize our goals

�The combination �Wins in the marketplace

�Compels precision about competitive positioning

�Drives execution� Facilitates understanding of required behaviors throughout

the organization

CHALLENGE

�Can you articulate the strategy for your business in less than forty words?!