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What is Competitive Advantage?

Competitive Advantage: a firms ability to create value in a way that its rivals cannot. Key question: How do firms create sustained above-average returns?

Also called as Strategic Advantage It is a position of

superiority of an organization competitors.

in relation to

What is Competitive advantage?

a basis for the firms long term success? a basis for value creation?

Do we really know where it resides? Can it be sustainable?

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What is Competitive advantage?

When two or more firms compete within the same market, one firms possesses a competitive advantage over its rivals when it earns a persistently higher rate of profit (or has the potential to earn a persistently higher rate of profit)
R. M. Grant, 2000

Strategy: A firms theory about how to gain

competitive advantages

The Strategic Management Process

External Analysis Strategic Choice Strategy Implementation Competitive Advantage

Mission

Objectives

Internal Analysis

All other elements of the strategic management process are

aimed at achieving competitive advantage

The Strategic Management Process

External Analysis

Objectives

Strategic Choice

Strategy Implementation

Competitive Advantage

Internal Analysis

Mission

The main types of Competitive Advantage

Cost advantage

Competitive advantage

Differentiation advantage

Competitive strategies by Porter

Types of competitive advantage
Low cost Differentiation

Industry-wide

Cost leadership

Differentiation

Market
Niche
Focus with low cost

Focus with differentiation

Competitive strategies extending Porter

Types of competitive advantage

Low cost Industry-wide

Market Cost Leadership

Differentiation
Differentiation

Hybrid Strategy Niche

Focus with low cost Focus with differentiation

In-between there might be a successful strategy (Value for Money)

Hybrid strategies can be more effective

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Features of competitive strategies

Cost Leadership
Efficient scale Standardization Design for low

Differentiation
Quality Innovation Design Credibility Brand name Reputation Environmental posture Customer service Integrated services
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production cost Control of overheads and R&D Avoid marginal customers

What is the basis for competitive advantage? The five forces determine
Industry structure
positioning within the

industry

Industry profitability This basis influences by five

forces Porter's focus on industry structure is a powerful means of analyzing competitive advantage in itself

industry profitability, and some industries may be more attractive than others The five forces framework highlights what is important, and directs managers towards those aspects most important to longterm advantage. 11

Discovering Core Competencies and basis of competitive advantage

Discovering Core Competencies Core Competencies Capabilities
Teams of Resources
Criteria of Sustainable Advantages * * * *

Strategic Competitiveness Competitive Advantage

Value Chain Analysis

* Outsource

Resources
* Tangible * Intangible

Valuable Costly to Imitate Rare Organized to be exploited

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How is competitive advantage created?

Primary routes- Product making and Marketing (both are

complementary or supplementary or reinforce each other) Product Making- Reflects core competencies , special capabilities , superior product design Product Marketing Reflects Marketing mix application, Positioning, offering bundle of benefits and values to the customers Firms create competitive advantage by perceiving or discovering new and better ways to compete in an industry and bringing them to market, which is ultimately an act of innovation. Innovations shift competitive advantage when rivals either fail to perceive the new way of competing or are unwilling or unable to respond

How is competitive advantage implemented?

Porters "Value Chain" and "Activity Mapping" concepts

help us think about how activities build competitive advantage. Structure Control Need factors contributing to Comp Adv How to compete Business assets and skills (Basis)

Where to compete Product-Market selection

Whom to compete against - Product-Market selection Way to compete Marketing Mix strategy

Implementing a Cost Leadership Strategy

A strategy is only as good as its implementation
Strategy is implemented through organizational structure and control: structure: 1) the division of management responsibilities, and 2) the establishment of reporting relationships control: policies intended to influence behavioralign the interests of the individual with the interests of the organization

What is Competitive Advantage?

Three Perspectives on Sustainable Competitive Advantage

Internal
Often called the resource view, contends that firms are heterogeneous bundles of resources and capabilities and firms with superior resources and capabilities enjoy competitive advantage over other firms. This advantage makes it relatively easier to achieve consistently higher levels of performance.

External
Also called the positional view, contends that variations in a firms competitive advantage and performance are primarily a function of industry attractiveness. Companies should therefore either (1) position themselves to compete in attractive industries or (2) adopt strategies that will make their current industries more attractive.

Dynamic
Suggests that in dynamic, rapidly changing markets, a firms current market position is not an accurate prediction of future performance. Instead, we look at the past for clues about how the firm arrived at its current position and to future trends both internal and external in an effort to predict the future landscape

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Sustainable competitive advantage

What is meant by sustainable competitive advantage? Durable Valuable to the firm

Exploiting weaknesses and neutralizing threats

Unique
Difficult for competitors to imitate Not easily substitutable

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May competitive advantage be sustainable?

Increased competition leads to decrease of

differences in competitive advantage

Standardization/ mass production of unique

features: What can be left for differentiation?

Unique features of differentiation become

prerequisites for survival

Dynamism & complexity of the environment

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How can competitive advantage be sustainable?

The firm must seek competitive advantage

in combining resources & capabilities

Develop resources and capabilities, which are

rare, valuable, non-tradable,

Make those resulting competences sustainable

by precluding imitation or substitution by competitors

The firm must offer competitive products

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Sustainable competitive advantage based on capabilities

Innovation Reputation Architecture of relationships J. Kay

DQE

Strategic assets

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Competitive advantage map

Source: Competitiveness: Strategies of the best UK companies, Winning DTI-CBI

Prerequisites Quality Low cost Operational performance

Elements of differentiation Quality Low cost Oper. performance

Delivery time
Creditability

Delivery time
Creditability

Product Service
Design Marketing Customer service

Product Service
Design Marketing Customer service

Customized product
Reputation Innovative product

Customized product
Reputation Innovative product

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Sustainable competitive advantage reflected on product

Quality and quality of customer service Design Innovative product Customized product with integrated services Environmental friendly

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The Resource-based View of the Firm

Resource-based View Firm as a bundle of resources and capabilities. Distinct resources and capabilities underpin competitive advantage. Specific combination and coordination of resources critical. Strategy based on skilled diagnosis and creative solutions.

Market-based View Firm as a unit in a market. Distinct position in market underpins competitive advantage. Detailed knowledge of market and competitive conditions critical. Strategy based competitive analysis and appropriate value creation.

The Language of Resources and Capabilities

Resources: inputs into a firms operations so as to produce goods and services. Capabilities: The ability to perform a task or activity that involves complex patterns of

coordination and cooperation. Rents: a surplus of revenue over cost. Strategic assets / Core competencies: resources and capabilities that can earn rents.

Core Competence
Core Competences
Collective knowledge of how to coordinate skills and technologies
Prahalad & Hamel (1990)

Distinctive Capabilities
Business processes connected to customer needs
Stalk, Evans & Shulman (1992)

= Strategic Assets
Capacity to deploy resources to effect a desired end
Amit & Shoemaker (1993)

The underlying capability that is the distinguishing characteristic of the organization

 Core competencies in combination with product-

market positions are the firms most important sources of competitive advantage and should drive its selection of strategies.

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A core competency is a capability thats:

Valuable
Costly to Imitate

Allows a firm to address threats or opportunities in its external enviro.

When other firms either cannot obtain them or must obtain them at a much higher cost.

Rare

Organized
to be Exploited

Possessed by few, if any, current and potential competitors. The firm must be organized appropriately to obtain full benefits of the resources in order to realize a competitive advantage.

Core Competencies Capabilities

Teams of Resources
*

Resources, Capabilities & Core Competencies

Functional Areas

Capabilities
Design & production skills yielding reliable products Product & design quality Prod. & component miniaturization Innovative technology Development of sophisticated elevator control solutions Rapid transformation of technology into new products and processes

Examples
Komatsu Gap, Inc. Sony Caterpillar Otis Elevator Chaparral Steel

Manufacturing

Research and Development

Capabilities
Teams of Resources

Identifying Intangibles
Intellectual property rights of patents, trademarks,

copyright and registered designs Trade secrets Contracts and licenses Databases Information in the public domain Personal and organizational networks The know-how of employees, advisers, suppliers and distributors The reputation of products and of the company The culture of the organization

The Value of a Core Competence

Strategic Industry Factors and Core Competences

Matching Resources and Markets

Resources and Capabilities

Hypercompetition

A situation of intense and continually increasing levels of competition in todays business environ

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 Competitive advantage defines the marketbased view the positioning of the firm in terms of competitors
Core competence defines the resource-based

view the underlying capability that is the distinguishing characteristic of the organization.

 Core competence underpins market positioning and thus competitive advantage.

The resource-based view demands attention

to processes, resource leverage and intangibles. Resources are linked to competitive advantage through key success factors.

References R.M. Grant, Contemporary Strategy Analysis, Blackwell

Publishers, 2000. M.E. Porter, Competitive Advantage, New York: Free Press, 1985. J. Kay, Foundations of Corporate Success, Oxford University Press, 1995. G. Johnson, K. Scholes & R. Whittington, Exploring Corporate Strategy, Prentice Hall, 7th eds, 2005 C. Prahalad & G. Hamel, The core competences of the corporation, Harvard Business Review, vol. 28, n.3, may-june, 1990.
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References
S. Marthur, How firms compete? The Journal of

General Management, vol.14, no 1, autumn 1988.

F. Tilley, P. Hooper & L. Walley, Sustainability and

competitiveness: Are there mutual advantages for SMEs?, in J. Oswald & F. Tilley, Competitive Advantage in SMEs: Organising for innovation and change, Wiley, 2003. K. Weigelt &C. Camerer, (1988), Reputation and Corporate Strategy: A review of recent theory and applications, Strategic Management Journal, 9
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