Sustainable Competitive

Advantage ,
Porters Generic Strategy
2
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

Competitive Advantage - Definition

A competitive advantage is an advantage over
competitors gained by offering consumers greater
value, either by means of lower prices or by providing
greater benefits and service that justifies higher prices.
An advantage that a firm has over its competitors,
allowing it to generate greater sales or margins
and/or retain more customers than its competition.
There can be many types of competitive advantages
including the firm's cost structure, product
offerings, distribution network and customer support.

Competitive Advantage
Competitive advantage comes from erforming
better than competitors
Sustainable competitive advantage comes from
performing better than competitors for a long
time
Competitive Advantage Examples
(cont)
Focus on a narrow market niche
eBay Online auctions
McAfee Virus protection auctions
Develop expertise, resource strengths, and
capabilities not easily imitated by rivals
FedEx Next-day delivery of small packages
Walt Disney Theme park management and family entertainment
Toyota Sophisticated production system
Competitive Advantage Examples
Strive to be the industrys low-cost provider
Wal-Mart
Outcompete rivals on a key differentiating feature
J ohnson & J ohnson Reliability in baby products
Harley-Davidson King-of-the-road styling
Rolex Top-of-the-line prestige
Mercedes-Benz Engineering design and performance
Amazon.com Wide selection and convenience
7
Cost advantage
Differentiation advantage
Competitive
advantage
The Main Types of Competitive
Advantage
There are two main types of competitive advantages:
Comparative advantage and
Differential advantage.
Comparative advantage, or cost advantage, is a firm's
ability to produce a good or service at a lower cost than
its competitors, which gives the firm the ability sell its
goods or services at a lower price than its competition
or to generate a larger margin on sales.
A differential advantage is created when a firm's
products or services differ from its competitors and are
seen as better than a competitor's products by customers

What do you mean by Sustainable
Sustainable is not measured in calendar time.
Sustainable does not mean the advantage will
last forever.
Sustainable suggests the advantage lasts long
enough that competitors stop trying to
duplicate the strategy that makes the advantage
sustained.
Where are we?
Assets Capabilities Competencies Competitive Advantage

Competitive advantage.
A competitive advantage is simply an advantage you have over
your competitors.
A competency will produce competitive advantage provided:
it produces value for the organization, and
it does this in a way that cannot easily be pursued by competitors.
Sustainable Competitive Advantage
However, we said the primary objective of business-
level strategy was to create sources of sustainable
competitive advantage (SCA).
How do we know SCA when we see it? What is it?
When is it considered sustainable?
To produce SCA, the capability must:
1. Produce value
2. Be rare
3. Imperfectly imitable, i.e. not be easily imitated or substituted
4. Be exploitable by the organization
Sustainable Competitive Advantage
1. The Question of Value:
Capabilities are valuable when they enable a firm to conceive of or
implement strategies that improve efficiency and effectiveness.
Value is dependent on type of strategy:
Low cost strategy: lower costs (Timex)
Differentiator: add enhancing features (Rolex)
To be valuable, the capability must either
Increase efficiency (outputs / inputs)
Information system reduces customer service agents required, or increases
the number of calls the same number of agents can answer
Increase effectiveness (enable some new capability not previously held)
Opening a new regional campus enables outreach to a new market of students

Sustainable Competitive Advantage
2. The Question of Rareness:
Valuable resources or capabilities that are shared
by large numbers of firms in an industry are
therefore not rare, and cannot be a source of SCA.
Given the following, which are rare?
A web server
An MIS instructor
A state-of-the-art stamping press
None of these are rare. Some researchers think
only organizational assets or resources are rare
(such as culture). What do you think?

Sustainable Competitive Advantage


3. The Question of Imitability
Valuable, rare resources can only be sources of SCA if firms that do
not possess them cannot obtain them. They must be imperfectly
imitable, i.e. impossible to perfectly imitate them.
Ways imitation can be avoided:
Unique Historical Conditions (Caterpillar, e.g.)
Causal Ambiguity (why resources create SCA is not understood,
even by the firm owning them)
Imitating firms cannot duplicate the strategy since they do not
understand why it is successful in the first place.
Social Complexity (trust, teamwork, informal relationships, causal
ambiguity where cause of effectiveness is uncertain)
E.g. A competitor steals all the scientists in an R&D lab and relocates
them to a new facility. But, the dynamics, culture and
atmosphere are not the same.
Sustainable Competitive Advantage

4. The Question of Substitutability
There must be no equivalent resources that can be
exploited to implement the same strategies.
Forms of substitutability:
Duplication: Although no two management teams are the same,
they can be strategically equivalent, produce the same results.
Substitution: Very different resources can be substitutes, e.g.
A charismatic leader with a clear vision vs. a strategic planning dept.
A superior marketing strategy for a recognized brand name.
A superior technical support group for an intelligent diagnostic
software package
Sustainable Competitive Advantage
An asset is anything the firm owns or controls.
Loosely, Asset is to Accounting as Resource is to
Management.
Types of assets:
Physical: plant equipment, location, access to raw materials
Human: training, experience, judgment, decision-making skills,
intelligence, relationships, knowledge
Organizational: Culture, formal reporting structures, control systems,
coordinating systems, informal relationships
Sustainable Competitive Advantage
A capability is usually considered a bundle of assets or resources to
perform a business process (which is composed of individual activities)
E.g. The product development process involves conceptualization,
product design, pilot testing, new product launch in production, process
debugging, etc.
All firms have capabilities. However, a firm will usually focus on certain
capabilities consistent with its strategy.
For example, a firm pursuing a differentiation strategy would focus on
new product development. A firm focusing on a low cost strategy would
focus on improving manufacturing process efficiency.
The firms most important capabilities are called competencies.
Competencies vs. Core Competencies vs.
Distinctive Competencies
A competency is an internal capability that a company
performs better than other internal capabilities.
A core competency is a well-performed internal
capability that is central, not peripheral, to a
companys strategy, competitiveness, and profitability.
A distinctive competence is a competitively valuable
capability that a company performs better than its
rivals.
Examples: Distinctive Competencies
Toyota, Honda, Nissan
Low-cost, high-quality manufacturing capability and short design-
to-market cycles
Intel
Ability to design and manufacture ever more powerful
microprocessors for PCs
Motorola
Defect-free manufacture (six-sigma quality) of cell phones
Creating Advantage - Synergy
and Vision versus Opportunism
PPT 8-20
Sustainable Competitive Advantage
SCA is an element (or combination of elements) of the
business strategy that provides a meaningful advantage
over both existing and future competitors.
An SCA needs to be meaningful, sustainable and
substantial.
An SCA needs to be supported and enhanced over time.
The assets and competencies of an organization
represent the most sustainable element of a business
strategy, because these are usually difficult to copy or
counter.
Creating Advantage - Synergy
and Vision versus Opportunism
PPT 8-21
Sustainable Competitive Advantage
An SCA should be visible to customers and
provide or enhance a value proposition.
The key is to link an SCA with the positioning
of a business.
A solid value proposition can fail if a key
ingredient is missing (e.g., Pringles).
Sustainable Competitive Advantages vs Key
Success Factors
A KSF is an asset or competence needed to
compete, whereas, an SCA is an asset or
competence that is the basis for a continuing
advantage.
An SCA is analogous to a Point of
Differentiation (POD), whereas a KSF can be
analogous to either a Point of Parity (POP) or a
POD.
Frameworks for Sustainable Competitive
Advantage
Knowledge-based strategy
Generic strategy
Hybrid strategy
Core competence/distinctive
capability/resource based strategy
Knowledge-based Strategy
Superior Knowledge
(compared to competitors)
Core Competences
Competitive Advantage
Knowledge (2 Types)
Explicit knowledge knowledge whose
meaning is clearly stated, the details of which
can be recorded and stored
Examples: human resource audit, financial
analysis, market research
Tacit knowledge unstated, based on
individual knowledge and experience, and is
difficult to record and store (but is also
difficult to imitate)
Knowledge and Core Competence
Core competences can come from
Knowledge of customers and their needs
Knowledge of technology and how to use it
distinctively
Knowledge of products and processes
Knowledge of the business environment
Knowledge of competitors
Knowledge of countries and culture

Porters Generic Strategy Framework
Porters generic strategy is based on answering
2 questions:
Should strategy be differentiation or cost
leadership?
Should the scope of strategy be broad or narrow?
Generic Strategy
According to Porter, competitive advantage,
and thus higher profits will result either from:
Differentiation of products and selling them at
a premium price, OR
Producing products at a lower price than
competitors


Generic Strategy (cont.)
In association with choosing differentiation or
cost leadership, the organization must decide
between:
Targeting the whole market with the chosen
strategy, OR

Targeting a specific segment of the market

Prof.Sushil\IITD\Session-VI 30
PORTERS GENERIC STRATEGIES

1. Cost
Leadership
2. Differentiation
3 A. Cost Focus
3 B. Differentiation
Focus
Narrow
Target
Broad
Target
Differentiation Lower Cost
Competitive Advantage
Competitive Score
Generic Strategy: Cost Leadership
Strategy
Strategy focus: organize value adding
activities to be the lowest cost producer of a
product in an industry
Strategy - Cost Leadership

With this strategy, the objective is to become the lowest-cost
producer in the industry. Many (perhaps all) market segments in the
industry are supplied with the emphasis placed minimizing costs. If
the achieved selling price can at least equal (or near)the average for
the market, then the lowest-cost producer will (in theory) enjoy the
best profits.
This strategy is usually associated with large-scale businesses
offering "standard" products with relatively little differentiation that
are perfectly acceptable to the majority of customers.
Occasionally, a low-cost leader will also discount its product to
maximize sales, particularly if it has a significant cost advantage
over the competition and, in doing so, it can further increase its
market share.
Examples of Cost Leadership: Dell Computers & Wal-Mart

Cost Leadership Strategy: Advantages
Higher profits resulting from charging prices below
that of competitors, because unit costs are lower
Increase market share and sales by reducing the
price below that charged by competitors (assuming
price elasticity of demand)
Ability to enter new markets by charging lower prices
Is a barrier to entry for competitors trying to enter the
industry
Cost Leadership and the Value Chain
Analysis of the value chain identifies where
cost savings can be made in the various parts
and links
Cost Leadership and the Value Chain
With a cost leadership strategy, the value chain
must be organized to:
Reduce per unit costs by copying, rather than original
design, using cheaper resources, producing basic products,
reducing labor costs and increasing labor productivity
Achieve economies of scale by high-volume sales
Using high-volume purchasing to get discounts
Locating where costs are low
Cost Leadership and Price Elasticity of
Demand
Cost leadership strategy is best used in a
market or segment when demand is price
elastic, OR
When charging a similar price to competitors
at the same time increasing advertising to
increase sales
Generic Strategy: Differentiation
Strategy
Differentiation strategy focuses on changing
customer perception about a product, i.e., that
the product is superior to other products
Based on actual superiority (superior
features) or perceived superiority
Generic Strategy Framework

Cost leadership

Differentiation

Cost focus

Differentiation
focus
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Low cost Differentiation
NOTE: If 2 or more competitors choose the same box, competition will increase
Differentiation Strategy: Advantages
Products will get a premium price
Demand for products is less price elastic than
that for competitors products
It is an additional barrier to entry for
competitors to enter the industry
Differentiation Strategy and the Value
Chain
With differentiation strategy, the value chain must
be organized to:
Create products that are superior to competitors
products in design, technology, performance, etc.
Offer superior after-sales service
Have superior distribution channels
Create a strong brand name
Create distinctive or superior packaging
Differentiation Strategy and Price Elasticity
of Demand
Differentiation strategy, properly used, can:
reduce price elasticity of demand for the product
lead to the ability to charge higher prices than
competitors, without reducing sales volume
lead to above average profits compared to sales
Generic Strategy: Focus Strategy
Focus strategy targets a segment of the product
market, rather than the whole market or many
markets
Segment is determined by the bases for segmentation,
i.e., geographic, psychographic, demographic,
behavioral characteristics
Within the segment, either cost leadership or
differentiation strategy is used
Strategy - Differentiation Focus

In the differentiation focus strategy, a business aims to differentiate
within just one or a small number of target market segments.
The special customer needs of the segment mean that there are
opportunities to provide products that are clearly different from
competitors who may be targeting a broader group of customers.
The important issue for any business adopting this strategy is to
ensure that customers really do have different needs and wants - in
other words that there is a valid basis for differentiation - and that
existing competitor products are not meeting those needs and wants.
Examples of Differentiation Focus: any successful niche retailers.
Strategy - Cost Focus

Here a business seeks a lower-cost advantage in
just on or a small number of market segments.
The product will be basic - perhaps a similar
product to the higher-priced and featured market
leader, but acceptable to sufficient consumers.
Such products are often called "me-too's".
Examples of Cost Focus: Many smaller retailers
featuring own-label or discounted label products.

Generic Strategy Framework

Cost
leadership

Differentiation

Cost focus

Differentiation
focus
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Low cost Differentiation
NOTE: If 2 or more competitors choose the same box, competition will increase
Focus Strategy: Advantages
Lower investment costs required compared to
a strategy aimed at the entire market or many
markets
It allows for specialization and greater
knowledge
It makes entry into a new market more simple
Focus Strategy: Advantages
Lower investment costs required compared to
a strategy aimed at the entire market or many
markets
It allows for specialization and greater
knowledge
It makes entry into a new market more simple
Criticisms of Porters Generic Strategy
A hybrid strategy may be successful, although Porter
argues that either differentiation or cost leadership must
be used (a mix of the two leads to being stuck in the
middle)
Cost leadership alone does not lead to sales of products
Differentiation strategies may be used to increase sales
volume, rather than charging a premium price
Price may be used to differentiate
Generic strategy doesnt create competitive advantage,
rather it is a model to help an organization in analysis
The resource based framework may be more accepted now
Economic Performance


Valuable?


Rare?
Costly to
Imitate?
Exploited by the
Organization?

Competitive
Implications

Economic
Performance
No -- -- --
Competitive
Disadvantage
Below Normal
Yes No -- --
Competitive
Parity
Normal
Yes Yes No --
Temporary
Competitive
Advantage
Above Normal
Yes Yes Yes Yes
Sustained
Competitive
Advantage
Above Normal