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Creating Strategic

Advantage

SMM
by David A.Aaker
9th Edition

Creating Strategic Advantage

All men can see the tactics whereby I conquer, but one
none can see is the strategy out of which great victory is
evolved
- Sun-Tzu, Chinese Military Strategist

From Analysis to Strategy

The Sustainable Competitive


Advantage
A sustainable competition advantage is an element (or
combination of elements) of the business strategy that
provides a meaningful advantage over both existing and
future competitors. It should be both meaningful and
sustainable.
e.g. Wal-Mart has a cost advantage because of its scale
economies, market power and logistical efficiencies,
value reputation and site location assets.

The Basis of Competition: Assets and


Competencies

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. e.g. anyone can try to
distribute
cereal
or
detergent
through
supermarkets but few have the competencies in
logistics, shelf space management and promotions
or relationships with chain executives that
distribution efficient and effective. Who you are, in
other words, is as important as what you do.

The three basic strategies of SCA

1. Operational Excellence

Firms employing a strategy of operational excellence focus


on efficiency of operations and processes. These companies
operate at lower cost than their competitors, allowing them
to deliver goods and services to their customers at lower
prices or a better value. e.g. Dell and Walmart
Common attributes:
Deliver compelling value through the use of low prices,
standard product offerings and convenient buying processes
Target a broad heterogeneous market of price-sensitive
buyers
Invest to achieve economies of scale
Develop MIS and waste recycling systems

The three basic strategies of SCA

2. Product Leadership
Firms that focus on product leadership excel at technology
and product development. As a result these firms offer
customers the most advanced, highest quality goods and
services in the industry. e.g. Microsoft constantly upgrades
and stretches its software technology while creating
complimentary products that solve customers needs. Other
examples are Pfizer, Intel and 3M.
Common attributes:
Go into self obsolenecy and rapidly introduce new products
Target narrow homogenous market
Creative, decentralized and adaptable organizational culture

The three basic strategies of SCA


3. Customer Intimacy
Working to know your customer and understand their needs
better than the competition is the hallmark of customer
intimacy. These companies seek to develop long term
relationship with their customers by seeking their input on
how to make the firm goods and services better or how to
solve specific customer related problems e.g. Amazon, DHL
and Toyota
Common attributes:
Give highest value to customer loyalty
Exceeding customer expectations with high quality and high
price products
Assess strategic alliances and customer relationship on
lifetime value

Common Sources of Competitive Advantage

Relational Advantages
- Brand loyal customers
- High customer switching
costs
- Long-term
relationships
with
supply
chain
partners
- Strategic
alliance
agreements
- Strong bargaining power
Legal Advantages
- Patents and trademarks
- Strong contracts

Organizational Advantages
- Abundant
financial
resources
- Modern
plant
and
equipment
- Effective intelligence
- Culture, vision and goals
- Organizational goodwill
Human
Resource
Advantages
- Management talent
- Organizational culture
- Employee commitment

Common Sources of Competitive Advantage

Product Advantages
-

Brand equity
Superior quality
Product expertise
Guarantees and warranties
Outstanding
customer
service
R&D

Pricing Advantages
-

Lower production cost


Economies of scale
Bulk buying
Low cost distribution

Promotion Advantages
-

Company image
Large promotion budget
Superior sales force
Creativity
Marketing expertise

Distribution Advantages
-

Efficient distribution system


Real time inventory control
Superior information system
Convenient locations
Strong
e-commerce
capabilities

SCAs versus Key Success Factors

A KSF is an asset or competency required to compete


A SCA involves an asset or competency that forms the
basis of a competitive advantage e.g. Cost leadership
by Toyota and Walmart
Points of Difference (POD) & Points of Parity (POP)
- PODs are unique, strong and favorable brand
differences e.g. Designs by IKEA
- POPs are not unique associations with the brand but
necessary to present a credible offering within a
product category e.g. ATMs and convenient banking
hours.
A SCA is analogous to a POD while a KSF may be
analogous to a POD or a POP.

Role of Synergy

Synergy means that the whole is more than the sum


of its parts. This principle can be used for creating
synergy in businesses, products or markets. Benefits
may include:
Lower operating cost
Increased customer value
Lower investment
Examples:
Technology: GE using turbine technology for
supporting jet engines and CT scanner businesses
Procurement and Warehousing: Walmart
Marketing and research at Coke
Sales force at P& G
Customer appliances at IBM

Philosophies for SCA development


Strategic Commitment
Calls for passionate, disciplined loyalty to a clearly
defined business strategy e.g. Googles focus on
being the best, simple, efficient search engine and
Wal-marts focus on cost leadership
It is based on the premise that the future will be
enough like the past
The philosophy should have a buy-in throughout the
organization
There has to a be a continued improvement in the
strategy,
reducing
cost,
improving
efficiency,
enhancing value preposition
Avoiding strategic stubbornness is critical
Faulty future assumption can a major pitfall
A paradigm shift in the environment may be brought
by a transformational innovation

Philosophies for SCA development


Strategic Opportunism
Focuses on the present. The premise is that the
environment is dynamic and it is profitable to capture
opportunities as they present with focus on short
term profits
KSF is entrepreneurial culture, decentralization with
empowerment to respond to changes
New product are developed and old products are
dropped fast
IMS are strong to ensure customer intimacy
Advantages
include
opportunity
encashment,
avoidance of strategic stubbornness and broader
scope of business. e.g. 3M, Nike, HP
Challenge is strategic drifting due to three
phenomena:
- Short lived opportunities

Philosophies for SCA development


Strategic Adaptability
Base on the premise that market is dynamic and an
existing business model may not be successful in the
future.
However unlike strategic opportunism, the belief is
that markets are predictable and can also be created
or influenced
The goal is to adapt the offering to the changing
markets while maintaining its relevance
Such opportunities occur once or twice in a decade
and the opportunity window is short
Such firms have competence to identify trends, have
aggressive response and organizational flexibility
Organizational flexibility includes KSFs such as
capability to operate in multiple markets, R & D
support, excess manufacturing and distribution
capacity, flexible portfolio with umbrella brands,

Determining Value Propositions

Which value or propositions with their supporting target


market, assets, competencies, and functional strategies
should form the basis for a business strategy?
To answer this question, each value proposition should be
challenged with respect to whether it contains a real and
perceived value proposition and whether it is feasible,
relevant and sustainable

Determining Value Propositions

A superior Attribute or Benefit

If a product benefit is central to the product purchase, one


strategic option is to dominate or own that attribute e.g.
- Volvo: safety design
- Pringles: convenient and compact storage of chips
- Heinz: innovative ketchup which ours slowly, is thick & rich
Organization may have patent protection or feature
improvement strategy
The attribute can also be branded e.g. Crayola is not an art
product company but a visual expression company

Appealing Design

The translucent Apple iMac showed that even computers


could have design flair
iPod and iPhone showed that design could be an ongoing
value proposition
Calls for deign passion driven approach e.g. Apple, Disney,
Ralph Lauren
Strategic alliance with a design firm can be a good option

System Solutions

A compelling value proposition can be based on moving


from selling products to selling system solutions based on
packaging products that work together to create a total
system
Competitors selling ad hoc products, even though they may
be superior, would be at disadvantage
It provides better customer relationship control and greater
margins
Company should be willing to deliver not simply products
but system orientation, expertise and high level of customer
service
Eg. Sony offering a complete range of home entertainment
products

Niche Specialist

Being a niche means that the firm concentrates on one part


of the market or product
Example, an industrial distributor may focus on large volume
users or even a single user or Myspace is differentiated for
its reliance on community
It is more likely to pursue a strategic commitment approach
A focused firm will have more credibility than a generalized
one
The relationship between the customer and company tends
to be stronger

Superior Customer Relationship

Customer intimacy can be a strategic option


Such firms understand their customers at a deep level e.g.
Starbucks claim to the third place (after home and office)
The result is an intensely loyal customer base
The key to really turning on customers is to resolving unmet
needs and leading to customer delight e.g. Harley-Davidson
bikes and Singapore airlines hospitality
Such loyal customer base needs active programs to nurture
and support

Superior Quality
A quality strategy means that the brand will be perceived as
superior to other brands in the reference set. Usually
superior quality will be associated with a price premium
It offers host of advantages such as it provides an
opportunity to be a category leader, it provides employee
motivation and is worthwhile in terms of profits
It is important to focus on visible dimensions of products /
services affecting perceptions e.g.
- Cable suppliers: a professional attitude on part of the
installation team
- Tomato juice: thickness
- Cleaners: A lemon scent
- Cars: a solid door-closure
- Clothes: higher price

Superior Quality

Total Quality Management

To pursue a quality strategic option successfully, a business


must adopt TQM system including the following:
The commitment of senior management
Cross functional teams
A process orientation
A focus on the underlying cause of customer dissatisfaction
The tracking of key quality measures
The involvement of suppliers

Thank you