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Building and Sustaining Competitive Advantage

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Objectives of Learning
1. 1.

Define competitors, competitive rivalry, competitive behavior, and competitive dynamics. Competitor analysis. Explain awareness, motivation, and ability as drivers of competitive behavior. Discuss factors affecting the likelihood a competitor will take competitive actions. Discuss factors affecting the likelihood a competitor will respond to actions taken against it. Explain competitive dynamics in slow-cycle, fast-cycle, and standard-cycle markets.

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Competitors
Firms operating in the same market, offering similar products and targeting similar customers

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Competitive The set of Behavior competitive actions and

competitive responses the firm takes to build or defend its competitive advantages and to improve its market position.

Competitive Advantage
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

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Competitive Actions A strategic or tactical action the firm

takes to build or defend its competitive advantages or improve its market position.

Competitive A strategic Responseor tactical action the firm

takes to counter the effects of a competitors competitive action.

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Competitive Rivalry Exists when two or more firms jockey

with one another in the pursuit of better market position.

Competitive Dynamics a series of competitive Results from

actions and competitive responses among firms competing within a particular industry.

From Competitors to Competitive Dynamics

Competitors Engag e in Why ? Competitive Rivalry

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To gain an advantageous market position

What Results?

How ?

Competitive Behavior Competitive actions Competitive responses

What Results?

Competitive Dynamics Competitive actions and responses taken by all firms competing in a

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A Model of Competitive Rivalry

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Competitor Analysis

External Environment

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1010

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Competitor Analysis consists of

Understanding competitors Predicting competitive actions and responses

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Competitor Analysis Components

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Market Commonality
It

is concerned with
The number of markets firm and competitor are involved

Degree of importance of individual markets

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Composition of markets
Market

segments

Commercial and consumer

Product

segments

Health Insurance and Life Insurance

Geographic

markets

North America and Southeast Asia

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Multi-market Competition

Firms competing with each other in multiple markets are involved in Multimarket Competition (MMC)

A firm with greater MMC is less likely to initiate an attack , but more likely to respond aggressively if attacked

Firms with high MMC like to respond with new product introductions if attacked but do not use price as a retaliatory weapon

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Resource similarity
o

The extent to which a firms tangible and intangible resources are similar to a competitors in terms of both type and amount.
Firms with similar types and amounts of resources are likely to:

Have similar strengths and weaknesses. Use similar strategies.

Eg: FedEx and UPS spend more than a Billion dollars in R&D annually to improve efficiency and reduce costs

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A Framework of Competitor Analysis

Drivers of Competitive Actions and Responses

Awareness

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Motivation

Ability

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Awareness
The

extent to which competitors recognize the degree of their mutual interdependence among firms with
market rivalry

Greatest

Similar resources

Multiple

Eg: Wal-Mart and Carrefour

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Motivation
A

firms incentive to respond to competitors attack on

Gains Losses

Depends

Perceived Perceived

Eg:

Airbus, Boeing

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Ability
A

firms possession of the resources to be able to respond to competitors actions

Includes Financial Human

capital

resources

Eg: Wal-Mart Small retail shops

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NetFlix and Blockbuster

NetFlix: Online Rent $

movie rental business

up to three movies at a time

6.5 million in 2004 to $49 mil in 2006

Blockbuster Main

competitor of NetFlix movie rental service

Retail

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Competitive Action-Blockbuster
Total

Access- delivers movies through the mail but also allows customer to exchange videos in person at Blockbuster stores. money on this service

Loses

Objective:

To deprive NetFlix of new subscribers

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Competitive response-NetFlix

Lower

prices for its plans Now - movie downloading service prices and Technological Investments:
in marketing budget

Watch

Lower

Reduction Dip

in firms profits

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Competitive Rivalry

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Analysis of the case

Competitor Same

Analysis:

target market resources

Similar

Competitive High

Drivers

level of Awareness, Motivation and Ability

Firms have to be carefully study competitive rivalry to make sure it doesnt degenerate into a mutually destructive competitive situation

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Competitive Rivalry

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Strategic and Tactical Actions

Strategic

Action (or Response)

Is a market-based move that involves

a significant commitment of organizational resources Is difficult to implement and reverse.

Example:

Airtel Africa Operations

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Tactical

Action (or Response)

Is a market-based move that is taken to fine-tune a strategy:

Usually involves fewer resources. Is relatively easy to implement and reverse.

Fine

tuning pricing and sales strategy

- Example: Wal-Mart low price strategy

Factors Affecting Likelihood of Attack: First

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mover incentives

First mover:

A firm that takes an initial competitive action in order to build or defend its competitive advantages or to improve its market position.
First

movers allocate funds for advertising

Product innovation and development research and development

Aggressive Advanced

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First

movers can gain

The

loyalty of customers who may become committed to the firms goods or services. share that can be difficult for competitors to take during future competitive rivalry.

Market

Example:

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Second mover :
Second mover responds to the first movers competitive action, typically through imitation Second mover does it in following ways

Studies customers reactions to product innovations. Tries to find any mistakes the first mover made, and avoid them. Can avoid both the mistakes and the huge spending of the first-movers. May develop more efficient processes and technologies

Example:Charles Stack Online Bookstore vs Amazon.

com

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Late mover:

Late mover responds to a competitive action only after considerable time has elapsed. success achieved will be slow in coming and much less than that achieved by first and second movers. movers competitive action allows it to earn only average returns and delays its understanding of how to create value for customers.

Any

Late

Example:

Factors Affecting Likelihood of Attack: Organization size

An organizations size affects the likelihood to take competitive action as well as the type and timings of those actions.

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Organization size-small

Small firms are more likely:

To launch competitive actions. Tend to do it more quickly.

Small firms are perceived as:

Nimble and flexible competitors Relying on speed and surprise to defend competitive advantages or develop new ones while engaged in competitive rivalry. Having the flexibility needed to launch a greater variety of competitive actions

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Organization size-large
Large

firms are likely to initiate more competitive actions as well as strategic actions during a given time period organizations commonly have the slack resources required to launch a larger number of total competitive actions

Large

Factors Affecting Likelihood of Attack: Quality - On the Basis of Product

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Quality can be defined as Zero Defects in production and continuous cycle of improvement Quality exists when the firms goods or services meet or exceed customers expectations Product quality dimensions include:

Performance Features

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Factors Affecting Likelihood of Attack: Quality - On the Basis of Service

Service quality dimensions include:

Timeliness Courtesy Consistency Convenience Completeness Accuracy

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Likelihood of response
Responses

to a competitors action are taken when the action:

Leads to better use of the competitors capabilities to gain or produce stronger competitive advantages or an improvement in its market position.

The action damages the firms ability to use its capabilities to create or maintain an advantage.

The firms market position becomes less defensible.

Factors Affecting Likelihood of Response

Firms

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study three other factors to predict how a competitor is likely to respond to competitive actions
Type of competitive action Reputation Market dependence

1. 2. 3.

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Strategic

Type of receive strategic responses actions competitive action

Strategic actions elicit fewer total competitive responses. The time needed to implement and assess a strategic action delays competitors responses.

Example: Palm Inc sold 25% of itself to Elevation Partners

Tactical

responses are taken to counter the effects of tactical actions

A competitor likely will respond quickly to a tactical actions.

Example: Price Reduction. (Airline companies)

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Reputation
Reputation

is the positive or negative attribute ascribed by one rival to another based on past competitive behavior. firm studies responses that a competitor has taken previously when attacked to predict likely responses

The

Example: IBM; committed significant resources to enter PC market. Dell, Compaq, HP, Gateway respond.

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Dependence on market
Market

dependence is the extent to which a firms revenues or profits are derived from a particular market. general, firms can predict that competitors with high market dependence are likely to respond strongly to attacks threatening their market position.

In

Example:- Sargento Foods <----Dedicated----> Market for Cheese.

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Competitive Dynamics

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Warren Buffett was once asked what is the most important thing he looks for when evaluating a company. Without hesitation, he replied, "Sustainable competitive advantage."

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Competitive Dynamics
Competitive dynamics concerns the ongoing actions and responses taking place among all firms competing within a market for advantageous positions.

Dynamic competitive market can be divided into three types

Slow Cycle Markets Fast Cycle Markets Standard Cycle Markets

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Slow cycle Markets

Competitive

advantage

Shielded from imitation commonly for long period of time is costly ( Resource or Capability)

Imitation

Usually

building a unique and proprietary capability produces a competitive advantage. firms concentrate on competitive actions

All

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Live Examples

MS operating system 98/XP/Vista/Windows7/ Office For Windows and Mac

MS

From

Mainframes
1952 to present
First Generation IBM 700/7000 Series Second Generation - System/360

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Fast Cycle Markets

The

firms competitive advantages arent shielded from imitation. happens quickly and some what inexpensively advantages arent sustainable.

Imitation

Competitive

Competitors use reverse engineering to quickly imitate or improve on the firms products

Non-proprietary Volatile

technology is diffused rapidly

in nature

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Fast Cycle Market condition

Competition Companies

is almost frenzied

growth

rely on innovation as the engine of

Prices

fall very quickly need to extract profits as quickly

Companies

as possible

What companies do in Fast Cycle Markets

Firms

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Avoid loyalty to any of their products

Prefer

to cannibalize their own before competitor learns how to do so through successful imitation focus on learning how to rapidly and continuously develop new competitive advantages that are superior to those they replace

Companies

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Cannibalizing
Coca

cola introduces Diet coke shops

discounts on products

Retailer Giving

Starbucks

or McDonald's

Marlboro

and Marlboro lights

Source: Wikipedia

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Pharmaceutical Industry
Patented When

drugs are sold at very high prices

a drug looses its patent rights all competitors can produce this drug
There

are only generic drug making companies which are having more sophisticated processing technologies to this heavy competition price of drugs falls rapidly

Due

In first 12 months prices fall up to 30 to 40% of branded drug In 24 months it falls up to 15 to 20% of branded drug

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PC Industry
Only

few parts are patented like Microprocessor parts are available easily in market very can be done by any related firm

Other

cheap

Assembling HP,

Dell, Acer and Lenovo can be affected by any new entrants, if it can build better supply chain and market it.

Developing Temporary Advantage to Create Sustained Advantage

Returns from a Sustained Competitiv e Advantage Exploitati on

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Laun ch

Counteratt ack

Developing Temporary Advantage to Create Sustained Advantage

Returns from a Sustained Competiti ve Advantag e Exploitat ion

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Firm has already moved on to Advantage No. 2

Laun ch

Counteratt ack

5 Time

Developing Temporary Advantage to Create Sustained Advantage

Returns from a Sustained Competiti ve Advantag e Exploitat ion Counteratt ack

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Firm continues to move on to the next Advantage

Laun ch

5 Time

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Standard Cycle Markets

Moderate

cost of imitation may shield competitive advantages. advantages are partially sustainable if their quality of its capabilities is continuously upgraded.

Competitive

Firms

Seek large market shares Gain customer loyalty through brand names Carefully control operations

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Example of Companies with Sustained Competitive Advantage

1. Strong research and Innovation The technology industry is one of the leading industries with respect to strong research and innovation. And when it comes to setting the pace using innovation as leverage; Apple and Sony are the two companies that have held their leadership position using innovation as a competitive advantage. 2. Brand Popularity

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4. Strategic assets Holding strategic assets such as patents is a strong source of sustained competitive advantage and General Electric has stood the test of time because of the several patents held. Mind you that possession of these strategic assets has made General Electric one of the most powerful companies in the world. 5. High volume production Dangote Group of companies became one of the leading conglomerates in Africa because of

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8. Superior Product or customer support IKEA has become a market leader in the furniture industry because of its ability to provide superior product at an affordable rate; backed by a strong customer support system. 9. Exclusive re-selling or distribution rights The Coscharis Group has become one of the leading automobile retailers in Nigeria and West Africa at large because of its possession of

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12. Speed

Speed and Time

and time was once an overlooked source of sustained competitive advantage until FedEx and Domino Pizza used it as leverage to become industrial pacesetters. Low pricing

13. Wal-Mart

as at the time of this writing is the most capitalized company in the world. Thanks to its low pricing strategy that became its strong source of competitive

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Competition Between HP & Dell

-The Battle Rages On

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You can do anything, but do you really want to do everything?

- Mayank Jain

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Key Points- Dell

Dell

grew from $1000 to $56b between 1984 to 2007 bypassed middle-man, selling custom-built computers directly to consumer process itself was called Dell Way

It

The

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Fall of the Leader

If

you concentrate on a single business model, you will grow only when market is growing. you have to continue your success, innovation and reinventions are keys.

If

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Key Points- Dell & HP

At

close of 2006, in global PC market HPs share was 18.1% while Dells share was 14.7% lost 32% market share during 2005 and 2006 same duration HP doubled its stock value

Dell In

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Success of HP
HP It

analyzed its resources and capabilities

focused in those areas where it was strong(core competency) like retail stores, where Dell was absent developed close relationship with retailers, advertized its products, personalized PCs and expanded its target market (to females) white and silver notebook was one of Best Buys best selling notebook in 2006 holiday season(competitive advantage)

It

Its

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Dells competitive reactions

Dell It

planned to start retail selling

joined hands with Bic Camera Inc. to sell notebooks and desktops in Japan focused on product innovation through R&D restructured its advertising campaign to attract consumers towards customized computers

It It

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Dell-HP: worldwide market share

12 10 8 6 4 2 0

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These days
Dell- Listen. Learn. Deliver. That's what we're about. HP- To provide products, services and solutions of the highest quality and deliver more value to our customers that earns their respect and loyalty.

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HP
Last

month HP announced that it would discontinue its TouchPad tablet computers and smartphones words of CEOLeo Apotheker- What we're really doing is creating two companies: One focused on the enterprise, and one which will be a highly-effective, end-user device business. It will be much more than PCs.

In

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Dell
Dell

is targeting the SMEs in smaller towns in India as its main driver for growth India is focusing on simplification of the business processes (improve cost efficiencies) has even tied up with Tally to offer accounting solutions online will also introduce a portal titledDell 360where SMBs can educate themselves on benefits of IT to their businesses.

Dell

It

Dell