BUILDING AND SUSTAINING COMPETITIVE ADVANTAGE

Objectives of Learning
1. 2. 3. 4. 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.

5.
6.

Discuss factors affecting the likelihood a competitor will respond to actions taken against it.
Explain competitive dynamics in slow-cycle, fast-cycle, and standardcycle markets.

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

Competitive Behavior
The set of 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

Competitive Actions
A strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position.

Competitive Response
A strategic or tactical action the firm takes to counter the effects of a competitors competitive action.

Competitive Rivalry
Exists when two or more firms jockey with one another in the pursuit of better market position.

Competitive Dynamics
Results from a series of competitive actions and competitive responses among firms competing within a particular industry.

FROM COMPETITORS TO COMPETITIVE DYNAMICS

Competitors Engage in Why? To gain an advantageous market position Competitive Behavior
Competitive actions Competitive responses

Competitive Rivalry How?

What Results?

What Results?
Competitive Dynamics Competitive actions and responses taken by all firms competing in a market

A Model of Competitive Rivalry

COMPETITOR ANALYSIS

External Environment

10

Competitor Analysis consists of

Understanding competitors Predicting competitive actions and responses

COMPETITOR ANALYSIS COMPONENTS

MARKET COMMONALITY

It is concerned with

The number of markets firm and competitor are involved Degree of importance of individual markets

COMPOSITION OF MARKETS

Market segments

Commercial and consumer

Product segments

Health Insurance and Life Insurance

Geographic markets

North America and Southeast Asia

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

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

A FRAMEWORK OF COMPETITOR ANALYSIS

DRIVERS OF COMPETITIVE ACTIONS AND RESPONSES

Awareness Motivation

Ability

AWARENESS

The extent to which competitors recognize the degree of their mutual interdependence Greatest among firms with
Similar resources Multiple market rivalry

Eg: Wal-Mart and Carrefour

MOTIVATION

A firms incentive to respond to competitors attack Depends on

Perceived Gains Perceived Losses

Eg: Airbus, Boeing

ABILITY

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

Financial capital Human resources

Eg: Wal-Mart Small retail shops

NETFLIX AND BLOCKBUSTER

NetFlix:

Online movie rental business Rent up to three movies at a time $ 6.5 million in 2004 to $49 mil in 2006

BlockbusterMain competitor of NetFlix Retail movie rental service

COMPETITIVE ACTION-BLOCKBUSTER

Total Access- delivers movies through the mail but also allows customer to exchange videos in person at Blockbuster stores. Loses money on this service Objective: To deprive NetFlix of new subscribers

COMPETITIVE RESPONSE-NETFLIX

Lower prices for its plans

Watch Now - movie downloading service Lower prices and Technological Investments:
Reduction in marketing budget Dip in firms profits

COMPETITIVE RIVALRY

ANALYSIS OF THE CASE

Competitor Analysis:

Same target market Similar resources

Competitive Drivers

High 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

COMPETITIVE RIVALRY

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

Tactical Action (or Response)

Is a market-based move that is taken to finetune 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 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

Product innovation and development

Aggressive advertising Advanced research and development

First movers can gain

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

Example:

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 firstmovers.
May develop more efficient processes and technologies

Example:Charles Stack Online Bookstore vs Amazon. com

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

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.

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

ORGANIZATION SIZE-LARGE

Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period

Large organizations commonly have the slack resources required to launch a larger number of total competitive actions

FACTORS AFFECTING LIKELIHOOD OF ATTACK:

QUALITY - ON

THE

BASIS OF PRODUCT

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 Flexibility Serviceability Aesthetics Perceived quality Conformance

FACTORS AFFECTING LIKELIHOOD OF ATTACK: QUALITY - ON THE BASIS OF SERVICE

Service quality dimensions include:

Timeliness
Courtesy Consistency Convenience Completeness Accuracy

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 study three other factors to predict how a competitor is likely to respond to competitive actions

1. 2. 3.

Type of competitive action Reputation Market dependence

Type of competitive action

Strategic actions receive strategic responses

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.

Free SIM card. (Telecom Industry)

Example: Price Reduction. (Airline companies)

REPUTATION

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

Example: IBM; committed significant resources to enter PC market.

Dell, Compaq, HP, Gateway respond.

DEPENDENCE ON MARKET

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

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

COMPETITIVE DYNAMICS

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."

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

SLOW CYCLE MARKETS

Competitive advantage

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

Usually building a unique and proprietary capability produces a competitive advantage.

All firms concentrate on competitive actions and responses to protect, maintain and extend proprietary competitive advantage

Eg: Copyrights, Patents, ownership of an information resource.

LIVE EXAMPLES

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

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

FAST CYCLE MARKETS

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

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

Non-proprietary technology is diffused rapidly

Volatile in nature

FAST CYCLE MARKET CONDITION

Competition is almost frenzied Companies rely on innovation as the engine of growth Prices fall very quickly Companies need to extract profits as quickly as possible

WHAT COMPANIES DO IN FAST CYCLE MARKETS

Firms Avoid loyalty to any of their products Prefer to cannibalize their own before competitor learns how to do so through successful imitation Companies focus on learning how to rapidly and continuously develop new competitive advantages that are superior to those they replace

CANNIBALIZING

Coca cola introduces Diet coke Retailer shops

Giving discounts on products

Starbucks or McDonald's Marlboro and Marlboro lights

Source: Wikipedia

PHARMACEUTICAL INDUSTRY
Patented drugs are sold at very high prices When 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 Due to this heavy competition price of drugs falls rapidly

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

PC INDUSTRY
Only few parts are patented like Microprocessor Other parts are available easily in market very cheap Assembling can be done by any related firm 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 Competitive Advantage

Exploitation Launch

Counterattack

10

15

Developing Temporary Advantage to Create Sustained Advantage

Returns from a Sustained Competitive Advantage

Firm has already moved on to Advantage No. 2

Exploitation Launch

Counterattack

Time (years)

10

15

Developing Temporary Advantage to Create Sustained Advantage

Returns from a Sustained Competitive Advantage

Firm continues to move on to the next Advantage

Exploitation Launch

Counterattack

Time (years)

10

15

STANDARD CYCLE MARKETS

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

Firms

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

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 Being recognized all over the world as a respected brand is a sustained competitive advantage that companies such as Virgin, Apple and Coca cola have used as leverage to hold the market sway for years. Virgin is a company that has used its brand name as leverage to break into new markets in completely new territories.
Corporate reputation Corporate reputation is a form of sustained competitive advantage that companies such as Price Waterhouse and Berkshire Hathaway have leveraged to become world class entities.

3.

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. High volume production Dangote Group of companies became one of the leading conglomerates in Africa because of its ability to produce goods on high volume and ensure a uniform price throughout Nigeria. Access to working Capital Generally, public liability companies (quoted companies) have a sustained competitive advantage over private companies because of their infinite capacity to raise capital from the public. Take a look at how Oracle acquired 57 companies in a space of five years and Reliance Industries investing a billion dollars in a single swoop to open a chain of retail stores. Barriers to Entry Barriers to entry due to government restrictions and regulations have been the source of sustained competitive advantage for companies such as Telmex and Chevron.

5.

6.

7.

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 exclusive distributorship of BMW brand throughout West Africa. 10. Ownership of capital equipment Ownership of capital equipment can be a source of sustained competitive advantage and Julius Berger has proved it by becoming a leading company in the construction industry. 11. Flexibility The ability to change swiftly is a strength and source of sustained competitive advantage that Microsoft leveraged upon to become the largest software company in the world.

12. Speed and Time Speed and time was once an overlooked source of sustained competitive advantage until FedEx and Domino Pizza used it as leverage to become industrial pacesetters. 13. Low pricing 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 advantage. 13. Superior database management and data processing capabilities GTBank, AT&T, Google, Facebook have become market leaders in their various niches because of the superior database management and data processing capabilities they possess.

COMPETITION BETWEEN HP & DELL

-THE BATTLE RAGES ON

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

- Mayank Jain

KEY POINTS- DELL

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

FALL OF THE LEADER

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

KEY POINTS- DELL & HP

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

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

SUCCESS OF HP

DELLS COMPETITIVE REACTIONS

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

DELL-HP: WORLDWIDE MARKET SHARE

25
20 17.9 15 13.3 10 7.2 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 hp dell 15.9 12.9

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.

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

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