Competitive Advantage

Author: Michael Porter

Instructor: Wesley Shu
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How a firm can actually create

and sustain a competitive
advantage in its industry

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Two Basic Types

Cost leadership
Differentiation

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Value Chain
Identify which activities contributing to
cost leadership and differentiation
Analyze the source of competitive
advantage

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Value Chain

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Primary Activities
Inbound Logistics
Receiving, storing, and disseminating inputs.
E.g., warehousing, inventory control

Operations
Transforming inputs into the final product
form

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Primary Activities
Outbound Logistics
Collecting, storing and distributing the
product to buyers

Marketing and Sales

Providing a means and incentive which allow
buyers to purchase the product

Service
Providing service to enhance or maintain the
value of the product

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Primary Activity Focus by Industry

Industry

Inbound
Logistics

Distributor

Restaurant

Operations

Outbound
Logistics

Marketing
& Sales

Service

X
X

NA

Corporate
Lending

Xerox

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Support Activities
Procurement
Function of purchasing inputs used in the
value chain

Technology Development

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Support Activities
Human Resource Management
Firm Infrastructure
planning, finance, accounting, legal,
etc.

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Competitive Scope
Four scopes may affect value chain
Ex. The value chain serves
minicomputer requires extensive
sales assistance, less hardware
performance different from what
serves small business

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Competitive Scope
Segment Scope
Differences required to serve different
product or buyer segment

Vertical Scope
Division of activities between a firm and
its suppliers, channels, and buyers

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Competitive Scope
Geographic Scope
Different geographic areas

Industry Scope
Interrelationships among business units

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Generic Competitive Advantage

Cost Leadership
Differentiation
Focus

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Competitive Strategies

Competitive Scope

Competitive Advantage
Lower Cost Differentiation
Broad Cost
Differentiation
Target Leadership
Narrow Cost Focus Differentiation
Focus
Target

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Cost Leadership Strategy

Steps to achieve cost leadership
Make cost assignment
Identify cost drivers
Understand cost dynamics
Control cost drivers
Reconfigure the value chain

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Operating Cost Assignment

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Asset Assignment

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Why cost assignment

Understand the firms cost structure
Find cost drivers of each cost segment
Match cost structure to buyers value
chain
Configure and reconfigure the cost
structure

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Cost Leadership Cost Drivers

Factors affect costs.

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Cost Leadership Cost Drivers

Economies or diseconomies of scale
Learning and spillover
Pattern of capacity utilization
When fixed cost high, capacity utilization is
important

Linkages
How other activities are performed
Linkages within the Value Chain
Vertical Linkages
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Cost Leadership Cost Drivers

Interrelationships
With other business units within a firm

Integration
Vertical integration in a value activity

Timing

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Cost Leadership Cost Drivers

Discretionary policies
Policies that reflect a firms strategy

Location
Institutional factors
e.g., government regulations, financial
incentives, unionization, etc.

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Identify Cost Drivers

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Cost Dynamics
What cause the change of cost drivers

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Cost Dynamics

Industry real growth

Differential scale sensitivity
Different learning rates
Differential technological change
Relative inflation of costs
Aging
Market adjustment
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How to Achieve Cost Advantage

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Analyze Cost Advantage

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Control Cost Drivers

E.g., control scale gain the
appropriate firm size

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Reconfigure the Value Chain

Reconfiguration of the value chain
presents the opportunity to fundamentally
restructure a firms cost, compared to
settling for incremental improvements.
By altering the basis of competition in a
way that favors a firms strengths, it may
change the important cost drivers in a way
that favors a firm.

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Steps in Strategic Cost Analysis

1. Identify the appropriate value chain and
assign costs and assets to it.
2. Diagnose the cost drivers of each value
activity and how they interact.
3. Identify competitor value chains, and
determine the relative cost of competitors
and the sources of cost differences.
4. Develop a strategy to lower relative cost
position through controlling cost drivers or
reconfiguring the value chain and/or
downstream value.

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Cost Focus
A firm dedicates its efforts to a wellchosen segment of an industry can often
lower its costs significantly.

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Differentiation
Emphasize on a unique source of
differentiation in the Value Chain, rather
than on products or markets only
Differentiation base on buyers value,
not only difference that buyers do not
value
Should consider the cost of
differentiation

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Identify Sources of Differentiation

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Drivers of Uniqueness
Policy Choices
Linkages
Linkages within the value chain
Supplier linkages
Channel linkages

Timing
Be the first

Location
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Drivers of Uniqueness
Interrelationship
Sharing a value activity with sister business units.
E.g., sharing a sales force for both insurance and
other financial products

Proprietary learning
Integration e.g., integrating online systems
to current ordering systems
Scale
Institutional factors e.g., Madames route

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Why buyers purchase?

Purchasing Criteria
User criteria firms to meet them by
lowering cost or raising buyer
performance
Signaling criteria telling buyers what
benefits to get

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Differentiation for creating

Buyer Value by
Lowering buyer cost
Raising buyer performance
Signaling the value

Through
Linking the firms value chain to the
buyers value chain

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Steps in Differentiation
1. Determine who the real buyer is
2. Identify the buyers value chain and
the firms impact on it
3. Determine ranked buyer purchasing
criteria
4. Assess the existing and potential
sources of uniqueness in a firms
value chain
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Steps in Differentiation
5. Identify the cost of existing and potential
sources of differentiation
6. Choose the configuration of value activities
that creates the most valuable differentiation
for the buyer relative to cost of differentiating
7. Test the chosen differentiation strategy for
sustainability
8. Reduce cost in activities that do not affect
the chosen forms of differentiation

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Discussion:
Red Ocean to Blue Ocean

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Other Discussion
Creative Industries
Supply Chain Management
What is Buyers Value Chain?

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