Professional Documents
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Competitive Advantage
Competitive Advantage
Sources of Competitive
Advantage
Dr Kevin Masters
Strategic Management
February 2015
Strategy
Internal sources
of change
Some firms
have greater creative
and innovative
capability
COMPETITIVE
COMPETITIVE
ADVANTAGE
ADVANTAGE
ct
u
d
ro
p
r
st
la
o
i
c
m
r
Si
we
o
l
at
Pri
ce
fro
pre
m
mi
un
um
iqu
ep
rod
uc
t
COST
COST
ADVANTAGE
ADVANTAGE
DIFFERENTIATION
DIFFERENTIATION
ADVANTAGE
ADVANTAGE
COST
DIFFERENTIATION
LEADERSHIP
SCOPE
Single Segment
FOCUS
Activity 1
Generic strategy
COST
LEADERSHIP
DIFFERENTIATION
Cost-leadership
ECONOMIES OF SCALE
ECONOMIES OF LEARNING
Increased dexterity
Improved organizational routines
Process innovation
Reengineering business processes
PRODUCTION TECHNIQUES
PRODUCT DESIGN
Location advantages
Ownership of low-cost inputs
Non-union labor
Bargaining power
INPUT COSTS
CAPACITY UTILIZATION
RESIDUAL EFFICIENCY
Example
Economies of Scale and the Long-Run
Cost Curve for a Manufacturing Plant
Sources of scale economies:
- Volume related economies of scale
- Indivisibilities (many resources and activities are lumpy
and small scale does not bring reduced costs, e.g. TV
advertising campaigns)
- Specialization (economies through greater division of
labour)
Cost per
unit of
output
Minimum
Efficient Plant
Size: the point at
which most scale
economies are
exhausted
Units of output
per period
Soft drinks brands with the greatest sales volumes tend to have the lowest
advertising costs per unit of sales.
Schweppe
s
SF Dr. Pepper
Diet 7-Up
Tab
Diet Pepsi
Diet Rite
Fresca
Seven Up
Dr. Pepper
Sprite
Pepsi
10
20
50
100
200
500
Coke
1,000
Total
7.2
United Airlines
(cents)
3.5
1.1
0.8
0.3
1.0
0.2
0.5
3.1
10.5
PURCHASING
PARTS
INVENTORIES
R&D
TESTING,
COMPONENT
ASSEMBLY
DESIGN
QUALITY
MFR
ENGNRNG
CONTROL
GOODS
INVENTORIES
PARTS
INVENTORIES
R&D
COMPONENT ASSEMBLY TESTING,
DESIGN
QUALITY
MFR
ENGNRNG
CONTROL
Prices paid
--Size of r&d commitment
depend on:
--Productivity of
-- Order size
R&D/design
-- Purchases per --No. & frequency of new
supplier
models
-- Bargaining power
-- Supplier location
GOODS
INVENTORIES
-- No. of dealers
-- Sales / dealer
-- Level of dealer
support
-- Frequency of defects
under warranty
SALES
&
MKITG
-- Plant scale
--Cyclicality &
-- Flexibility of production predictability of sales
-- No. of models per plant --Customers
-- Degree of automation
willingness to wait
-- Sales / model
-- Wage levels
-- Capacity utilization
PRCHSNG
PARTS
INVNTRS
R&D
DESIGN
COMPONENT
MFR
ASSEMBLY
TESTING
QUALITY
GOODS
INV
SALES
MKTG
DSTRBTN
DLR
CTMR
of comparative inefficiency?
Can volumes be increased to release
scale efficiencies?
Can productivity be improved, relocated
or outsourced?
Purchasing
Use fewer suppliers to increase volumes?
Use JIT component supply systems?
R&D Design
Components
Seek economies of scale?
Out-source production if volumes are suboptimal?
Differentiation strategies
Differentiation
Involves uniqueness along some
dimension that is sufficiently valued by
customers to allow a price premium
Encompasses everything about a product
or service that influences the value that
the customer derives from it
Includes every aspect of the way in which
a company relates to its customers (e.g.
the Starbucks Experience)
The
The Nature
Nature of
of Differentiation:
Differentiation:
Tangible
Tangible and
and Intangible
Intangible Dimensions
Dimensions
DEFINITION: Providing something unique that is valuable to the
buyer beyond simply offering a low price. (M. Porter)
THE KEY IS TO CREATE VALUE FOR THE CUSTOMER
TANGIBLE DIFFERENTATION
Observable product characteristics:
size, color, materials, etc.
performance attributes
packaging
complementary services
INTANGIBLE
DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customers image, status, identity,
and desire for exclusivity
Figure 6.5
Source: Simplified from Figure 1, in D. Gursoy, M. Chen and H. Kim (2005), The US airlines relative positioning, Tourism Management, 26, 5, 5767: p. 62
What needs
does it satisfy?
THE PRODUCT
THE
CUSTOMER
By what
criteria do
they choose?
What
motivates
them?
What are
demographic,
sociological,
psychological
correlates of
customer behavior?
FORMULATE
DIFFERENTIATION
STRATEGY
Select product
positioning in
relation to product
attributes
Select target
customer group
Ensure customer /
product
compatibility
Training to support
customer service
excellence
Unique product
features. Fast new
product development
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND
OPERATIONS
LOGISTICS
Quality of
components &
materials
Defect free
products.
Wide variety
OUTBOUND
MARKETING
LOGISTICS
& SALES
Fast delivery.
Efficient order
processing
Building brand
reputation
SERVICE
Customer technical
support. Consumer
credit. Availability
of spares
5
2
Distribution
Marketing
Canning
Processing
Inventory holding
Purchasing
Service &
technical support
Sales
Distribution
Inventory holding
Manufacturing
Design
Engineering
Inventory holding
Purchasing
Supplies of steel
& aluminum
CAN MAKER
CANNER
COST
DIFFERENTIATION
LEADERSHIP
SCOPE
Single Segment
FOCUS
Activity 2
The argument for pure generic strategies
is controversial, even Porter acknowledges
that the strategies can be combined.
Turn
TOYOTA IN CARS?
MCDONALDS IN FAST FOOD?
NIKE IN ATHLETIC SHOES?
Activity 3
Essential reading:
Grant (2010) Chapters 7 and 10
Johnson, Whittington and Scholes (2011)
Chapter 6
Further reading:
Thompson et al. (2013) Crafting and
Executing Strategy: The Quest for
Competitive Advantage. London, McGraw Hill.
Porter (1985) Competitive Advantage. New
York, Free Press.
THE END
THANK YOU!