Transcript Modern Competitive Strategy 1e - Gordon Walker

Chapter 2
Competitive
Advantage
Gordon Walker
McGraw-Hill/Irwin
Copyright © 2004 McGraw Hill Companies, Inc. All rights reserved.
PowerPoint Presentation by Charlie Cook
What is Competitive Advantage?
• The goal of strategic thinking
• The focus of entrepreneurial action
• The motivation for top management’s vision
for the firm’s future
• The result of a combination of effective
marketing positioning and defense against
competitors
2–2
What Determines Economic
Performance?
• Macro-economic factors
– The business cycle
– Interest rates
– Exchange rates
• Industry factors
– Buyers, suppliers, competition, substitutes
• Business strategy
– Sustained differences in market position within an
industry
2–3
Strategic Terms
• Economic contribution
– The difference between the product’s value and its
cost to the firm
• Resource
– A relatively stable, observable, tradeable asset
owned by the firm and one that contributes to the
firm’s performance.
» Examples: A patent or combination of patents, a
brand, a geographical location (retailing), or a dealer
network
2–4
Capabilities
• Capability
– Is the ability of a firm to use its organization and
people to accomplish tasks at a high level of
expertise continuously over time.
» Practices leading to superior quality, consistent justin-time delivery, customer service or pricing
– Cannot be traded without trading the company or
the unit where the capability is enacted
2–5
Elements of Competitive Advantage
• Positioning the product line more effectively
than competitors
– Creates a higher economic contribution
» Contribution = value minus cost
• Defending the sources of the market position
against rivals
– Customer retention
– Isolating mechanisms
• Both are necessary and neither is sufficient.
2–6
Competitive Advantages
• Value advantage
– Investments in raising product value improve the
firm’s performance when customers that are most
likely to buy are value sensitive.
• Cost Advantage
– Investments in lowering costs improve the firm’s
performance when customers that are most likely
to buy are price sensitive.
2–7
Building Competitive Advantage
Figure 2.1
2–8
The Distribution of Economic Contributions
between Buyer and Supplier
Figure 2.2
2–9
Competitive Positioning Strategies
• Generic strategies
– Differentiator
» Investing in value (features or low cost)
» Developing either a road or a narrow (niche) market
focus
– Cost leader
» Investing to achieve the lowest costs
– Stuck in the middle
» Being neither a differentiator or cost leader
2–10
Tradeoff between Differentiation and
Low-Cost Generic Strategies
Assumption 1: SIM firm cannot
compete on value with the D firm or
on cost with the LC firm.
Assumption 2: SIM firm’s customer
base prevents it from improving its
competitive position.
Figure 2.3
2–11
The Internet Brokerage Industry:
Selected Firms (Fall 2000)
Table 2.1a
2–12
The Internet Brokerage Industry:
Selected Firms (Fall 2000)
Table 2.1b
2–13
The Internet Brokerage Industry
Worth of
competitive
advantage
Figure 2.4
2–14
What Are Value and Cost?
• Definition of value
– Willingness to pay: The highest price a customer
would be willing to pay for a product in the
absence of a competing product and in the the
context of other purchasing opportunities
• Definition of cost
– The marginal cost to produce a unit of the product
with a particular level of value.
2–15
Value or Cost Advantage?
• Pursue value investments when:
– New customers are likely to adopt the product
– Large numbers of customers are value-sensitive
– Returns on increasing value are higher than
returns on reducing costs to compete on price
2–16
Value or Cost Advantage? (cont’d)
• Pursue cost reductions when:
– Reducing price increases demand and revenues
– Reductions increase margins without the necessity
of price increases or maintain margins if prices fall
– Marginal customers are price-sensitive
– Value improvements are costly, difficult, or easily
duplicated by competitors
2–17
Value and Cost Drivers
Table 2.2
2–18
Examples of Value Drivers
• Customization
– Menu-driven product
design
• Geography
– Location, scope
• Risk assumption
– Warranties
• Brand and
reputation
– Signals of price or
quality
• Network
externalities
– Common
communication
standard
• Environmental
policies
– Sustainable practices
• Complements
– DVD players and
DVD disks
2–19
Examples of Value Drivers (cont’d)
• Quality
– Durability, reliability,
aesthetics
• Delivery
– Just-in-time
production systems
• Breadth of line
– Potential benefits:
one-stop shopping,
interchangeable
parts, interface
compatibility
• Service
– Responsiveness,
problem solving
• Technology
– Functionality,
features
2–20
Cost Drivers
• Scale economies
– Competitive advantage that results from average
costs declining as volume increases based on high
sunk costs or high recurring fixed costs.
• Scope economies
– Competitive advantage gained when the cost of
producing two products together (using the same
resources and capabilities) is lower than the cost
of producing them separately.
2–21
Cost Drivers (cont’d)
• Learning curve
– Competitive advantage that accrues from costs
declining with cumulative volume increases as
learning takes place and practices improve.
• Lower input costs
– Firms with lower resource inputs costs are
competitively better positioned to take advantage
of industry opportunities and to absorb changes in
the costs of inputs than competitors with higher
resource cost structures.
2–22
Cost Drivers (cont’d)
• Vertical integration
– For specialized tasks, coordination costs are lower
within the firm than with a market supplier.
• Organizational practices
– Firms develop process innovations to lower costs
in all activities.
2–23
Defending against Competitors
• Isolating mechanisms
– Factors that reduce imitation and increase
switching costs are used by a firm to defend its
market position.
– A firm aligns these mechanisms with its value and
cost drivers, and with its resources and
capabilities that produce these drivers.
– Without these mechanisms, competitive forces
would quickly eat up the firm’s profit.
2–24
Isolating Mechanisms for Defending
Against Competitors
• Increasing
Customer
Retention
– Search costs
– Transition costs
– Learning costs
• Preventing
Imitation
–
–
–
–
Property rights
Dedicated assets
Causal ambiguity
Learning costs
Table 2.3
2–25
Barriers to Imitation
• Property rights
– Patents, trademarks, asset ownership
• Dedicated assets
– Exclusive distribution channels or suppliers
• Causal ambiguity
– The difficulty in copying a internalized capability
because it cannot be modeled
• Learning and development costs
– Created by causal ambiguity, sunk costs,
complementary practices within the firm, and
history-dependent capabilities
2–26
Increasing Customer Retention:
Switching Costs
• Search costs
– High for products whose value is apparent only
when the product is experienced.
• Transition costs
– Costs associated with the interval between
removal of old equipment and installation of new
equipment
• Learning costs
– Training and lost productivity costs incurred in
adopting a new product
2–27
Summary
• Competitive advantage comes from the combination
of superior market positioning and the ability to
defend the position from the competition.
• Superior market positioning is based on more value
produced more efficiently than competitors.
• Value and cost drivers are determined by the firm’s
resources and capabilities.
• Defending against competitors depends on erecting
barriers to imitation and retaining customers.
2–28