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
Firm Infrastructure Supporting Activities Human Resource Management Technology Development

Operations

Marketing and Sales

Outbound Logistics

Inbound Logistics

Primary Activities

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Service

Margin
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Procurement

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 Distributor Restaurant Inbound Logistics X X
Operations

Outbound Marketing Service Logistics & Sales X NA

Corporate Lending
Xerox

X
X

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

Competitive Scope

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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

Firm Infrastructure (9%) Human Resources Management (2%) Technology Development(9%) Procurement (1%)

Inbound Logistics (3%)

Purchased Operating Inputs

Human Resource Costs

Marketing & Sales (6%)

Outbound Logistics (1%)

(40%)

(27%)

Operations (67%)

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Service (1%)

Margin (5%)

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Asset Assignment
Human Resources Management (1%) Firm Infrastructure (16%) Technology Development(2%) Procurement (2%)

(8%)

Liquid Assets

(6%)

(15%)

Fixed Assets

(38%)

(2%)

(5%)

Inbound Logistics

Operations (67%)

Outbound Logistics (1%) Marketing & Sales (1%)

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Service (2%)

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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

Cost Position composition of a firms value chain versus competitors a firms relative position vis--vis the cost drivers of each activity Reconfigure the value chain
achieve

Cost Advantage

Control cost drivers

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Analyze Cost Advantage

Firm Infrastructure Human Resource Management Technology Development Procurement Your cost Advantage

Inbound Logistics

Operations

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Marketing and Sales

Outbound Logistics

Service
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Margin

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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Uniqueness

Differentiation

Buyers Value

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Identify Sources of Differentiation

Your strength which can lead to differentiation and then improve buyers value

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Margin

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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

Porters Strategy BPR BOS

Porters Strategy

BOS

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

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