Sustainable Competitive Advantage
(What, When and How???)
Submitted by –
Manas Kumar Meher (08BS0004011) Saurav Kumar (08BS0003026) Saurabh Singh (08BS0003021)
Prof. Biraj Mohanty
INTRODUCTION SUSTAINABLE COMPETITIVE ADVANTAGE CREATE A SCA ROUTES TO SCA CREATE COMPETITIVEADVANTAGE RECOGNISING PATTERNS PORTER`S APPROACH PORTER`S APPROACH TO CA PORTER`S RECIPE BEYOND PORTER ATTACKERS VS DEFENDER EXAMPLE OF SUZLON
SUSTAINABLE COMPETITIVE ADVANTAGE Sustainability is a framework for responding to the emerging competitive threats and maintaining competitive advantage. Sustaining competitive advantage requires erecting barriers against the competition. A competitive strategy consists of moves to 1) Attract customers 2) Withstand competitive pressures 3) Strengthen an organization’s market position INTRODUCTION • • • • Having a competitive advantage is necessary for a firm to compete in the market But what is more important is whether the competitive advantage is sustainable A firm must identify its position relative to the competition in the market By knowing if it is a leader, challenger, follower or nicher, it can adopt appropriate strategies to compete
SUSTAINABLE COMPETITIVE ADVANTAGE A good strategist seeks not only to “win the hill, but hold on to it.”(Subash Jain) Sustainability is a framework for responding to the emerging competitive threats and maintaining competitive advantage. Sustaining competitive advantage requires erecting barriers against the competition Aakers suggested looking at the following: How you compete Basis of competition Where you compete Whom you are competing against CREATE A SCA We are examining options for creating value. We have suggested that the ability to add value is enhanced by outright dominance or cooperation 3
In the case of oligopoly we get an understanding of the drivers of market level profits (5 forces) But what about differences amongst firms in the same market. What might determine the ability of a particular firm to outperform the market average? To achieve a sustainable superior level of performance? Or generate ‘rents of ability’? ROUTES TO SCA What are the firm specific determinants of relative success and failure in the firm’s search for value (absolute if you buy the Austrian line of course). Are there any useful generalisations to be made, lessons to be learned, which can help to guide the strategy process? Lower overall costs for same prices. More productive organisation relative to rivals. Higher (premium) prices for similar costs. More highly valued products (by consumers) not negated by higher costs of production. Innovation. Differentiation. Organisational effectiveness CREATE COMPETITIVE ADVANTAGE Cheaper (lower cost) producer Better (superior perceived quality) Newer (more innovative/up to date/fashionable) Faster (speed to market) More desirable/ distinctive (successful branding) Better reputation: First mover advantages Provide your own examples of firms that compete successfully on this basis RECOGNISING PATTERNS Advantage comes from understanding and exploiting the emerging competitive market patterns. There is scope for advantage based on: Search/ scanning capabilities 4
Analysis/ interpretation capabilities Risk taking capabilities Implementation capabilities Change management capabilities Ownership of/ access to required complementary assets/ capabilities The ability to do this depends in turn on the effectiveness and integration of the appropriate key business activities and processes (distinctive capabilities/ competencies) which underlie cost competitiveness, quality, innovation, speed to market, network building, and customer intimacy. Production, marketing, logistics, supply chain management, collaboration, branding, quality, market development, product development, and innovation. Which in turn depends on organisational processes and practices such as HRM, information and decision management, and relationship management. PORTER’S APPROACH In ‘Competitive Advantage’ P argues that firm specific perf depends basically on the individual firm’s ability to organise and manage the cost/ differentiation drivers involved so as to produce a cost advantage or a differentiation advantage. (see next slide) But this approach has problems and is incomplete. Cost advantage means having costs below average for a given market price which might come from …. Differentiation means getting a higher price for similar costs Which might come from being better, newer, earlier to market, more desirable, more distinctive, more reliable, offering a more cost effective ‘solution’ for customers, or providing a better ‘total system’ with complementor’s (Wintel) BENEFIT ADVANTAGE Differential adv means benefit advantage. A strategy based on this would aim to offer a superior ‘benefit’ to the consumer and obtain a price differential which would justify the higher costs involved. That is there would be a positive return to the extra investment. The significance of costs Costs arise for a business because it acquires RESOURCES (people/ machines/buildings), builds an ORGANISATION to mobilise and coordinate them, creates CAPABILITIES& COMPETENCIES, creates BRAND NAMES, creates a REPUTATION, establishes POSITIONS in markets, creates firm specific KNOWLEDGE, acquires PATENTS, creates supply NETWORKS, creates RELATIONSHIPS, creates a portfolio of STRATEGIC ACTIONS/ policies and so on.
ASSET CREATION These benefits are the business’s ASSETS. Organisational assets Positional assets Knowledge assets Network assets Brand assets/ reputation assets Capabilities/ competencies (such as for product development/ marketing/ innovation/ cost management) Relational assets Patents Strategic assets ( such as cooperative suppliers or competitors) PORTER’S APPROACH TO CA Low cost/ differentiation may indeed be the proximate cause of CA but they cannot be the ultimate source. Low cost positions, superior quality, speed to market, or whatever, must come from something or other the organization has or does. For example in Ricardo’s time the superior returns (CA) of some farmers indeed came from lower costs which derived ultimately from superior quality (i.e. more productive) land, a resource that was very hard to make more of! Nowadays Nokia’s or Dell’s superior returns come ultimately from something similar, something (scarce and hard to make more of) which allows them to do things which enable them to offer a better ‘value for money’ proposition to consumers. But what things exactly? BEYOND PORTER Can we now offer a better/ deeper explanation of the roots of (and routes to) superior business performance? In the 90’s a capabilities/ competencies approach emerged as a ‘new orthodoxy’ leading to a distinctive ‘resource based view’ of the firm and approach to strategy. 6
THE CAPABILITIES APPROACH Question: What ‘things’ or ‘qualities’ could give a specific firm a sustainable edge (cheaper/ better/ …) over its rivals? A series of influential articles in the HBR and elsewhere during the 90’s suggested a new approach (although it turned out its origins were much earlier…Penrose, or even earlier…Ricardo) RESOURCE BASED APPROACH Examines the nature and origins of firm specific competitive advantage, or the firm specific determinants of performance. It takes as a start point the evidence, of substantial and sustained differences in the profitability of firms operating in the same market. It then considers how such a differential could be sustained in competitive conditions. Why don’t the laggard firms simply study and replicate the lessons of their more successful rivals? Why don’t the individual resource owners involved capture the value created for themselves rather than it going to the organisation? The school gets its name from the answer it provides to this question. Basically the answer it provides is to point to the simple fact that each firm has a distinctive history and thus distinctive resources, assets, capabilities and competencies, acquired and developed over time, which drive its performance. PRAHALAD AND HAMEL (1990): CORE COMPETENCIES Management’s ability to consolidate technology and production skills into competencies so the business can adapt quickly to changing opportunities/circumstances. Core competencies = collective learning of the organisation about prod/tech/markets. e.g. Sony’s miniaturisation skills. Competencies have to be built over a long period. They are difficult to identify precisely and hard to imitate. Many firms fail to identify their own core competencies and so fail to nurture them properly or exploit them fully. COLLIS AND MONTGOMERY (1995): COMPETING ON RESOURCES Competitive advantage derives ultimately from the ownership of a scarce valuable ‘resource’. Superior performance derives from developing a ‘competitively distinct’ set of resources and deploying them effectively. Resources involved could be physical, intangible, or organisational processes. Example given: Marks and Spencer (poor timing!) 7
BALANCED SCORECARD Traces connection between performance, strategy, customer perspective, processes and assets. Key perspectives or generic value propositions are product leadership, customer intimacy, and operational excellence. Key processes are innovation, customer management, operations and logistics. Key assets are people, technology, and corporate culture. Kaplan and Norton, HBR, 2000. DISTINCTIVENESS IS THE KEY NB it isn’t just a matter of having capabilities or competencies, but having distinctive c and c. More effective than average in some area(s)? Production/ marketing effectiveness Innovation effectiveness New product generation effectiveness Strategic thinking effectiveness Transactional/ coordinative effectiveness Organisational effectiveness People management effectiveness Problem solving effectiveness Financial effectiveness Marketing/ Customer relations effectiveness Cost management effectiveness Learning effectiveness Kay identifies only three basic types of distinctive capability: Corporate Architecture 8
ATTACKERS V DEFENDERS Recent research by McKinsey suggests that all really successful businesses (out performers) are innovators but that not all innovators are successful (Apple). Success comes from ‘creative destruction’. From aggressive attacking not defending. But success can bring ‘cultural lock in’ and gradual decline. Few firms are superior performers for very long (10/15 years is a long time nowadays). These longer term successes manage the trick of ‘creative destruction’, generating creative change whilst maintaining effective central control. In a word, architecture.
STRATEGIES FOR MARKET LEADER MARKET LEADER’S OBJECTIVES: Expand the total market by Finding new users Creating new uses, and Encouraging more usage Protect its current market share by Adopting defense strategies (see following slides) Increase its market share Note the relationship between market share and profitability
MARKET FOLLOWER STRATEGIES Theodore Levitt in his article, “Innovative Imitation” argued that a product imitation strategy might be just as profitable as a product innovation strategy e.g. Product innovation—Sony Product-imitation—Panasonic FOUR BROAD FOLLOWER STRATEGIES: 9
Counterfeiter (which is illegal) Cloner e.g. the IBM PC clones Imitator e.g. car manufacturers imitate the style of one another
MARKET NICHER STRATEGIES Smaller firms can avoid larger firms by targeting smaller markets or niches that are of little or no interest to the larger firms e.g. Logitech—mice Microbrewers--special beers Nichers must create niches, expand the niches and protect them e.g. Nike constantly created new niches-cycling, walking, hiking, cheerleading, etc. What is the major risk faced by nichers? Market niche may be attacked by larger firms once they notice the niches are successful . COMPANY OVERVIEW Suzlon Energy Limited (Suzlon) is a wind power company along with its subsidiaries engages in designing, developing and manufacturing of wind turbine generators and related components such as rotor blades, control panels, nacelle cover, tubular towers, generators and gearboxes. Further, the company also provides consultancy, design, manufacturing, installation, operation maintenance services as well as is involved in wind resource mapping, identification of suitable sites and technical planning of wind power projects. The company principally operates in India, China, Americas, Europe, New Zealand, South Korea, South Africa Australia. Suzlon, a major force in Global Wind Industry (Ranked Worldwide) by installed capacity. It provides end-to-end power solutions. The company holds nearly 10.5% share in the global market. Now, the company has the total production capacity of over 3000 The company currently has a combined manufacturing base of 2700 MW of annual capacity, and is undertaking an aggressive expansion program to expand its base to 5,700 MW of capacity in FY2009.
TIMELINE & SELECT MILESTONES
SUZLON GROUP – GLOBAL PRESENCE
ACQUISITION OF HANSEN TRANSMISSION
DRIVERS FOR GROWTH 1. Access to technology Technical collaboration with Südwind (1995) à internalizing R&D by 1997/8. Formation of AE Rotors in the Netherland. Product and process engineering in India. Alliances: e.g. joint venture with Elin Generators. Maiden venture into the US market (2002/3). European technology platform. 2. Access to people Experienced professionals in e.g. international sales, project management, and service. Management etc. with existing and tested relationships comprising the core team. Follow the demand – North America, Europe, Australia, China etc. Creation of Business Units (local organizations, local manufacturing etc.) Follow shift in customer trends (consolidating and becoming bigger more complex. 13
3. Access to new markets/customers Acquisitions: Repower / Hansen Transmissions. Enter new markets and access new customers. Build up experienced and international (but localized) managerial/specialist base. Local manufacturing to lower transportation costs. Expand product portfolio. Access state-of-the-art technology
WORKING CAPITAL MANAGEMENT Working capital buildup • Working capital reduction plan designed in association with AT Kearney. Receivables • • • Program management for order fulfillment. Improvement in production planning process. Improvement in documentation and certification process. Inventories • • • • Procurement reduction. Non- and slow-moving inventory reduction. Redistribution of excess between units. Mismatch and excess inventory reduction. 14
SUSTAINING COMPETETIVE ADVANTAGE OF SUZLON
CONCLUSIONS Sustainability is a method for integrating environmental and social issues into critical long-term decision making decisions for the company. Sustainability provides a mechanism through which a company can maintain a competitive edge. Sustainability is a framework for providing strategic and financial value. Application of the proposed Sustainability Triangle can help companies answer the question “Why Sustainability” by addressing specific issues of relevance, scope and bottom line results.