Business Strategy and Competitive Advantage

Strategic Management
IIMU MBA Term III (2021-22)
Section A

Instructor: Prarthan B. Desai

Slide# 1
Success of a Strategy
• When can we say a strategy has been successful?
– When a firm performs better (and hence provides better returns to
shareholders) than competitors over a long period of time

• When can a firm achieve consistent better performance over a long

period?
– When it is able to consistently create superior value for its target customers
(and capture a sufficient of the value) which cannot be matched by its
competitors

• What is the meaning of “value created” by a firm?

Slide# 2
Value Creation
• Meaning of value creation: Gap between Willingness to Pay (WTP) and
Costs
Willingness to
Pay (WTP)

Costs

• Please remember: WTP is not the same as price. Price has to be less than or equal to WTP.

Slide# 3
Drivers of Cost Advantage
• Lower costs of inputs (Location advantage, Ownership of low-cost
inputs, Non-union labour, Bargaining power)
• Economies of Scale
• Learning or Experience Curve Effect
• Production techniques (Process innovation, Business Process
Reengineering)
• Product design (Standardized parts, Design to manufacture)
• High capacity utilization (Including low setup times and Mean time
between failures)
• Efficient and effective management, low administrative overheads

Slide# 4
Drivers of WTP or Differentiation Advantage
• Product design and manufacturing activities that influence physical
product characteristics – quality, performance, features, aesthetics,
durability

• Agility or flexibility in manufacturing, time-to-market or JIT delivery

• Sales or delivery: speed of delivery, availability and terms of credit,

convenience of the buyer, quality of presale advice

• Signals conveyed through advertising, packaging, branding

• Post-sale service or complementary goods – customer training,

consulting services, spare parts, product warranties, repair services,
compatible products
Slide# 5
Competitive Advantage
• Competitive advantage: The added value by the firm is superior to
other firms in the industry or market

• Competitive parity: many firms can add similar value

• Competitive disadvantage: The added value by the firm is inferior

to the added value by other firms in the industry or market

Slide# 6
Competitive Advantage…

Cost Advantage WTP or Differentiation Dual Advantage

Advantage
WTP WTP WTP

Cost Cost Cost

Slide# 7
Competitive Advantage…
• Creating and sustaining competitive advantage involves creating
complementarities or “fit” among company activities
– When activities interact and reinforce each other, they become difficult to
imitate by the competitors
– Hence they may provide sustainable competitive advantage

• A possible way to understand activities is to look at value chain of a

firm
– Primary activities: Inbound logistics, Operations, Outbound logistics, Marketing
and Sales, and Service
– Support activities: Firm infrastructure, Human resources, Technology
development

Slide# 8
Firm Level Value Chain Activities

Infrastructure activities: Planning, finance, MIS, legal services

Support
Technology: Research, development, design
Activities

Human resource management and development

Inbound logistics, Production Warehousing Sales and Dealer support

Purchasing, and distribution marketing and
Primary
Inventory holding, customer
Activities
Materials service
handling

Margin

Slide# 9
Analyzing a Business-Level Strategy
• Advantage
– Type of competitive advantage: Cost, WTP, or Dual

• Scope
– Type of customers, Product / service characteristics, Geography

• Activities
– Configuration of value chain activities

Slide# 10
Analyzing a Business-Level Strategy…

Slide# 11
Threats to Sustainability of Competitive Advantage

• Imitation
– Competitors have resources and capabilities to copy our offerings

• Substitution
– Competitors have alternative resources and capabilities to serve the customer
needs in a different manner

• Holdup
– Suppliers or buyers become too powerful

• Slack
– Wrong choices by managers

Slide# 12
Sustainability of Competitive Advantage: Resource Based
View
• Resource Based View: When resources or capabilities owned by a
firm has “VRIO” property, they provide sustainable competitive
advantage

• Resources can be
– Physical assets: for example, prime location, oil well
– Intangible assets: for example, a strong brand, a patent

• Capabilities: value chain activities with good complementarities or

“fit”

Slide# 13
Sustainability of Competitive Advantage: Resource Based
View…
• “VRIO” property of a resource
– Value: Enables a firm to increase Willingness to Pay, or reduce costs, or doing
both
– Rarity: Owned by only a few other firms (or ideally, no other firm)
– Inimitability/Nonsubstitutability: Difficult to copy or substitute by competitors
– Organizing: Policies and procedures allow effective utilization or execution

Slide# 14
Sustainability of Competitive Advantage…

• Is a resource or capability…
Valuable? Rare? Costly to Organized Competitive Implications
Imitate or well?
Substitute?
No --- --- --- Competitive disadvantage

Yes No --- Yes Competitive parity

Yes Yes No Yes Temporary competitive

advantage

Yes Yes Yes Yes Sustained competitive advantage

Slide# 15