COMPETITIVE STRATEGY

CREATING COMPETITIVE
ADVANTAGE
 What is Competitive advantage?

… a basis for the firm’s long

term success?
… a basis for value creation?

Do we really know where it resides?

Can it be sustainable?
What is Competitive advantage?
“When two or more firms compete
within the same market, one firms
possesses a competitive advantage over its
rivals when it earns a persistently higher
rate of profit (or has the potential to earn a
persistently higher rate of profit)”
R. M. Grant, 2000
The main types of Competitive
Advantage
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 Competitive strategies
by Porter
Types of competitive advantage

Low cost Differentiation

Industry-wide
Cost leadershipDifferentiation
Market

Niche Focus with Focus with

low cost differentiation
Five Generic Strategies
Competitive Advantage
Cost Uniqueness
Cost Differentiation
Leadership
Competitive Scope
Broad
target

Integrated
Cost
Leadership/
Differentiation
Narrow
target

Focused Focused
Cost Differentiation
Leadership
Cost Leadership Strategy
An integrated set of actions designed to
produce or deliver goods or services at the

lowest cost, relative to

competitors with features that are acceptable
to customers
◦ relatively standardized products
◦ features acceptable to many customers
◦ lowest competitive price
 Cost Leadership Strategy
Cost saving actions required by this strategy:
◦ building efficient scale facilities
◦ tightly controlling production costs and
overhead
◦ minimizing costs of sales, R&D and service
◦ building efficient manufacturing facilities
◦ monitoring costs of activities provided by
outsiders
◦ simplifying production processes
 How to Obtain a Cost Advantage
Determine and Reconfigure, if
control needed
Cost Drivers
Value Chain

• Alter production process • New raw material

• Change in automation
• New distribution channel
• New advertising media
• Direct sales in place
of indirect sales
• Forward integration
• Backward integration
• Change location
relative to suppliers
or buyers
 Factors That Drive Costs

Economies of scale Product features

Asset utilization Performance
Capacity utilization Mix & variety of
pattern products
• Seasonal, cyclical Service levels
Interrelationships Small vs. large buyers
Order processing Process technology
and distribution Wage levels
Value chain linkages Product features
• Advertising & sales
Hiring, training,
• Logistics &
motivation
operations
Major Risks of Cost Leadership
Strategy
Dramatic technological change could take
away your cost advantage
Competitors may learn how to imitate value
chain
Focus on efficiency could cause cost leader
to overlook changes in customer
preferences
Differentiation Strategy
An integrated set of actions designed by a
firm to produce or deliver goods or services
(at an acceptable cost) that customers
perceive as being different or unique in
ways that are important to them.
◦ price for product can exceed what the firm’s
target customers are willing to pay
◦ Non standardized products
◦ customers value differentiated features more
than they value low cost
Differentiation Strategy
A product differentiation strategy must meet the
VRIO criteria…
Is it Valuable?
Is it Rare?
Is it costly to Imitate?
Is the firm Organized to exploit it?

…if it is to create competitive advantage.

Factors That Drive Differentiation

Unique product features

Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional design skill
Prestige and exclusivity
Differentiation Strategy
Differentiation actions required by this
strategy:
◦ Analysis of the value chain identifies in what
parts of the chain and through which links
superior products can be created and
customer perception may be changed
◦ Shaping perceptions through advertising
◦ Focus on quality – customer loyalty.
◦ Capability in R&D.
Differentiation Strategy and Price
Elasticity of Demand

•Differentiation strategy, properly used, can:

reduce price elasticity of demand for the
particular product.
•This leads to the ability to charge higher
prices than competitors, without reducing
sales volume.
•Leads to above average profits compared
to sales.
Major Risks of Differentiation
Strategy
 Customers may decide that the price differential
between the differentiated product and the cost leader’s
product is too large
 The “me-too” danger. Product features and
characteristics can be easily copied. The company needs to
be one step ahead of the curve and invest in improving and
perfecting the product, otherwise it will quickly become
obsolete.
 The “demanding consumer” danger. Products have
shorter life cycles and consumers gravitate towards what’s
new. In order to remain competitive firms need to keep up
with the latest trends and technologies, or their target
audience will switch to competitive offerings.
Focused Business-Level Strategies
A focus strategy must exploit a narrow
target’s differences from the balance
of the industry by:
◦ isolating a particular buyer group
◦ isolating a unique segment of a
product line
◦ concentrating on a particular
geographic market.
Factors That May Drive Focused
Strategies
Large firms may overlook small
niches
Firm may lack resources to compete
in the broader market
May be able to serve a narrow market
segment more effectively than can
larger industry-wide competitors
Focus strategy may allow the firm to
direct resources to certain value chain
activities to build competitive
advantage.
Major Risks of Focused Strategies
Firm may be “outfocused” by
competitors
Large competitor may set its
sights on your niche market
Preferences of niche market may
change to match those of broad
market
 Integrated or Hybrid Strategy
A firm that successfully uses an integrated
cost leadership/differentiation strategy should
be in a better position to:
◦ adapt quickly to environmental changes
◦ learn new skills and technologies more
quickly
◦ effectively leverage its core competencies
while competing against its rivals by
providing differentiated products at low costs.
Benefits of Integrated Strategy
Successful firms using this strategy
have above-average returns
Firm offers two types of values to
customers
◦ some differentiated features (but
less than a true differentiated firm)
◦ relatively low cost (but not as low as
the cost leader’s price)
Major Risks of Integrated Strategy
An integrated cost/differentiation
business level strategy often involves
compromises (neither the lowest cost
nor the most differentiated firm)
The firm may become “stuck in the
middle” lacking the strong
commitment and expertise that
accompanies firms following either a
cost leadership or a differentiated
strategy
 Sustainable competitive
advantage
What is meant by sustainable competitive
advantage?
◦ Durable
◦ Valuable to the firm
 Exploiting weaknesses and neutralizing threats
◦ Unique
◦ Difficult for competitors to imitate
◦ Not easily substitutable
 Examples of SCA
For many years, Singapore Airlines were
riding on its SCA of having the best in-flight
service
As more airlines improved their service and
narrowed the gap, SIA sought other
competitive advantages among which are
◦ The most modern fleet
◦ Outstanding Service on the Ground
◦ A super entertainment system in its cabins
◦ Comfort in its First Class cabins at an unparallel
level
 Warren Buffet's
Investment Criteria
Warren Buffet was once asked
what is the most important
thing he looks for when
evaluating a company to 
invest in. Without hesitation,
he replied, "Sustainable
competitive advantage."
STRATEGIES FOR

◦ Market Leaders
◦ Challengers
◦ Followers, and
◦ Nichers
 MARKET LEADER`S
STRATEGY: Defense Strategy
A market leader should generally adopt a
defense strategy
5 commonly used defense strategies
◦ Position Defense
◦ Flanking Defense
◦ Contraction Defense
◦ Pre-emptive Defense
◦ Counter-Offensive Defense
Defense Strategy (cont’d)
Position Defense

Use ones existing good position as defence.

One of the most successful of the defense
strategies
e.g. High end car manufacturers like Mercedes,
Lamborghini, Ferrari use a position defense
strategy given their
Defense Strategy (cont’d)

Flanking Defense:
◦ Secondary markets (flanks) are the weaker
areas and prone to being attacked
◦ Pay attention to the flanks
Defense Strategy (cont’d)

Contraction Defense
Withdraw from the most vulnerable segments
and redirect resources to those that are more
defendable
By planned contraction or strategic withdrawal
e.g. India’s TATA Group sold its soaps and
detergents business units to Unilever in 1993
Defense Strategy (cont’d)

Pre-emptive Defense
Detect potential attacks and attack the
enemies first
Let it be known how it will retaliate
Product or brand proliferation is a form of
pre-emptive defense e.g. Seiko has over
2,000 models
Defense Strategy (cont’d)

Counter-Offensive Defense
Responding to competitors’ head-on attack
by identifying the attacker’s weakness and
then launch a counter attack
e.g. Toyota launched the Lexus to respond
to Mercedes attack
Market Challenger Strategies
The market challengers’ strategic objective
is to gain market share and to become
the leader eventually
How?
By attacking the market leader
By attacking other firms of the same size
By attacking smaller firms
Market Challenger Strategies
(cont’d)
Types of Attack Strategies
Frontal attack
Flank attack
Encirclement attack
Bypass attack
Guerrilla attack
 Frontal Attack
Seldom work unless
◦ The challenger has sufficient fire-power (a 3:1
advantage) and staying power, and
◦ The challenger has clear distinctive advantage(s)
e.g.Japanese and Korean car manufacturers
launched frontal attacks in various ASPAC
countries through quality, price and low cost
Flank attack
Attack the enemy at its weak points or
blind spots i.e. its flanks
Ideal for challenger who does not have
sufficient resources
e.g. In the 1990s, Yaohan attacked
Mitsukoshi and Seibu’s flanks by opening
numerous stores in overseas markets
Encirclement attack
Attack the enemy at many fronts at the
same time
Ideal for challenger having superior
resources
e.g. Seiko attacked on fashion, features,
user preferences and anything that
might interest the consumer
Bypass attack
By diversifying into unrelated products
or markets neglected by the leader
Could overtake the leader by using new
technologies
e.g. Pepsi use a bypass attack strategy
against Coke in China by locating its
bottling plants in the interior provinces
 Guerrilla attack
By launching small, intermittent hit-and-run
attacks to harass and destabilize the leader
Usually use to precede a stronger attack
e.g. airlines use short promotions to attack
the national carriers especially when
passenger loads in certain routes are low
 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
Market-Follower Strategies (cont’d)

Each follower tries to bring distinctive advantages to

its target market--location, services, financing
Four broad follower strategies:
◦ Counterfeiter (which is illegal)
◦ Cloner e.g. the IBM PC clones
◦ Imitator e.g. car manufacturers imitate the style of one
another
◦ Adapter e.g. many Japanese firms are excellent adapters
initially before developing into challengers and eventually
leaders
 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--mouse
Microbrewers--special beers
 Market-Nicher Strategies (cont’d)

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
Multiple Niching
“A firm should `stick to its niching’ but not
necessarily to its niche. That is why
multiple niching is preferable to single
niching. By developing strength in two or
more niches the company increases its
chances for survival.”
Philip Kotler
THANK YOU !!