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Supplementary Slides on
Types of Competitive Advantage and Sustainability
• Michael Porter presented three generic strategies to overcome the five forces and achieve competitive advantage
- Overall cost leadership
• Low-cost-position relative to a firm’s peers • Manage relationships throughout the entire value chain
• Create products and/or services that are unique and valued • Non-price attributes for which customers will pay a premium
- Focus strategy
• Narrow product lines, buyer segments, or targeted geographic markets • Attain advantages either through differentiation or cost leadership
Three Generic Strategies
Exhibit 5.1 Three Generic Strategies Source: Reprinted with permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press.
• Companies pursuing an overall cost leadership strategy
- McDonalds - Wal-Mart
• Companies pursuing a differentiation strategy
- Harley Davison - Apple
• Companies pursuing a focus strategy
- Rolex - Lamborghini
5-5 Overall Cost Leadership • Cost leadership requires a tight set of interrelated tactics such as: aggressive construction of efficientscale facilities. tight cost and overhead control. and cost minimization in all activities in a firm’s value chain . vigorous pursuit of cost reductions from experience. avoidance of managerial customer accounts. .
3) .5-6 Value-Chain Activities: Overall Cost Leadership (Exhibit 5.
unit costs decline as output increases .5-7 Experience Curves • An important concept that is related to an overall cost leadership strategy is the experience curve. • This means that in many industries.
4 Comparing Experience Curve Effects .5-8 Comparing Experience Curve Effects Exhibit 5.
firms following a cost leadership position must attain parity or proximity on the basis of differentiation relative to competitors. in order to enjoy above-average performance.5-9 Conditions for success of OCL Strategy • It is important to point out that. • Proximity to differentiation means that the price discount needed to get an acceptable market share does not offset a cost leader’s cost advantage .
Key issue: how does CL strategy impact on the Five Forces CL Strategy Focus Strategy DIFF Strategy .
5 .Provides substantial entry barriers from economies of scale and cost advantages .Puts the firm in a favorable position with respect to substitute products .Protects a firm against powerful buyers .Protects a firm against rivalry from competitors .Provides more flexibility to cope with demands from powerful suppliers for input cost increases .11 Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces • An overall low-cost position .
Lack of price competition leads to greater profits.Cost Leadership Strategy: Competitors Rivalry with Existing Competitors Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Due to cost leader’s advantageous position: Rivals hesitate to compete on basis of price. Bargaining power of buyers .
causing them to exit. thus shifting power with buyers back to the firm.Cost Leadership Strategy: Buyers Bargaining Power of Buyers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Can mitigate buyers’ power by: Driving prices far below competitors. Bargaining power of buyers .
Cost Leadership Strategy: Suppliers Bargaining Power of Suppliers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Can mitigate suppliers’ power by: Being able to absorb cost increases due to low cost position. reducing chance of supplier using power. Bargaining power of buyers . Being able to make very large purchases.
Bargaining power of buyers .Cost Leadership Strategy: New Entrants The Threat of Potential Entrants Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Can frighten off new entrants due to: Their need to enter on a large scale in order to be cost competitive. The time it takes to move down the learning curve.
Buy patents developed by potential substitutes. Bargaining power of buyers . Lower prices in order to maintain value position.Cost Leadership Strategy: Substitutes Product Substitutes Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Cost leader is well positioned to: Make investments to be first to create substitutes.
A lack of parity on differentiation 5. Erosion of cost advantages when the pricing information available to customers increases . All rivals share a common input or raw material 3.5 . Too much focus on one or a few value-chain activities 2.17 Pitfalls of Overall Cost Leadership Strategies 1. The strategy is imitated too easily 4.
innovation. or dealer networks . technology.18 Differentiation Strategy • As the name implies.5 . customer service. • Differentiation can take many forms such as: prestige or brand image. differentiation consists of creating differences in the firm’s products or service offerings by creating something that is perceived industry-wide as being unique and valued by customers. features.
19 Differentiation • Firms may differentiate along several dimensions at once • Firms achieve and sustain differentiation and aboveaverage profits when price premiums exceed extra costs of being unique • Successful differentiation requires integration with all parts of a firm’s value chain • An important aspect of differentiation is speed or quick response .5 .
Value-Creating Activities and Differentiation • Highly developed MIS • Emphasis on quality • Worker compensation for creativity/productivity • High quality replacement parts • Superior handling of incoming raw materials • Attractive products • Rapid response to customer specifications • Use of subjective performance measures • Basic research capability • Technology • High quality raw materials • Delivery of products • Order-processing procedures • Customer credit • Personal relationships .
5 .5 .21 Value-Chain Activities: Differentiation Exhibit 5.
Key issue: how does DIFF strategy impact on the Five Forces DIFF Strategy Focus Strategy CL Strategy .
23 Differentiation: Improving Competitive Position vis-à-vis the Five Forces • Differentiation .Creates higher entry barriers due to customer loyalty .Establishes customer loyalty and hence less threat from substitutes .Reduces buyer power because buyers lack suitable alternative .5 .Reduces supplier power due to prestige associated with supplying to highly differentiated products .Provides higher margins that enable the firm to deal with supplier power .
Differentiation Strategy: Competitors Rivalry with Competitors Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Defends against competitors because brand loyalty to differentiated product offsets price competition. Bargaining power of buyers .
Differentiation Strategy: Buyers Bargaining Power of Buyers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases. Bargaining power of buyers .
Differentiation Strategy: Suppliers Bargaining Power of Suppliers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Can mitigate suppliers’ power by: Absorbing price increases due to higher margins. Passing along higher supplier prices because buyers are loyal to differentiated brand. Bargaining power of buyers .
Differentiation Strategy: New Entrants The Threat of Potential Entrants Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Can defend against new entrants because: New products must surpass proven products. Bargaining power of buyers . but offered at lower prices. New products must be at least equal to performance of proven products.
Bargaining power of buyers .Differentiation Strategy: Substitutes Product Substitutes Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers • Well positioned relative to substitutes because: Brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands.
Perceptions of differentiation may vary between buyers and sellers .5 . 3. Uniqueness that is not valuable Too much differentiation Too high a price premium Differentiation that is easily imitated Dilution of brand identification through product-line extensions 6. 2. 4. 5.29 Potential Pitfalls of Differentiation Strategies 1.
30 Focus • Focus is based on the choice of a narrow competitive scope within an industry .5 .Firm achieves competitive advantages by dedicating itself to these segments exclusively • Two variants .Cost focus .Differentiation focus .Firm selects a segment or group of segments (niche) and tailors its strategy to serve them .
. • A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors. • A firm may lack the resources needed to compete in the broader market. • Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage.Factors That Drive Focused Strategies • Large firms may overlook small niches.
The original model can now be expanded to five different strategies depending on the scope .
firm seeks to differentiate in its target market 5-33 .5 .firm strives to create a cost advantage in its target segment • Differentiation focus .33 Focus Strategy Variants • Cost focus .
Creates barriers of either cost leadership or differentiation. or both .34 Focus: Improving Competitive Position vis-à-vis the Five Forces • Focus .5 .Used to select niches that are least vulnerable to substitutes or where competitors are weakest .
Focusers can become too focused to satisfy buyer needs . Focused products and services still subject to competition from new entrants and from imitation 3. Erosion of cost advantages within the narrow segment 2.35 Potential Pitfalls of Focus Strategies 1.5 .
5 .36 Combination Strategies: Integrating Overall Low Cost and Differentiation • Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy • Goal of combination strategy is to provide unique value in an efficient manner .
5 . differentiation. . and focus strategy formulation. • The text also address Internet-related value chain activities that firms can implement to enhance their strategic success. • In this section.37 How the Internet and Digital Technologies Are Affecting the Competitive Strategies • To stay competitive. the text covers the impact of the Internet on overall cost leadership. firms must update their strategies to reflect the new possibilities and constraints that the Internet and Webbased technologies represent.
But these capabilities are available to many firms and may provide only short-lived advantage.38 Impact of the Internet on Low Cost Strategies • An overall low cost leadership strategy involves managing costs in every activity of a firm’s value chain and offering nofrills products that are an exceptional value at the best possible price. Transaction costs refer to various expenses associated with conducting business. • . It applies not just to buy-sell transactions but to the costs of interacting with every part of a firm’s value chain.5 . both within and outside the firm. • Most analysts agree that the Internet’s ability to lower transaction costs will transform business. Internet technologies now provide more opportunities to manage costs and achieve greater efficiencies.
and the cost of maintaining a physical address.5 . Removing those intermediaries lowers transaction costs. additional costs are added.39 Impact of the Internet on Low Cost Strategies • The process of disintermediation lowers costs. . Each time intermediaries are used in a transaction. • The Internet may also reduce the costs of traveling.
40 Internet-Enabled Low Cost Leader Strategies .5 .
41 Potential Internet-Related Pitfalls for Low Cost Leaders • Internet-related pitfalls include the threat of imitation by competitors who can quickly duplicate capabilities without threat of infringement on proprietary information. • Other pitfalls include the availability of information online that increases buyer power. .5 . excessive cost cutting. and offering too many free or low cost products or services.
• Internet technologies are being used to threaten the position of companies that have traditionally maintained the best reputations.5 . • Other technologies are being employed by industry leaders to make their position stronger.42 Impact of the Internet on Differentiation Strategies • A differentiation strategy involves providing unique. high-quality products and services that promote a favorable reputation and strong brand identity and usually command a premium price. .
combined with factors such as speed of delivery and reliability of results. . preserve their brand image.5 . • Many consumers now judge the quality and uniqueness of a product or service by their ability to be involved in planning and design. but the Internet has generated a giant leap forward in the amount of control customers can have in influencing the process. • Mass customization is not new. and achieve superior service.43 Impact of the Internet on Differentiation Strategies • One way the Internet is creating differentiation advantages is by enabling mass customization. make their reputation. • Such capabilities are changing the way companies develop unique products and services.
5 .44 Internet-Enabled Differentiation Strategies .
45 Potential Internet-Related Pitfalls for Differentiators • Internet-related pitfalls include overspending differentiating features that customers don’t want or creating a sense of uniqueness that customers don’t value. • This happened with some personalization and customization software that early dot-com companies added at great expense. • Other problems can result from overpricing products and services or developing brand extensions that dilute a company’s image or reputation. .5 .
rapid response. • Focusers face many of the same problems as low cost leaders and differentiators. and strong customer service – in niche markets . • Focusers can use Internet technologies to achieve cost savings and unique advantages – such as specialized knowledge. The Internet has opened up new opportunities for niche players who seek to access small markets in a highly specialized fashion. To create focus strategies that work.46 Impact of the Internet on Focus Strategies • A focus strategy involves targeting a narrow market segment with customized products and/or specialized services.5 . firms must use the kind of single-mindedness that is characteristic of a focus strategy throughout every value-creating activity.
47 Internet-Enabled Focus Strategies .5 .
48 Potential Internet-Related Pitfalls for Focusers • Internet-related pitfalls include focusing on segments that are too narrow to be profitable or trying to appeal to niches that are overly broad.5 . content. they may have trouble generating enough activity to justify the expense of operating. or services — can lose the cost advantages associated with a narrow focus and become vulnerable to imitators or new entrants. • When focus strategies become too narrow. . • Focusers that try to extend to a broader audience — by offering additional inventory.
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