Strategy AND THE SOURCES OF STRATEGIC ADVANTAGE Wai

Strategy AND THE SOURCES OF STRATEGIC ADVANTAGE Wai Chamornmarn Thammasat university 2005

Key Theme… CHANGE HAS REDEFINED STRATEGY AND THE SOURCES OF STRATEGIC ADVANTAGE.

Competitive Outcomes Firm A’s Actions Rivalry Organizational Characteristics Firm B’s Actions Industry Characteristics

Focus • The best strategy is always to be very strong, first generally then at the decisive point… There is no more imperative and no concentrated. simpler law for strategy than to keep the fo Karl von Clausewitz (1780– 1831)

What is strategy? • Strategy is the creation of a unique and valuable position involving a different set of activities • “Tradeoffs are essential to strategy” • “The essence of strategy is to choose activities that are different from rivals, ” Michael Porter. • “The essence of strategy is to convince your competitors not to invest in ‘your business’ area, ” Bruce Henderson (BCG founder)

Breaking the Rules. . . SOUTHWEST

Strategic Capability • • . Product Concept (Product Development, Sales/Service( User / Market Class (Marker/User Research, Consumer Loyalty( Technology (Technology Research, Application Marketing( Production (Manufacturing Efficiency, Substitute Marketing( Sales / Marketing (Sales Recruitment, Selling Effectiveness( Distribution Method (System Effectiveness, System Organization( Natural Resources (Exploration, Conversion( Size / Growth (Volume Maximization, Asset Management( Return / Profit (Portfolio Management, Information Systems(

Overview of the different strategic possibilities • Focus • Product focus • Segment focus • Geographic focus • Differentiation • Ingredient or component • Superior product offering • Added service • Broad product line • Quality • Brand name Strategic Thrust • Synergy • Enhance customer value • Reduce operation cost • Reduce required investment • Low Cost • No-frills product • Product design • Production/Operations • Scale economies • Experience curve • The Preemptive Move • Production system • Gain customer loyalty/commitment • Distribution/service

Attacking a Competitor’s Strengths • Offer equally good product at a lower price • Develop low-cost edge, then use it to under-price rivals • Leapfrog into next-generation technologies • Add appealing new features • Run comparison ads • Construct new plant capacity ahead of the rival or in the rival’s market strongholds • Offer a wider product line • Develop better customer service capabilities

Generic Business Strategies High Low Cost Producer “stuck in the middle” Low Cost efficiencies No Advantage Competitive Advantage Differentiated Provider Low Differentiation High customer value (pricing) Adapted from M. Porter: Competitive Strategy, 1980.

Choices That Drive Costs Economies of scale Product features Asset utilization Performance Capacity utilization pattern - Seasonal, cyclical Mix & variety of products Service levels Interrelationships - Order processing and distribution Small vs. large buyers Value chain linkages - Advertising & Sales - Logistics & Operations Wage levels Process technology Hiring, training, motivation

Drivers of Differentiation Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information

Continuous Improvement Organizational Learning High Low Cost Producer ? Low Cost Differentiated Provider Low Differentiation High

Continuous Improvement High Hyundai Toyota (- ) Low Cost Jaguar Low Differentiation High

Strategies for Competing on Value • Time-based competition – Quick Response, Rapid Deployment, Wal-Mart • Mass Customization – Building unique products at mass production speed and prices • Total Quality Management – Corporate strategy for generating value through quality

Mass Customization High Low Cost Producer Mass Customization ? Low Cost Differentiated Provider Low Differentiation High

How Do We Compete? • What do we sell to our customer? – – Product Capacity Capability Process • Shift from product to process • Increasing awareness of the importance of process – general – customer

New Strategy • value migration: movement of growth and profit opportunities from one industry player to another • co-evolution: by working with direct competitors, customers, and suppliers, a company can create new businesses, markets, and industries • white-space opportunity: overlooked areas of growth possibilities that don't exactly match existing skills • strategic intent: corporate goal or destiny that represents a stretch for the organization, a point of view about the competitive position a company hopes to build over the coming decade

Twenty-Two Profit Models Customer Solutions Profit Product Pyramid Profit Multicomponent Profit Switchboard Profit Price Profit Buyers 0 Base Business Volume Time Profit Sellers Blockbuster Profit Other Components Profit Multiplier Model Entrepreneurial Profit Other Forms $/Unit $/Project Price Cost Revenue Base Business Cost Q 2 Q 4 Q 6 Q 8 Post-Launch Q 10 Project Type Key Asset Spin-Outs

Implications for the Value Chain Support Activities Firm Infrastructure Web-based, distributed, ERP Human Resource Management Self-service benefits admin Web-based training Technology Development Collaborative product design in multiple locations; knowledge directory Procurement Direct procurement in “marketplaces” Automated customer agreements Customer access to development and delivery status Integrated Channel Management Real time integrated scheduling, demand mgmt. In-process and inventory data Inbound Logistics Integrated information exchange a On-line channels Real-time access to customer data Real time information to back up sales promises Dynamic pricing Operations Outbound Logistics M Marketing & Sales On-line customer support r g i n Customer self-service Improved field access to data After-Sales Service Primary Activities Source: Michael Porter, Competitive Advantage, 19

Systems and Relationships

Beyond Continuous Improvement Radical Incremental Nonlinear Innovation Business Concept Innovation Continuous Improvement Business Process Improvement Component System Adapted from G. Hamel: Leading the Revolution, HBSP, 2000. Business Models

GE

GE’s Business Design Focus Services and Solutions For Profit Growth Work-Out #1 or #2 ?

Systems Economics “Big Box” The Customers’ Total Economic Equation Product “Little Box”

Big box: The Customers’ Total Economic Equation • Evaluation • Assembly/labor cost • Procurement • Energy cost • Storage • Yield loss • Testing/Monitoring • Production cycle • Installation • Services • Financing • Repair • Training • Maintenance • Disposal • Other

GE’s Business Design Reinvention 1997 4. 0 3. 2 Market Value 1. 5 1987 1. 0 Sales 1. 0 1980 0. 6 0 Value Inflow Source: Mercer Value Growth Database. Stability Value Outflow

Sources of Competitive Advantage

Sources of Sustainable Competitive Advantage Patents Copyrights Locations Equipment Technology Organization’s Skills and Assets Customer Service Promotion

Competitive Advantage • • • Can be achieved in different ways Concentration on particular market segment Products that are different than competitors’ Alternative distribution channels Selective pricing and different cost structures

Paradigm Shift • Old Paradigm – – Large Scale Production – Cost Reduction – Adversary Relationships • New Paradigm– – Continuous Improvement Total Quality Control JIT Cooperative Relationships

Identifying Competitive Dimensions • Competitive priorities Cost Quality 1. 2. 3. Time 4. (or speed) 5. 6. Flexibility 7. 8. Low-cost operations High-performance design Consistent quality Fast delivery On-time delivery Development speed Customization Volume flexibility

Lead Time Strategies • Engineer to Order – designed to customer specification • Make to Order – standard design, produced only upon order • Assemble to Order – subassemblies produced, assembled upon order • Make to Stock – finished product made prior to order

Comparative Lead Times Engineer to Order Make to Order Assemble to Order Make to Stock Internal Lead time Customer Lead time

Flexibility • Ability of the system to respond quickly in terms of range and time to changes, either internally or externally generated • 7 major types – 1. Mix Flexibility – – – 2. Changeover Flexibility 3. Modification Flexibility 4. Volume Flexibility 5. Rerouting/Program Flexibility 6. Resource Flexibility 7. Flexibility Responsiveness

Basics of Lean Production • “Concept Value Stream Map” – Tool of Lean Production: – A “Concept Value Stream” maps the flow of materials and information through an organizations internal processes, creating a clear distinction between what is Value-Added and what is Waste. Current State Map: A B Future State Map: A C Ideal State Map: A C C D E D F G Key: VA G NVAR NVAW

The dominant firm model • Network externalities lead to “natural monopolies” • Winner takes all • Winning firm generates lock-in and sets its own standards • Other firms become feeders, fortunes rise and fall with industry leader

The differentiated firms model • No one firm establishes dominant position • Open standards and interoperability characterize this model • Firms compete on differentiated basis—cost, features, quality, etc.

Critical functions and resources • The firm’s knowledge base become significant sources of value – Data mining—understanding and selling your information • Marketing becomes a critical function – Position, product, price, promotion • IT becomes a critical function – – – Low Cost Differentiation Focus

Third Generation R&D and innovation: the Partnership Model

World Class Companies Have In Common Quality Totally deployed company-wide Simplicity Linked continuous flow Flexibility High variety at any volume Engagement Focused on today’s problems Supply Chain Tight responsive networking

Kenichi Ohmae “In business as on the battlefield… …the object of strategy is to bring about the conditions most favorable to one’s own side. “In strategic thinking, one first seeks a clear understanding of the particular character of each element of a situation… …and then makes the fullest possible use of human brainpower to restructure the elements in the most advantageous way.

Kenichi Ohmae “Phenomena and events in the real world do not always fit a linear model. “Hence, the most reliable means of dissecting a situation into its constituent parts… …and then reassembling them in the desired pattern is not a step-by-step methodology such as systems analysis. “Rather, it is that ultimate non-linear thinking tool, the human brain. ”

Kenichi Ohmae “No matter how difficult or unprecedented the problem, a breakthrough to the best possible solution can come only from a combination of rational analysis based on the real nature of things, and imaginative reintegration of all the different items into a new pattern… …using non-linear brainpower. ”

The Competitive Advantage “ An organization’s ability to learn, and translate that learning into action, is the ultimate competitive advantage. Jack Welch GE ”

Questions and Answers