The Nature and Sources of Competitive Advantage OUTLINE

The Nature and Sources of Competitive Advantage OUTLINE • The emergence of competitive advantage • Sustaining competitive advantage • Competitive advantage in different market settings • Types of competitive advantage: cost and differentiation

The Emergence of Competitive Advantage How does competitive advantage emerge? External sources of change e. g. : • Changing customer demand • Changing prices • Technological change Resource heterogeneity among firms means differential impact Some firms faster and more effective in exploiting change Internal sources of change Some firms have greater creative and innovative capability

Competitive Advantage from Internally. Generated Change: Strategic Innovation Characteristics of innovatory strategies: – Associated with new entrants to an industry (e. g. Nucor in steel, IKEA in furniture, Enron in energy, Home Depot in DIY, Dell in PCs) – Reconcile conflicting performance goals (e. g. Toyota’s lean production system combines low cost, high quality, and flexibility. Richardson Sheffield in kitchen knives is low cost, innovative and customer responsive. ) – Reconfiguring the value chain e. g. -- • Nike’s system for manufacturing and distributing shoes totally different from traditional shoe manufacturer • Southwest Airlines simplification of the normal airline value chain • Zara’s system of design, manufacture, and distribution

Sustaining Competitive Advantage Against Imitation REQUIREMENT FOR IMITATION Identification Incentives for imitation ISOLATING MECHANISM - Obscure superior performance - Deterrence--signal aggressive intentions to imitators - Pre-emption--exploit all available investment opportunities Diagnosis - Rely upon multiple sources of competitive advantage to create “causal ambiguity” Resource acquisition - Base competitive advantage upon resources and capabilities that are immobile and difficult to replicate

Competitive Advantage in Different Market Settings MARKET TYPE TRADING MARKETS SOURCE OF IMPERFECTION OF COMPETITION • None (efficient markets) • Imperfect information availability • Transactions costs • Systematic behavioral trends • Overshooting • Barriers to imitation PRODUCTION MARKETS • Barriers to innovation OPPORTUNITY FOR COMPETITIVE ADVANTAGE None Insider trading Cost minimization Superior diagnosis (e. g. . chart analysis) Contrarianism Identify barriers to imitation (e. g. deterrence, preemption, causal ambiguity, resource immobility, barriers to resource replication) & base strategy upon them. Difficult to influence or exploit.

Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets MARKET TYPE SOURCE OF IMPERFECTION OF COMPETITION OPPORTUNITY FOR COMPETITIVE ADVANTAGE TRADING MARKETS • None (efficient markets) • Imperfect information availability • Transactions costs • Systematic behavioral trends None Insider trading Cost minimization Superior diagnosis (e. g. . chart analysis) Contrarianism • Overshooting • Barriers to imitation PRODUCTION MARKETS • Barriers to innovation Identify barriers to imitation (e. g. deterrence, preemption, causal ambiguity, resource immobility, barriers to resource replication) & base strategy upon them. Difficult to influence or exploit.

Sources of Competitive Advantage COMPETITIVE ADVANTAGE COST ADVANTAGE ct u d ro p r st la o i c m r Si we o l at fro m Pri ce un pre iqu mi um ep rod uc t DIFFERENTIATION ADVANTAGE

Porter’s Generic Strategies SOURCE OF COMPETITIVE ADVANTAGE Low cost Differentiation Industry-wide COMPETITIVE COST DIFFERENTIATION LEADERSHIP SCOPE Single Segment FOCUS

Features of Cost Leadership and Differentiation Strategies Generic strategy COST LEADERSHIP DIFFERENTIATION Key strategy elements Resource & organizational requirements Scale-efficient plants. Access to capital. Process Design for manufacture. Control of overheads & R&D. Avoidance of marginal customer accounts. engineering skills. Frequent reports. Tight cost control. Specialization of jobs and functions. Incentives for quantitative targets. Emphasis on branding and brand advertising, design, service, and quality. Marketing. Product engineering. Creativity. Product R&D Qualitative measurement and incentives. Strong cross-functional coordination.