Lesson 15

Strategic Elements of
Competitive Advantage

© Prentice Hall 15-1

Industry Analysis: Forces
Influencing Competition
Industry: A group of firms making products which
are close substitutes for each other
Porter’s insights into sources of competition
◦ Competition drives down the rate of return to return
under perfect competition
◦ Higher rates of return will stimulate greater capital inflow
(i.e. greater competition)
◦ Lower rates of return will result in withdrawl from
industry
Five sources of competition in an industry

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1. Threat of New Entrants
New entrants mean downward pressure on prices
and reduced profitability; increasing capacity
New entrants will have unique approaches to
serving consumers
Barriers to entry determines the extent of threat of
new industry entrants
Barriers to entry raise the cost and risk for
potential entrants to levels which may be seen to
be unprofitable.

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How do these serve as barriers to
entry
Economies of Scale
◦ Refers to the decline in per-unit product costs as the
absolute volume of production per period increases
Product differentiation
◦ The extent of a product’s perceived uniqueness, e.g. Intel &
AMD, Amazon.com and Barnes & Noble
Capital requirements
◦ Required investment for manufacturing, R&D, advertising,
field sales and service, etc. e.g. oil and mineral extraction

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How do these serve as barriers to
entry
Switching costs
◦ Costs related to making a change in suppliers or products.
e.g. changing operating systems on PCs from Windows to
something else
Distribution channels
◦ Are there current distribution channels available with
capacity
Government policy
◦ Are there regulations in place that restrict competitive
entry?

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How do these serve as barriers to
entry
Cost advantages independent of scale economies
◦ Access to raw materials, large pool of low-cost labor, favorable locations,
and government subsidies

Competitor response
◦ How will existing firms react in anticipation of increased competition within a
given market e.g. Jet Blue & US Airways, AA & Continental

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2. Threat of Substitute
Products
Availability of substitute products places limits on the prices market
leaders can charge
High prices induce buyers to switch to the substitute
E.g. music on CDs vs. downloadable from the net

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3. Bargaining Power of
Buyers
Buyers (retailers and other manufacturers) seek to
pay the lowest possible price
Buyers have leverage over suppliers when
◦ They purchase in large quantities (enhances supplier
dependence on buyer) e.g. Walmart
◦ Suppliers’ products are commodities
◦ Product represents significant portion of supplier’s costs
◦ Buyer is willing and able to achieve backward integration

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Bargaining Power of Buyers
“We do not quibble or argue with anyone’s right to sing what they want,
to print what they want, and say what they want. But we reserve the
right to sell what we want.”

- Wal-Mart’s response to the accusation that it is

using its financial power to dictate what is
appropriate music and art

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4. Bargaining Power of
Suppliers
When suppliers have leverage, they can raise prices high
enough to affect the profitability of their customers
Leverage accrues when
◦ Suppliers are large and few in number
◦ Supplier’s products are critical inputs, are highly differentiated, or
carry switching costs
◦ Few substitutes exist
◦ Suppliers are willing and able to sell product themselves

E.g. Microsoft and Intel (90% of world PCs use MS and Intel)
relative to HP, Dell, etc.

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5. Rivalry among
Competitors
Refers to all actions taken by firms in the industry
to improve their positions and gain advantage over
each other
◦ Price competition
◦ Advertising battles
◦ Product positioning
◦ Differentiation

Mature markets – firms jostle with each other to

gain market share at the expense of competition

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Competitive Advantage
Achieved when there is a match between a firm’s distinctive
competencies and the factors critical for success within its industry
Two ways to achieve competitive advantage
◦ Low-cost strategy
◦ Product differentiation and higher prices

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Competitive Advantage
“The only way to gain lasting competitive advantage is to leverage your
capabilities around the world so that the company as a whole is greater
than the sum of its parts. Being an international company - selling
globally, having global brands or operations in different countries—isn’t
enough.”

- David Whitwam, CEO, Whirlpool

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Generic Strategies for Creating
Competitive Advantage
Broad Market Narrow Market

Narrow product Cost leadership Cost focus e.g.

mix (experience curve Polish & Chinese
benefits) shipyards

Broad product Product Focused

mix differentiation e.g. differentiation e.g.
any successful Bose
branded product

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Cost Leadership e.g. Walmart
Based on a firm’s position as the industry’s low-
cost producer (the experience curve concept)
Must construct the most efficient facilities
Must obtain the largest market share so that its per
unit cost is the lowest in the industry
Only works if barriers exist that prevent
competitors from achieving the same low costs

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Product Differentiation e.g.
Nike
Product that has an actual or perceived uniqueness in a broad market
has a differentiation advantage
Extremely effective for defending market position
Extremely effective for obtaining above-average financial returns;
unique products command a premium price.

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Cost Focus e.g. IKEA
Firm’s lower cost position enables it to offer a narrow target market
and lower prices than the competition
Sustainability is the central issue for this strategy
◦ Works if competitors define their target market more broadly
◦ Works if competitors cannot define the segment even more narrowly

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Focused Differentiation
The product only has actual uniqueness but it also has a very narrow
target market
Results from a better understanding of customer’s wants and desires
Example – High-end audio equipment like Mark Levinson, Bose, etc.
High prices

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The Flagship Firm
Rugman and D’Cruz
Long term competitiveness is more a matter of competition between
business systems not rivalry between firms
◦ Different from Porter – competition between individual firms

Japanese keiretsu and Korean chaebols

Benetton

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The Flagship Firm: The Business
Network with Five Partners

Network Relationship Commercial Relationship

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Creating Competitive Advantage
via Strategic Intent
Few competitive advantages are long lasting.
Keeping score of existing advantages is not the
same as building new advantages. The essence of
strategy lies in creating tomorrow’s competitive
advantages faster than competitors mimic the ones
you possess today. An organization’s capacity to
improve existing skills and learn new ones is the
most defensible competitive advantage of all.
- Gary Hamel and C.K. Prahalad

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Creating Competitive Advantage
via Strategic Intent
Focuses on the pace of implanting new competitive
advantages deep within the organization
Strategic Intent
◦ Grows out of ambition and
◦ Obsession with winning

Implant tomorrow’s competitive advantages faster than

competitors can imitate your present advantages
Based on W.E. Deming’s TQM principles – commitment to
continuing improvement in order to win

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Creating Competitive Advantage
via Strategic Intent
Building layers of advantage
Searching for loose bricks
Changing the rules of engagement
Collaborating

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Building Layers of advantage
A company faces less risk if it has a wide portfolio
of advantages
Successful companies build portfolios by
establishing layers of advantage on top of one
another
E.g. Japanese TV companies
◦ First layer – low cost (B&W TV sets in 70s)
◦ Second layer – quality and reliability in 80s
◦ Third layer – building brands in late 80s and 90s

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Searching for Loose Bricks
Search for opportunities in the defensive walls of
competitors whose attention is narrowly focused
◦ Focused on a market segment
◦ Focused on a geographic area to the exclusion of others

E.g. Acer lead in S.E. Asia & Latin America –

markets ignored by Compaq & HP; Intel focused on
complex chips – NEC Corp & LSI Logic created chips
for other products like digital cameras, smart cards,
etc.

Return

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Changing the Rules of Engagement
Refuse to play by the rules set by industry leaders
Example Xerox and Canon
◦ Xerox employed a huge direct sales force; Canon chose to
use product dealers
◦ Xerox built a wide range of copiers; Canon standardized
machines and components
◦ Xerox leased machines; Canon sold machines
◦ Xerox targeted management; Canon targeted secretaries
& office managers

Return

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Collaborating
Use the know-how developed by other companies
Licensing agreements, joint ventures, or partnerships
E.g. Sony acquiring technology for the transistor from AT&T in the
1950s for 25K

Return

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Current Issues in Competitive
Advantage D’Aveni
Today’s business environment, market stability is
undermined by:
◦ short product life cycles
◦ Short product design cycles
◦ New technologies
◦ Globalization
Result is an escalation and acceleration of
competitive forces
Goal of strategy – shifted from sustaining your
advantages to disrupting competitor’s advantages

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Current Issues in Competitive
Advantage
Hyper-competition is a term used to describe a dynamic competitive
world in which no action or advantage can be sustained for long
Competition unfolds in a series of dynamic strategic interactions in four
areas: cost quality, timing and know-how, entry barriers, and deep
pockets

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Current Issues in Competitive
Advantage
In today’s world, in order to achieve a sustainable advantage,
companies must seek a series of unsustainable advantages
The role of marketing is innovation and the creation of new markets
Innovation begins with abandonment of the old and obsolete

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Current Issues in Competitive
Advantage
“Innovative organizations spend neither time nor resources on defending
yesterday. Systematic abandonment of yesterday alone can transfer the
resources…for work on the new.”
-Peter Drucker

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