Ch. 16: Strategic Elements of Competitive Advantage

Diego Della Valle

entrepreneur, Italian, got an idea from a really ugly shoe in America, took them back to Italy and motto was : soft, to fit like a glove using the best quality leather-business called Tod's S.p.A.

Composition of Home Demand

how firms perceive focus and respond to buyers needs o Competitive advantage achieved - when the home demand sets the quality standard and gives local firms a better picture of buyer needs, at an earlier time, than what is available to foreign rivals

Deep Pockets - definition

interaction occurs when the incumbent realized it must respond fully to the invader by making strategic responses to create new hurdles

3. Capital requirements: What industry is enormous capital required for?

Industries as pharmaceuticals, mainframe computers, chemical and mineral extraction present intimidating entry barriers

Means by Which a Nation's Products and Services are Pushed or Pulled into Foreign Countries

issue here is whether a nation's people go abroad and demand the home nation's products and services in those second countries

Home Plate

Related supporting industries

What sport can you visualize these attributes with?

baseball

Generic strategies: cost leadership

competitive advantage based on a firm's position as the industry's low-cost producer, in broadly defined markets or across a wide mix of products

Factor conditions

country's endowment with resources - basic factors- may have been inherited or created without much difficulty because they were obtained so easily that are not significant sources of national advantage.

Hypercompetition

describes a dynamic competitive world in which no action or advantage can be sustained for long

Who created the five force model?

developed by Harvard University's Michael E. Porter, a leading authority on competitive strategy, explains the competition in an industry

2. threat of substitute products or services - example

development of MP3 file music was accompanied by popularity in peer-to-peer (p-to-p or P2P) file swapping with music fans oNapster: and other online music services offered customers a substitute instead of paying $15 or more for a CD

7. Cost advantages independent of scales economies

established industries enjoy this benefit - access to raw materials, a large pool of low-cost labor, favorable locations and government subsidies

Red Ocean

existing markets or industries with well-defined boundaries where rules are understood by all players

Demand Conditions

factors that either train firms for world-class competition or that fail to adequately prepare them to compete in the global marketplace

Generic strategies: product differentiation

firm has an actual or perceived uniqueness

Government

government is not a determinant on competitive advantage rather an influence on determinants

Industry

group of firms that produce products that are close substitutes for each other

Strategic intent

growing out of ambition and obsession with winning as the means for achieving competitive advantage

Brinkmanship

happens when industry leaders convince potential competitors that any market-entry effort will be include vigorous and unpleasant responses

1. Layers of advantage:

having a wide portfolio of advantages - as in having a big portfolio and several products, adding an additional layer of quality and reliability, brand names(another layer) - global brand franchise

5. Distribution channels

if channels are full or unavailable the cost of entry is substantially increased because a new entry must invest time and money to gain access to existing channels or to establish new channels

The major difference between Porter's model and the flagship?

is the fact that flagship model is based more on corporate individualism

Blue Ocean

market or industries that do not currently exist

Infrastructure resources

nation's banking system, health care system, transportation and communications and availability and costs

Porter describes these attributes in terms of?

national "diamond"

Five categories of factor conditions:

o Human Resources o Physical Resources o Knowledge Resources o Capital Resources o Infrastructure resources

• Factors that influence rivalry:

o Maturity of the industry o Industries characterized by high fixed costs that are only pressure for productivity o Lack of differentiation or absence of switching costs o Firms with high strategic success in an industry, destabilize because they are willing to accept below-average on profit margins to establish themselves

Chance

occurrences that are beyond the firms control, industries and governments- these include wars and their aftermaths, technological breakthroughs, shifts in factor or input cost, oil crises, dramatic swings in exchange rates

Global competition

occurs when a firm takes a global view of competition and sets about maximizing profits worldwide rather than on a country-by-country basis

Generic strategies: cost focus

offering a lower price to a narrow target market

Size and Pattern of Growth of Home Demand

only important if the firm sophisticated and anticipates foreign demand

3. Changing the Rules

refusing to play the rules set by the industry leaders

2. Product differentiation

second major entry barrier, the extent of the product's perceived uniqueness, whether it is a commodity

Knowledge Resources

significant portions of the population having scientific, technical and market-related knowledge

5. Distribution channels: Example

some Western companies have encountered this barrier in Japan

Entrepreneur

someone who introduces innovation, always pioneers of new products

Blue Ocean Strategy

strategy framework propped by Professors Renee Mauborgne and Kim Chan- it defines two categories of competitive space, red and blue oceans

4. bargaining power of suppliers

suppliers can leverage when they are large, few in number, important input to user firms, differentiated products, carry switching costs, willingness and ability to develop their own product and brand

Generic strategies: focused differentiation

targets a narrow target market at the perception of product uniqueness at a premium price

5. Rivalry among competitors

the actions taken by firms in an industry to improve their positions and gain advantage over each other

3. bargaining power of buyer

the aim of buyers is to pay the lowest possible price to obtain the product or service - In order to gain leverage on their vendors they have to by buying large quantities from its suppliers -which means the supplier is highly dependent on the buyer's business

1. Economies of scale

the decline in per-unit product costs as the absolute volume of production per period increases

Firm Strategy, Structure, and Rivalry

the final determinant of a nation's diamond

Human Resources

the quantity of workers, available the skills posses by these workers and the wage levels, overall work ethic of the workforce in a nation

Key suppliers

those that perform some value-creating activities such as manufacturing of critical components better than the flagship

4. Collaborating

using the know-how developed by other companies - can take the form of joint-ventures or licensing agreements

Competitive advantage

when there is a match between a firm's distinctive competencies and the factors critical for success within its industry

4. Switching costs

which results from the need to change suppliers and products

Who does the flagship network have a relationship with?

with key customers and key consumers

Cemex

• A global Mexican construction company, building solutions with operations in more than 50 countries • Lorenzo Zambrano, Chief executive, grandson of the company's founder, got his MBA from Stanford University

4 Characteristics of home demand that are important

• Composition of Home Demand • Size and Pattern of Growth of Home Demand • Rapid Home-Market Growth • Means by Which a Nation's Products and Services are Pushed or Pulled into Foreign Countries

Generic strategies: product differentiation - Examples:

- Maytag in large home appliances - Caterpillar in construction equipment - IBM has differentiated itself in its sales/service organization and the security it offers - Nike in being a technological leader thanks to its unique products found in wide array of shoes

Deep Pockets

1. "Drive' em out" 2. Smaller competitors use courts or Congress to derail deep-pocketed firm 3. Large firm thwarts antitrust suit 4. Small firms neutralize the advantage of the deep pocket 5. The rise of a countervailing power

Companies can gain competitive advantages due to innovation - Japanese uses 4 approaches for competitive advantages

1. Layers of advantage 2. Loose Bricks 3. Changing the Rules: refusing to play the rules set by the industry leaders 4. Collaborating

Five forces model

1. threat of new entrants 2. threat of substitute products or services 3. bargaining power of buyer 4. bargaining power of suppliers 5. Rivalry among competitors

• Competitive advantage can be achieved in 2 ways

1.low-cost strategy- offers products at lower price and strategy 2. differentiating products-customers perceive unique benefits often comes with a premium price

How many barriers are there in the threats of new entrants?

8

2. Changing the Rules - Example

Canon decided to do a new rulebook, while Xerox chose to distribute though office-product dealers, it made a huge direct sales force, did serviceability through the dealers, decided to sell instead of leasing, targeted secretaries and departments instead of head of corporate offices

First Base

Demand conditions

3. bargaining power of buyer - Example: Walmart

Since Walmart purchases massive quantities of goods for resale, it has this power towards its vendors and extends to the music industry o It refuses to stock CDs that have parental advisory for lyrics or violent imagery

Firm Strategy, Structure, and Rivalry - Example

The PC industry in the US is a good example of how a strong domestic rivalry keeps an industry dynamic ad creates continual pressure to improve and innovate

Third Base

Factor conditions

Entry Barriers

1. Building a geographic stronghold by creating and reinforcing entry barriers 2. Targeting the product market strongholds of competitors in other countries 3. Incumbents make short-term counter-responses to guerrilla attacks 4. Incumbents realize they must respond fully to the invaders by making strategic responses to create new hurdles 5. Competitor react to new hurdles 6. Long-run counter-responses via defensive or offensive moves 7. Competition between the incumbent and entrant is exported to entrant's home turf 8. An unstable standoff between the competitors is established

Timing and Know-How

1. Capturing first-mover advantages 2. Imitation and improvement by followers 3. Creating impediments to imitation 4. Overcoming the impediments 5. Transformation or leapfrogging 6. Downstream vertical integration • Example: Sony has a history of being a first-mover, based on its know-how audio technology: first pocket-sized transistor radio , first consumer VCR, first portable personal stereo and first compact disc player

According to D'Aveni Competition Unfolds in 4 Dynamic Interactions:

1. Cost/Quality 2. Timing and Know-How 3. Entry Barriers 4. Deep Pockets

What are the 8 barriers of new entrants?

1. Economies of scale 2. Product differentiation 3. Capital requirements 4. Switching costs 5. Distribution channels 6. Government policy 7. Cost advantages independent of scales economies 8. Competitor Response

Cost/Quality

1. Price wars 2. Quality and price positioning 3. "The middle path" 4. "Cover all niches" 5. Outflanking and niching 6. The move toward an ultimate value marketplace 7. Escaping from the ultimate value marketplace by restarting the cycle o Example: The Swatch Group, world's largest watchmaker. The watch industry continues to be highly segmented, prestige brands compete on reputation and exclusivity

Generic strategies

1. cost leadership 2. product differentiation 3. cost focus 4. focused differentiation

Generic strategies: cost focus - Example

Aldi's offers limited products of household goods and offers these goods at a very low price

Blue Ocean - Example

Ebay, - created a completely new industry, Cirque du Soleil innovated within the boundaries of an existing industry-the circus, Nintendo created a blue ocean with the low-tech lower priced Wii console and family-oriented games

Second Base

Firm's strategy, structure and rivalry

Knowledge Resources - Example

German's leadership in chemicals; nearly 200 years, has been home to the top university chemistry programs, scientific journals and apprenticeship programs

Generic strategies: focused differentiation - Example

Germany's Mittelstand companies have been successful in offering this strategy backed by their strong export effort

Porter's Belief Pertaining Competition

He believes that the presence or absence of particular attributed in individual countries influence industry development, not just the ability for them to create for competencies an competitive advantage

1. Economies of scale - Example: Honda

Honda's efficiency at engine R&D results from the wide range of products it produces that feature gasoline-powered engines

6. Government policy - Japan's Post-war industrialization strategy

Japan did this in their post-war industrialization strategy which was based on a policy on preserving and protecting national industries in their development by excluding non-Japans companies from entering the market

Rapid Home-Market Growth - example

Japan's rapid home market growth provided incentive for Japanese firms to invest heavily in modern automated facilities

What journal critics Porter's model?

Journal of Management Studies- Howard Davies and Paul Ellis -asserts that nations can achieve sustained prosperity without becoming innovation driven and note the absence of strong diamonds in the home bases of many global industries

2. Product differentiation - Example: Intel

Intel achieved differentiation and erected a barrier in the microprocessor industry with its "Intel Inside" advertising campaign and logo that appears on many brand of PCs

4. Bargaining power of suppliers- Example: Microsoft & Intel

Microsoft and Intel - 90% of the world run on Microsoft's operating system and 80% on Intel's microprocessors

Brinkmanship: - Example

Microsoft has used this approach several times to maintain its dominance in software operating systems and applications

4. Switching costs- Example: Microsoft

Microsoft's installation base of Windows operating systems and applications presented a formidable entry barrier for many years

Flagship Model

Rugman and D'Cruz developed an alternative framework based on business networks

2. threat of substitute products or services

The availability of substitute products places limits on the prices market leaders can charge in an industry; high prices may make consumers to switch to the substitute

What does the diamond represent?

The environment in which the firms compete

Example

Volkswagen, dealers are it key customer and individual car buyers are its key consumers

6. Government policy

a major entry barrier, in some instances the government will restrict competitive entry

Related and Supporting Industries

a nation has an advantage when it is home to globally competitive companies in business sectors

Leonardo del Vecchio

an entrepreneur who developed an innovative approach to existing product and in 1961 founded a company that manufactures and markets it • He partnered with Geiorgio Armani-Milan-based designer in order to do its eye frames with its eyeglasses

Rapid Home-Market Growth

an incentive to invest in and adopt new technologies faster and to build large, efficient facilities

2. Loose Bricks

attention focused on a market segment or a geographic area to the exclusion of others

Capital Resources

availability, amount, cost and types of capital available

Physical Resources

availability, quantity, quality an cost of land water, minerals and other natural resources- as well as size and location

8. Competitor Response

can be a major entry barrier, if a competitor's belief that entry into an industry or market will be an unpleasant experience it may serve as a strong deterrent (discouragement).

3. Capital requirements

capital is required not only for manufacturing facilities (fixed capital) but for financing R&D, advertising, field sales and service, customer credit and inventories (working capital).

3. Collaborating- Examples

• Sony's licensing of transistor technology from AT&T Bell Lbs subsidiary in the 1950s for $25,000- this gave access to transisitor and allowed marketing of portable radios

1. Layers of advantage- Example

•Caterpillar's attened was focused elsewhere when Komatsu made its first entry in Eastern Europe Market- Acer prospered by folliwng founder Stan Shih's strategy approaching the world computer market • When it was already ready to target the US it was the number 1 PC in key countries- Latin America, Southeast Asia and the Middle East