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