Title: Porters Theory of Competitive Advantage
1Porters Theory of Competitive Advantage
Firm Success
Attractive Relative Position
Attractive Industry Structure
Sustainable Competitive Advantage
Activities / Value System
Drivers
Managerial Choices
Initial Conditions
2The Michael Porter Paradigm (1980-2001)
Competitive
Superior
Advantage
Performance
3The Michael Porter Paradigm
Industry
Structure
Competitive
Advantage
Relative
Position
4Attractive Relative Position
- Holding industry constant, some firms do better
than others because of their relative position,
or competitive advantage, within the industry.
5Strategic or Relative Position
- Mantra 3 - If everyone can do it, you can't
achieve extraordinary results.
6- Strategy is not about operational excellence -
JIT, TQM, MBO, etc. - Strategy is about doing things differently than
your rivals.
7Attractive Relative Position
- A companys strategy must enable it to deliver a
value proposition, or set of benefits, different
from those that competitors offer.
8Competitive Advantage
- Total Revenue
- - Total Cost
- Profit
9Competitive Advantage
- Willingness to Pay
- - Cost
- Profit
10Competitive Advantage
- In order to increase profit you to
- drive increase the wedge between
- Willingness to Pay
- and
- Cost
11Competitive Advantage
- In order to increase profit you have two choices
- Increase Revenues Profitably or
- Decrease Cost Without Decreasing WTP
12Competitive Advantage
- Competitive Advantage 1
- Low Costs
13Competitive Advantage 1
14- But what is most stunning of all about Southwest
is that since 1973, when it first turned a
profit, the company hasn't lost a penny. In an
industry plagued by fare wars, recessions, oil
crises, and other disasters, this is an
astounding feat. No other airline has ever come
close to it. Even during the Persian Gulf war,
when every other major carrier gushed red ink,
Southwest made money. In just this past quarter,
because of rising jet-fuel prices, five of the
largest air carriersincluding Delta, United, and
American--lost money. Southwest made 121 million
in net profitsup 65 from a year ago (Fortune,
May 28, 2001).
15Airline - Market Capitalization
(2/05/07)(millions)
16- The company has fostered a 33-year tradition of
success by focusing on very large stores with a
huge selection of national brands at prices below
our competition. In addition, the very nature of
having employee stockholders that have seen their
Employee Stock Ownership Plan (Pension Plan) grow
at a 16.5 annual compound growth rate creates
extremely dedicated employees. This has made
WinCo a very successful company.
17Competitive Advantage
- Competitive Advantage 2
- Differentiation (Monopoly)
18Competitive Advantage 2
19- TRADER JOE'S A UNIQUE GROCERY STORE
- Our Mission... At Trader Joe's, our mission is
to bring you the best food and beverage values
you can find anywhere, and the information you
need to make informed buying decisions. You'll
find more than 800 unique grocery items in our
label, at prices everyone can afford. We work
hard at buying things right Our buyers travel
the world searching for new items we work with a
variety of suppliers who make interesting
products for us and we make special purchases
which are presented to us throughout the year.
All our private label products have their own
"angle," i.e., great flavor, unusual recipes,
high quality ingredients, special nutritional
claims, and all natural ingredients.
20Porters Generic Strategies
Focus
21Competitive Advantage Must Come FromActivities
in the Value Chain
22And in the Fit and Complexity of the Activity
System
23Drivers
- Why is one firm able to perform activities better
than another firm? - Advantage must lie in the DRIVERS or inputs of
the ACTIVITIES.
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26Drivers
- Examples of Drivers
- Scale
- Learning
- Location
- Timing
27Managerial Choices and Initial Conditions
- Why are some firms able to maintain advantages in
DRIVERS and RESOURCES? - MANAGERIAL CHOICES
- INITIAL CONDITIONS
28SWOT Analysis Strategic Fit
29What makes a strength?
30Resource Based View of Firm
- Resources - all assets, capabilities,
competencies, organizational processes, firm
attributes, information, knowledge, and so for
that are controlled by a firm and enable the firm
to conceive of and implement strategies that
improve its efficiency and effectiveness.
31Typical Resources
32Characteristics of Resources
- 1. Valuable - Do a firm's resources and
capabilities enable the firm to respond to
environmental threats or opportunities? - 2. Rare - How many competing firms already
possess particular valuable resources and
capabilities?
33Characteristics of Resources
- 3. Costly to Imitate - Do firms without a
resources or capability face a cost disadvantage
in obtaining it compared to firms that already
possess it? - 4. Exploited by Organization - Is a firm
organized to exploit the full competitive
potential of its resources and capabilities?
34Resource Value
35Examples
36Resources and Activities
Resource Endowments (Stocks)
Activities (Flows)
37Resources and Activities
Making Resource Commitments
Developing Capabilities
38Are you a stock picker?
39Example of Successful Resource Picking
- In 1980 Microsoft purchased the QDOS operating
system (the precursor to MS-DOS) from Seattle
Computer Products for 50,000. - Microsoft had knowledge that IBM needed an PC
operating system.
40Or an architect?
41Capability Building
- A capability is an organizationally embedded
nontransferable firm-specific resource whose
purpose is to improve the productivity of other
resources possessed by the firm. - Capabilities cannot easily be bought they must
be built.
42Example of Capability Building
- Wal-Mart internally developed a unique
cross-docking logistical system which enhanced
the productivity of other resources, such as its
commercial real estate, its trucking fleet, its
workforce, and its information technology.
43Its all about the resources you possessto do
Conclusion
44Mantra 4
- I pick the right poker games to play in and,
- I am a good poker player.
45Finally Whats wrong with the logic of
competitive advantage?
- Typical consultant advice
- Firms with sustainable competitive advantages
achieve superior performance. - Therefore you must develop sustainable
competitive advantages (Industry and SWOT
analysis, resource picking and capability
building, etc)
46Strategic Management Research
- A firm with long-term superior performance is
identified. - The firm is studied in detail.
- An explanation is provided to explain the firms
superior performance. - The explanation is often attributed to sustained
competitive advantage(s).
47The Logic Behind Competitive Advantage (Powell,
SMJ, v 22, 2001)
- Consider the following logical propositions (a
proposition is an assertion to which we assign a
truth value, either T or F)
48Strategy Logic
- If p then q If firm X achieved sustained
superior performance (SSP), then firm X had one
or more sustainable competitive advantages (SCA)
(SCA is a necessary but not sufficient condition
for SSP). - If q then p If firm X had one or more
sustainable competitive advantages, then firm X
achieved sustained superior performance (SCA is a
sufficient but not necessary condition for SSP).
49Strategy Logic
- First, we must prove the propositions to be true
which has not been done yet. Second, we cannot
infer proposition 2 from 1, owing to the general
logical fallacy of affirming the consequence. - At a minimum, sustained superior performance
requires sustained competitive advantage and the
absence of competitive disadvantages. -
50Conditions of Sustained Superior Performance