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Porters Theory of Competitive Advantage

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Title: Porters Theory of Competitive Advantage


1
Porters Theory of Competitive Advantage
Firm Success
Attractive Relative Position
Attractive Industry Structure
Sustainable Competitive Advantage
Activities / Value System
Drivers
Managerial Choices
Initial Conditions
2
The Michael Porter Paradigm (1980-2001)
Competitive
Superior
Advantage
Performance
3
The Michael Porter Paradigm
Industry
Structure
Competitive
Advantage
Relative
Position
4
Attractive Relative Position
  • Holding industry constant, some firms do better
    than others because of their relative position,
    or competitive advantage, within the industry.

5
Strategic 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.

7
Attractive Relative Position
  • A companys strategy must enable it to deliver a
    value proposition, or set of benefits, different
    from those that competitors offer.

8
Competitive Advantage
  • Total Revenue
  • - Total Cost
  • Profit

9
Competitive Advantage
  • Willingness to Pay
  • - Cost
  • Profit

10
Competitive Advantage
  • In order to increase profit you to
  • drive increase the wedge between
  • Willingness to Pay
  • and
  • Cost

11
Competitive Advantage
  • In order to increase profit you have two choices
  • Increase Revenues Profitably or
  • Decrease Cost Without Decreasing WTP

12
Competitive Advantage
  • Competitive Advantage 1
  • Low Costs

13
Competitive Advantage 1
  • Low Costs

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).

15
Airline - 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.

17
Competitive Advantage
  • Competitive Advantage 2
  • Differentiation (Monopoly)

18
Competitive Advantage 2
  • Differentiation

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.

20
Porters Generic Strategies
Focus
21
Competitive Advantage Must Come FromActivities
in the Value Chain
22
And in the Fit and Complexity of the Activity
System
23
Drivers
  • Why is one firm able to perform activities better
    than another firm?
  • Advantage must lie in the DRIVERS or inputs of
    the ACTIVITIES.

24
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25
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26
Drivers
  • Examples of Drivers
  • Scale
  • Learning
  • Location
  • Timing

27
Managerial Choices and Initial Conditions
  • Why are some firms able to maintain advantages in
    DRIVERS and RESOURCES?
  • MANAGERIAL CHOICES
  • INITIAL CONDITIONS

28
SWOT Analysis Strategic Fit
29
What makes a strength?
30
Resource 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.

31
Typical Resources
32
Characteristics 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?

33
Characteristics 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?

34
Resource Value
35
Examples
36
Resources and Activities
Resource Endowments (Stocks)
Activities (Flows)
37
Resources and Activities
Making Resource Commitments
Developing Capabilities
38
Are you a stock picker?
39
Example 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.

40
Or an architect?
41
Capability 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.

42
Example 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.

43
Its all about the resources you possessto do
Conclusion
44
Mantra 4
  • I pick the right poker games to play in and,
  • I am a good poker player.

45
Finally 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)

46
Strategic 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).

47
The 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)

48
Strategy 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).

49
Strategy 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.

50
Conditions of Sustained Superior Performance
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