The Nature and Sources of Competitive Advantage

1
The Nature and Sources of Competitive Advantage
OUTLINE

• The emergence of competitive advantage
• Sustaining competitive advantage
• Competitive advantage in different market
  settings
• Types of competitive advantage cost and
  differentiation

2
The Emergence of Competitive Advantage
How does competitive advantage emerge?

• External sources of
• change e.g.
• Changing customer demand
• Changing prices
• Technological change

Internal sources of change
Some firms have greater creative and
innovative capability
Resource heterogeneity among firms means
differential impact
Some firms faster and more effective in
exploiting change
3
Competitive Advantage from Internally-Generated
Change Strategic Innovation

• Characteristics of innovatory strategies
• Associated with new entrants to an industry (e.g.
  Nucor in steel, IKEA in furniture, Home Depot in
  DIY, Dell in PCs, American Apparel in casual
  clothing)
• Reconcile conflicting performance goals (e.g.
  Toyotas lean production system combines low
  cost, high quality, and flexibility. Retailers
  Primark and Target combine low cost with
  stylishness.)
• Reconfiguring the value chain e.g.---
• Nikes system for manufacturing and distributing
  shoes totally different from traditional shoe
  manufacturer
• Southwest Airlines simplification of the normal
  airline value chain
• Zaras system of design, manufacture, and
  distribution

4
Sustaining Competitive Advantage Against Imitation
REQUIREMENT FOR IMITATION
ISOLATING MECHANISM
Identification - Obscure superior performance
- Deterrence--signal aggressive Incentives
for imitation intentions to imitators -
Pre-emption--exploit all available
investment opportunities
- Rely upon multiple sources of
Diagnosis competitive advantage to
create causal ambiguity
- Base competitive advantage upon Resource
acquisition resources and capabilities that
are immobile and difficult to replicate
5
Competitive Advantage in Different Industry
Settings Trading Markets and Production Markets
SOURCE OF IMPERFECTION OF COMPETITION
OPPORTUNITY FOR COMPETITIVE ADVANTAGE
MARKET TYPE

• None (efficient markets)
• Imperfect information
• Transactions costs
• Systematic behavioral trends
• Overshooting

TRADING MARKETS
None Insider trading Cost minimization Superior
diagnosis (e.g. chart analysis) Contrarianism
Identify potential barriers to imitation (e.g.
deterrence, preemption, causal ambiguity,
resource immobility, etc.) base strategy upon
them. Difficult to influence or exploit.

• Barriers to imitation
• Barriers to innovation

PRODUCTION MARKETS
6
Sources of Competitive Advantage
COST ADVANTAGE
Similar product
at lower cost
COMPETITIVE ADVANTAGE
Price premium
from unique product
DIFFERENTIATION ADVANTAGE
7
Porters Generic Strategies
SOURCE OF COMPETITIVE ADVANTAGE
Low cost Differentiation
Industry-wide COST
DIFFERENTIATION COMPETITIVE
LEADERSHIP SCOPE Single Segment
F O C U S
8
Features of Cost Leadership and Differentiation
Strategies

• Generic strategy Key strategy elements
  Resource organizational
• requirements
• COST Scale-efficient plants.
  Access to capital. Process
• LEADERSHIP Design for manufacture.
  engineering skills. Frequent
• Control of overheads
  reports. Tight cost control.
• RD. Avoidance of
  Specialization of jobs and
• marginal customer
  functions. Incentives for
• accounts. quantitative
  targets.
• DIFFERENTIATION Emphasis on branding
  Marketing. Product
• and brand advertising,
  engineering. Creativity.
• design, service, and
  Product RD
• quality. Qualitative measurement
  and incentives. Strong
  cross-functional
  coordination.