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Creating Competitive Advantage

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Creating Competitive Advantage Ghemawat, Chapter Three Notes Average Economic Profits in the Steel Industry, 1978 -1996 Average Economic Profits in the Drug Industry ... – PowerPoint PPT presentation

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Title: Creating Competitive Advantage


1
Creating Competitive Advantage
  • Ghemawat, Chapter Three Notes

2
Average Economic Profits in the Steel Industry,
1978 -1996
Source Compustat, Value Line, Marakon Associates
Analysis
3
Average Economic Profits in the Drug Industry,
1978 -1996
Source Compustat, Value Line, Marakon Associates
Analysis
4
Calibrating Profit Drivers
Source Richard P. Rumelt, How Much Does
Industry Matter?, Strategic Management Journal,
1991 12167-185
5
Added Value
Added value total industry value created with
the firm in the game - total value created
without the firm in the game OR EQUIVALENTLY the
value that would be lost to the industry if the
firm disappeared
  • Under unrestricted bargaining, a firm cannot
    capture more than its added value
  • If you (in your relationships with customers and
    suppliers) create no value, you can capture no
    value
  • More generally, if a firm (in its relationships)
    creates no new value, it had better have some
    clever way of claiming value

6
Value Creation
  • Value is created by a business operating together
    with its customers and its suppliers
  • A firm does not create value in isolation
  • Willingness to pay the most that a customer
    will pay for a firms product
  • Supplier opportunity cost willingness to
    receive the least that a supplier will accept
    for the resources required to make a product
  • The value created by a transaction is the
    difference between the customers willingness to
    pay and the opportunity cost of the resources

7
Value Division
Customer Firm Supplier
Willingness to pay
Value captured by customer
Price
Value captured by firm
Cost
Value captured by supplier
Supplier opportunity cost
8
Activity Analysis of Competitive Advantage
  • Added value gt goal is to drive a wedge between
    willingness to pay and (supplier opportunity)
    cost
  • Indeed, a wider wedge than competitors achieve
  • Problem a firm must often incur higher costs to
    deliver a better product or service
  • Partial solution use activity analysis to spot
    opportunities to widen the wedge

9
McKinseys Business System
Source Carter F. Bales, P.C. Chatterjee, Donald
J. Gogel, and Anapam P. Puri, Competitive Cost
Analysis, McKinsey Co. Staff Paper (January
1980)
10
Value Chain for an Internet Start-Up
11
Porters Generic Strategies
STRATEGIC ADVANTAGE
Stuck in The middle
12
Small group exercise Name the generic
strategies in our cases
  • Coca Cola
  • PepsiCo
  • Continental Can
  • Crown Cork and Seal

13
Interplay between Cost and Differentiation
price

cost
1.
3.
Industry average competitor
2.
14
Porters Generic Strategies
15
Cost Leadership Strategy
  • Deliver a GOOD product or service at the lowest
    possible cost
  • Open a significant and sustainable cost gap over
    all competitors
  • Create advantage through superior management of
    key cost drivers
  • Translates into above-average profits with
    industry-average prices
  • BUT
  • Cost leaders must maintain product parity or
    proximity in satisfying buyer needs
  • Cost leadership often requires making trade-offs
    with differentiation

16
Cost Drivers
  • Scale
  • Learning
  • Pattern of capacity utilization
  • Linkages
  • Interrelationships
  • Integration
  • Timing
  • Policies
  • Location
  • Institutional factors

Source Michael E. Porter, Competitive
Advantage (New York Free Press, 1985)
17
Common Pitfalls in Cost Leadership
  • Misunderstanding of actual costs
  • False perception of cost drivers
  • Focus on manufacturing
  • Failure to exploit linkages
  • Inadequate proximity to differentiators
  • Ignoring competitor behavior
  • Poor implementation
  • Acting incrementally
  • No cost management program

18
The Differentiation Strategy
  • Select one or more needs that are valued by buyer
  • Achieve and sustain superior performance by
    meeting these needs uniquely
  • Selectively add costs if necessary to do so
  • Successful differentiation leads to premium prices
  • Differentiators must pick cost-effective forms of
    differentiation
  • Differentiation leads to above-average
    profitability provided the firm maintains cost
    parity or proximity to competitors

19
Common Pitfalls in Differentiation
  • Creating differentiation that buyers do not value
  • Over-fulfilling buyer needs
  • Looking too narrowly at the sources of
    differentiation
  • Charging an excessive price premium
  • Failing to understand costs of differentiation
  • Ignoring signals of value
  • Failing to recognize buyer segments
  • Creating differentiation that competitors can
    emulate quickly or cheaply

20
Focus Strategy
  • Exploits the same fundamental types of
    competitive advantage
  • Selects narrow target segment(s) with unusual
    needs
  • Creates optimal strategy for the target

Narrowing of scope creates cost
or differentiation advantage
21
Can business do more than one?
  • Overall Cost
  • Leadership
  • Differentiation

OR
  • Focus
  • Sometimes consistent
  • But requires defense against a competitor
    achieving one or the other
  • Can have multiply-focused entities in one company

22
Stuck in the middle
  • A company can be stuck in the middle if
  • A differentiator attempts to cut costs that are
    essential to its differentiation
  • A low cost leader incurs costs, above those which
    are essential to its low cost position, which do
    not differentiate the product
  • A focus company attempts to broaden its strategic
    target beyond the segments in which it has an
    advantage
  • In other words, by incurring costs, or by cutting
    costs, or by pursuing markets that reduce the
    wedge

23
An Expanded Version of Generic Strategies
  • Extend BCG framework to include a broader set of
    cost structures
  • Extend Porters five forces to recognize a more
    diverse set of competitive environments
  • Apply the economic theory of long run average cost

24
LRAC Review
Experience advantages decline with volume, Scale
advantages exhausted at optimal scale, If no
change in technology, no advantage to volume
25
Strategy and long-run average cost
26
Competitive Strategy and Long Run
Cost/Differentiation I
  • Volume Industry
  • Low cost leadership type markets
  • There is an advantage in scale or technology
  • Stalemate Industry
  • Cant differentiate
  • Economies of scale, experience common to
    competitors
  • No process innovation

27
Competitive Strategy and Long Run
Cost/Differentiation II
  • Fragmented Industry
  • Differentiation is key competitive factor
  • Niche strategy
  • Volume in niches inadequate to achieve volume
    cost advantages
  • Profitable and defensible industry
  • Differentiated product
  • Customer preference
  • Low cost producer of differentiated product
  • Transitory industry
  • Cost advantage based on labor
  • Cost advantage based on any other temporary
    advantage

28
Small group exercise Provide an example of a
cost leadership strategy in one of our cases
(identify the company and provide some detail)
  • Cola wars and beverage industry
  • Coors and brewing industry
  • Crown Cork and Seal
  • DeBeers and the diamond industry
  • Egghead and the retail industry
  • Barnes and Noble, Amazon and the retail book
    industry

29
Small group exercise Provide an example of a
differentiation strategy in one of our cases
(identify the company and provide some detail)
  • Cola wars and beverage industry
  • Coors and brewing industry
  • Crown Cork and Seal
  • DeBeers and the diamond industry
  • Egghead and the retail industry
  • Barnes and Noble, Amazon and the retail book
    industry

30
Small group exercise Provide an example of a
focus strategy (either cost or differentiation)
strategy in one of our cases (identify the
company and provide some detail)
  • Cola wars and beverage industry
  • Coors and brewing industry
  • Crown Cork and Seal
  • DeBeers and the diamond industry
  • Egghead and the retail industry
  • Barnes and Noble, Amazon and the retail book
    industry
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