General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Fundamentals of Strategy - Competitive

Advantage
Itai Ater
School of Management
Tel Aviv University

January 5, 2016

Summary

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Summary

Business Model

The firm decides how to compete with its business model

A business model is the underlying logic of the firm, how it
operates and how it creates and captures value.
Two fundamental strategic choices in a business model are:
value proposition and target market.

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Summary

Fit and Consistency

To be able to capture value, the business model must
involve a coherent set of choices:
These choices/activities include: R&D, procurement,
manufacturing, sales, HR, culture, etc.
The business model needs to tie together these activities in
a manner consistent with the value proposition and the
target market.
Simple consistency concerns the fit between the value
proposition and the business choices.
For instance, BMW should look for high-quality engineers
and we should not expect to buy high-end watches at Rami
Levy.

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Internal Consistency

Consistency also implies mutual reinforcement choices.

By making mutual reinforcement choices of activities, the
firm can more easily reduce its costs or command a
premium for its product.
Internal consistency or strategic fit makes copying of only a
subset of these organizational procedures by rivals
unproductive
Thus, strategic fit is essential for long term competitive
advantage

Summary

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Summary

Trade-offs

Good strategy also implies what NOT to do

Strategic fit also implies that some activities do not fit well
with the business model.
Example 1: BMW (unlikely to sell low quality vehicles).
Example 2: McDonalds (offering a wide-range of local manu
offerings).
Example 3: IKEA (tailored-selling experience).

Good strategy also implies what NOT to do

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Summary

External Consistency
Positioning on the Business Landscape

Firms try to maximize the wedge between their costs and

their customers willingness-to-pay
Firms that achieve a larger wedge than their peers in the
industry are said to have a competitive advantage
Strategic positioning implies occupying the areas (market
segments) where the wedge is potentially largest
Strategic positioning requires consistency between the
business model (value proposition, market segment) and the
external environment
e.g. Rami Levy choice to open its stores in low-cost areas,
where the large retailers have lower presence

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Competitive Advantage

Competitive advantage can be identified by the question:

Why should the consumer use my services and not the
services of my competitors?
The answers could vary: price, reliability, brand, availability,
no-alternative..

Summary

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Summary

Sources of Competitive Advantage

Positional Advantage

Positional advantage is usually based on one of the

following:
Market structure - oligopolistic markets (e.g. Aircraft
manufacturers), cheap production (e.g. subsidies, proximity
to natural resources).
Economies of scale in large markets (e.g. brand, network
effect).
First mover advantage (stronger brand name, installed base,
network effects).

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Sources of Competitive Advantage

Capability Advantage

Unique core competency.

Harder to identify.
Examples:
Cheap production due to idiosyncratic efficiency or learning
curve (e.g. Sonys miniaturization).
Short-time to market (e.g. Japanese cars in the 1980s).
Responsiveness to changes. Agility (Walmart after 9/11).

Summary

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Core Competencies

Core competencies are capabilities/activities that a firm

does especially well compared to its competitors:
Core competency should be:
Generic valuable across multiple products or markets.
Tacit difficult to translate into simple algorithms or
procedures.
Impersonal embedded in the organizational routines and
do not depend on particular employees.

Summary

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Summary

Management as Competitive Advantage

Is good management a competitive advantage?

Is this advantage sustainable? What the source of this
advantage?
Does the Israeli ecosystem offer a competitive advantage for
start-ups?

General

Business Model

Consistency

Sustainability

Competitive Advantage

Sustainability

Threats for Sustainability

Summary

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Imitation

A new firm offers better value of the same deal

Barriers to imitation:
Patents.
Network externalities.
Strategic fit
Time to imitation.
Complexity.
Reputation.

Summary

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Summary

Substitutes

Substitution reduces the demand for what a firm uniquely

provides by shifting the demand elsewhere
Introduction of a superior substitute may take the edge off a
competitive advantage (e.g. digital photography, cell
phones).
Possible reactions for the introduction of new substitutes:
No reaction - e.g. there are doubts regarding the new
substitute (Better Place).
Increase the value (some sort of vertical integration) - e.g.
increase entry costs (exclusivity).
Move to the advanced technology while keeping core
competencies (newspapers websites).

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Summary

Hold-up

A firm may have a significant competitive advantage and at

the same time be susceptible to hold up.
Hold-up diverts value to customers, suppliers, or
complementors who have some bargaining leverage
Possible ways to avoid potential hold-up:
Standard practices - vertical integration, long term contracts,
etc.
Use core competencies to support products that are not
susceptible to hold-up (diversify the product line).

General

Business Model

Consistency

Competitive Advantage

Hold up in the PC industry

Sustainability

Threats for Sustainability

Summary

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Slack

Slack, or waste within the firm, dissipates value

Plush carpets for their own sake are slack
But plush carpets to win customers and recruit talent might
be wise investments

Slack tends to be worst under certain conditions

Forgiving competitive environments
Settings in which managers have wide discretion over
productive processes

Summary

General

Business Model

Consistency

Competitive Advantage

Sustainability

Threats for Sustainability

Overview

Strategy is the firms answer to two fundamental questions:

1
2

Where to compete?
How to compete?

Topics:
Introduction.
External Analysis.
Internal Analysis.
Business Models and Competitive Advantage.

Summary