Unit 2

COMPETITIVE
ADVANTAGE

Unit - II

1 IFETCE/MBA/IIYR/IIISEM/2012-
13/BA9210/SM/UNIT2/PPT/VER1.1
Environment
The aggregate of all conditions, events and
influences that surround and affect it.
Characteristics of Environment:
Environment is complex
Environment is dynamic
Environment is multi-faceted
Environment has a far-reaching impact
Political/
Legal
Economic
Technological
Regulat
ory
Supplier
Social
Industry
Environment
Components of the Environment
Market
ENVIRONMENTAL SCANNING
The process by which organizations monitor their
relevant environment to identify opportunities
and threats affecting their business is known as
environmental scanning.
FACTORS
Events
Trends
Issues
Expectations
APPROACHES
Systematic Approach
Ad hoc Approach
Processed- form Approach
The purpose of
Five-Forces Analysis
The five forces are environmental forces
that impact on a companys ability to
compete in a given market.
The purpose of five-forces analysis is to
diagnose the principal competitive
pressures in a market and assess how
strong and important each one is.
Threat of
New
Entrants
Threat of
New
Entrants
Porters Five Forces
Model of Competition
Threat of New Entrants
Barriers to
Entry
Government Regulation
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Absolute Cost advantages
Bargaining
Power of
Suppliers
Threat of
New
Entrants
Threat of
New
Entrants
Porters Five Forces
Bargaining Power of Suppliers
Suppliers exert power
in the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Suppliers are likely to be powerful if:
Suppliers products have few substitutes
and is vital to the companies in an
industry.
Buyer is not an important customer to
supplier
Suppliers product is an important
input to buyers product
Suppliers products are differentiated
Suppliers products have high
switching costs
Supplier poses credible threat of
forward integration
Bargaining
Power of
Buyers
Threat of
New
Entrants
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Porters Five Forces
Bargaining Power of Buyers
Buyers compete
with the supplying
industry by:
* Bargaining down prices
* Forcing higher quality
* Playing firms off of
each other
Buyer groups are likely to be powerful if:
When the industry that is supplying
particular product is composed of many
small companies and the buyers are
large and few in number.
Buyers purchase in large quantities
bargain for price reductions.
Switching costs low
Supply industry depends on buyers
Buyer presents a credible threat
Buyer has full information
Threat of
Substitute
Products
Threat of
New
Entrants
Threat of
New
Entrants
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Porters Five Forces
Threat of Substitute Products
Products
with similar
function
limit the
prices firms
can charge
Keys to evaluate substitute products:
Products with improving
price/performance tradeoffs
relative to present industry
products
Example:
Electronic security systems in
place of security guards
Fax machines in place of
overnight mail delivery
Threat of
Substitute
Products
Threat of
New
Entrants
Threat of
New
Entrants
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Porters Five Forces

Rivalry Among Existing Competitors

Rivalry refers to competitive struggle between
companies in an industry to gain market share from
each other.
The Competitive struggle can be fought using prices,
product design, advertising and promotion spending,
direct selling efforts and after sales service.
The major factors:
Industry Competitive Structure
Industry Demand
Cost conditions
Exit barriers
Industry Competitive Structure:
Fragmented industry
Consolidated industry

Industry Demand
Growing demand
Decline demand
Cost Conditions
Exit Barriers

The Five Forces are Unique to
Your Industry
Five-Forces Analysis is a framework for
analyzing a particular industry.
Competitor Analysis
The follow-up to Industry Analysis is
effective analysis of a firms Competitors
Competitive
Environment
Industry
Environment
Competitor Analysis
Assumptions
What assumptions do our
competitors hold about the future
of industry and themselves?

Current Strategy
Does our current strategy support
changes in the competitive
environment?
Future Objectives
How do our goals compare to our
competitors goals?
Capabilities
How do our capabilities compare
to our competitors?
Response
What will our
competitors do in the
future?
Where do we have a
competitive
advantage?
How will this change
our relationship with
our competition?
Future Objectives
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
What is the attitude
toward risk?
What Drives the competitor?
Competitor Analysis
What is the competitor doing?
What can the competitor do?
Future Objectives
toward risk?
Current Strategy
How are we currently
competing?
Does this strategy
support changes in the
competitive structure?
Competitor Analysis
What does the competitor believe
about itself and the industry?
Future Objectives
toward risk?
Current Strategy
competing?
Does this strategy
competition structure?
Do we assume the future
will be volatile?
Are we assuming stable
competitive conditions?
competitors hold about the
industry and themselves?
Assumptions
Competitor Analysis
What are the competitors
capabilities?
Future Objectives
toward risk?
Current Strategy
competing?
Does this strategy
will be volatile?
Are we operating under
a status quo?
Assumptions
What are my competitors
strengths and weaknesses?
How do our capabilities
compare to our
competitors?
Capabilities
Competitor Analysis
Future Objectives
toward risk?
Current Strategy
competing?
Does this strategy
will be volatile?
Are we operating under
a status quo?
Assumptions
Response
What will our competitors
do in the future?
Where do we have a
competitive advantage?
How will this change our
relationship with our
competition?
Capabilities
What are my competitors
strengths and weaknesses?
How do our capabilities
compare to our
competitors?
Competitor Analysis
Competitive Advantage
A firms profitability is greater than the average
profitability for all firms in its industry.

Sustained Competitive Advantage
A firm maintains above average and superior
profitability and profit growth for a number of
years.

The Primary objective of a strategy is to achieve a
sustained competitive advantage which in turn
results in superior profit and profit growth
Competitive advantage during
Industrial Evolution
Pioneering Industry Environment
Growth Industry Environment
Shakeout Industry Environment
Mature Industry Environment
Declining Industry environment
Evolution of Industry Structure over the Life Cycle
INTRODUCTION GROWTH MATURITY DECLINE
DEMAND Affluent buyers Increasing Mass market Knowledgeable,
penetration replacement customers, resi-
demand dual segments

TECHNOLOGY Rapid product Product and Incremental Well-diffused
innovation process innovation innovation technology

PRODUCTS Wide variety, Standardization Commoditiz- Continued
rapid design change ation commoditization

MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity
URING intensive mass-production

TRADE -----Production shifts from advanced to developing countries-----

COMPETITION Technology- Entry & exit Shakeout & Price wars,
consolidation exit

KSFs Product innovation Process techno- Cost efficiency Overhead red-
logy. Design. uction, ration-
alization, low
cost sourcing
The Driving Forces of Industry Evolution
Customers become
more knowledgeable
& experienced
Diffusion of
technology
Demand growth
slows as market
saturation approaches
Customers become
more price conscious
Products become
more standardized
Distribution channels
consolidate
Production shifts
to low-wage
countries
Price competition
intensifies
Bargaining power
of distributors
increases
BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION
Excess capacity
increases
Production
becomes less R&D
& skill-intensive
Quest for new
sources of
differentiation
Strategy, Resources,
Capabilities, and Competencies
Distinctive Competencies and
Role of Resources and Capabilities
Resources
Tangible (physical) and intangible (non-physical)
Allow a company to create value for its customers
Must have skills to take advantage of the resources
Firm-specific and difficult-to-imitate resources
as well as valuable resources that create strong
demand for a companys products lead to
distinctive competencies

Capabilities
Coordinating resources & putting to productive use
Skills reside in the organizations rules, routines and
procedures
Product of its organization, processes and controls
Firm-specific capabilities to manage its resources lead to
distinctive competencies
Distinctive Competencies
Firm-specific strengths allow a company to differentiate its
products and/or achieve substantially lower costs than its
rivals in order to gain a competitive advantage.

Competitive Advantage, Value Creation, and Profitability
How profitable a company becomes depends on three
basic factors:
VALUE or UTILITY the customer gets from owning
the product
PRICE that a company charges for its products
COSTS of creating those products
+Consumer surplus is the excess utility a consumer
captures beyond the price paid.

Value Creation per Unit
Value Creation and Pricing
Options
The Value Chain
A company is a chain of activities for
transforming inputs into outputs that
customers value including the primary
and support activities.

The Value Chain
Building Blocks of Competitive
Advantage
2
4
1
3
The Generic Distinctive Competencies
Allow a company to:
Differentiate product offering
Offer more utility to customer
Lower the cost structure regardless of the
industry, its products, or its services

Efficiency
Measured by the quantity of inputs it takes to produce a given
output:
Efficiency =Outputs / I nputs
Productivity leads to greater efficiency and lower costs:
Employee productivity
Capital productivity

Superior efficiency helps a company attain a competitive
advantage through a lower cost structure.

Quality
Quality products are goods and services that are:
Reliable and
Differentiated by attributes that customers perceive to have higher value
+The impact of quality on competitive
advantage:
High-quality products differentiate and increase the value of the
products in customers eyes.
Greater efficiency and lower unit costs are associated with reliable
products.
Superior quality = customer perception of greater value in a
products attributes
Form, features, performance, durability, reliability, style, design

A Quality Map for Automobiles
When customers evaluate
the quality of a product,
they commonly measure it
against two kinds of
attributes:

1. Quality as Excellence

2. Quality as Reliability
Innovation
Innovation is the act of creating new products or new
processes
Product innovation
Creates products that customers perceive as
more valuable and
Increases the companys pricing options
Process innovation
Creates value by lowering production costs
Successful innovation can be a major source of
competitive advantage by giving a company something
unique, something its competitors lack

Responsiveness to Customers
Superior quality and innovation are integral to superior
responsiveness to customers.
Customizing goods and services to the unique demands of
individual customers or customer groups.
+Enhanced customer responsiveness
Customer response time, design, service, after-sales
service and support
Superior responsiveness to customers differentiates a
companys products and services and leads to loyalty and
premium pricing.

Competitive Advantage: The Value Creation Cycle
Analyzing Competitive Advantage and
Profitability
Competitive Advantage
When a companies profitability is greater than the average of all
other companies in the same industry that compete for the same
customers
Benchmarking
Comparing company performance against that of competitors and
the companys historic performance

Measures of Profitability

Return On Invested Capital (ROIC)
Net profit Net income after tax
Capital invested Equity + Debt to creditors

Net Profit
Net Profit = Total revenues Total costs
Drivers of Profitability (ROIC)
48
Ways to Increase ROIC
Increase Companys Return on Sales
Increase sales revenue more than costs
Reduce cost of goods sold
O Reduce spending on SG&A
Sales, Marketing, General & Administrative
Expenses
O Reduce R&D expenses
Research & Development
Increase Capital Turnover
Reduce the amount of working capital
Inventory, Accounts Receivable, Payables
O Reduce the amount of fixed capital
PPE - Property, Plant & Equipment

O
O
O
O
O
O
IFETCE/MBA/IIYR/IIISEM/2012-
49
The Durability of Competitive Advantage
Barriers to Imitation
Making it difficult to copy a companys distinctive competencies
+ Imitating Resources
+ Imitating Capabilities
Capability of Competitors
+ Strategic commitment
Commitment to a particular way of doing business
+ Absorptive capacity
Ability to identify, value, assimilate, and use knowledge
Industry Dynamism
Ability of an industry to change rapidly
The DURABILITY of a companys competitive advantage over its
competitors depends on:
Competitors are also seeking to develop distinctive
competencies that will give them a competitive edge.
Avoiding Failure:
Sustaining Competitive
Advantage
51
Why Companies Fail
Inertia
Companies find it difficult to change their strategies and structures
Prior Strategic Commitments
Limit a companys ability to imitate and cause competitive
disadvantage
The Icarus Paradox
A company can become so specialized and inner directed based on
past success that it loses sight of market realities
Categories of rising and falling companies:
Craftsmen Builders Pioneers Salespeople
When a company loses its competitive advantage, its
profitability falls below that of the industry. + It loses
the ability to attract and generate resources. + Profit margins
and invested capital shrink rapidly.
52
Steps to Avoid Failure
Focus on the Building Blocks of Competitive Advantage
Develop distinctive competencies and superior performance in:
+ Efficiency
+ Quality
+ Innovation
+ Responsiveness to Customers
Institute Continuous Improvement and Learning
Recognize the importance of continuous learning within the organization
Track Best Practices and Use Benchmarking
Measure against the products and practices of the most efficient global
competitors
Overcome Inertia
Overcome the internal forces that are barriers to change


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