COMPETITIVE ADVANTAGE: Aakriti

Alvin

CHAPTER 1 - CORE CONCEPTS Hasna

Sharooque
INTRODUCTION
Competition: core of success/ failure of firms
Determines appropriateness of firms activities
Contribute to performance innovations, cohesive culture, good implementation, etc.
Industry: fundamental arena where competition occurs
Competitive strategy: search for a favourable competitive position in an industry
It aims to establish a profitable and sustainable position against competition in the
industry
Central theme: how a firm can create and sustain a competitive advantage in the
industry; how it can implement the broad generic strategies
Aims to build a bridge between strategy and implementation
CENTRAL QUESTIONS UNDERLYING CHOICE OF
COMPETITIVE STRATEGY
1. Attractiveness of industries for long-term profitability & its determining factors.
Inherent profitability of industry Profitability of the firm
Unequal opportunities for sustained profitability
2. Determinants of relative competitive position within an industry.
Competitive position: unending battle among competitors
Some firms more profitable than others
Both are dynamic: industries become more/ less attractive over time; long periods
of stability can be abruptly ended by competitive moves both can be shaped
by a firm
However, neither question is self-sufficient to guide the choice of competitive
strategy.
 Attractive industry Poor Competitive Position

Poor Profitability
Poor industry Excellent Competitive Position

Industry attractiveness: reflection of factors over which firms have little influence
Competitive strategy: power to make industry more/ less attractive
Firms can erode or improve their position through its choice of strategy
Competitive strategy - responds to the environment, and attempts to shape the
environment in the firms favour
Value: what buyers are willing to pay.
Superior value lower prices than competitors for equal benefits/ unique benefits
that offset a high price
Competitive advantage grows, fundamentally, out of value a firm is able to create
for its buyers, that exceeds the firms cost of creating it.
Two basic types of competitive advantage: cost leadership & differentiation
STRUCTURAL ANALYSIS OF INDUSTRIES
Competitive strategy must grow out of a sophisticated understanding of the rules of
competition that determine an industrys attractiveness
Ultimate aim is to cope with and change these rules in the firms favour
The rules are embodied in the five competitive forces
The competitive strength of the forces determines the firms ability to earn ROI in
excess of the cost of capital, on average
This strength of the forces varies from industry to industry function of industry
structure
In industries where the forces are favourable, many competitors may earn attractive
returns. Eg: pharmaceuticals, soft drinks, etc
In industries where pressure from one or more firms is intense, few firms command
attractive returns, regardless the efforts of the management. Eg: rubber, steel, etc
STRUCTURAL ANALYSIS OF INDUSTRIES
The forces determine industry profitability as the influence the elements of ROI
prices, costs, investment of firms & firms can influence the forces through their
strategies
Buying power & threat of substitution influence price
Bargaining power of suppliers determines cost of raw materials and other inputs
Intensity of rivalry influences prices, costs of competing
Threat of entry places a limit on prices, and shapes investment required to deter
entrants
ELEMENTS
OF
INDUSTRY
STRUCTURE
INDUSTRY STRUCTURE AND BUYER NEEDS :

Satisfying buyer needs is a prior condition that has to be satisfied for the firms in
the industry to work successfully.
Industry structure determines who captures the value of the buyers.
Threats to capturing value of buyers.
Industry structure determines who keeps what proportion of the value a product
creates for buyer.
INDUSTRY STRUCTURE AND SUPPLY/DEMAND
BALANCE:
Profits are a function of the balance between demand and supply.
Industry structure determines how rapidly competitors add new supply.
The impact of imbalance between demand/supply affects industry profitability
depends on industry structure.
GENERIC COMPETITIVE STRATEGY
Positioning determines a firms profitability.
Michael Porter stated that a firm wishing to obtain competitive advantage over its
rivals are face with 2 choices :
1) Cost leadership vs Differentiation
2) Degree of Focus
3 generic strategies
1) Cost leadership
2) Differentiation
3) Focus
COST LEADERSHIP
In this, a firm is set out to be the low cost producer of the industry.
Low cost producers in an industry for a given level of quality.
In case of price war, firm can maintain some profitability while competitors suffer
loss.
Usually targets a broader market.
DIFFERENTIATION
In this, a firm seeks to be unique in its industry.
Differentiation is different to each industry.
A differentiator can perform well if its premium price exceeds extra costs incurred
in being unique.
A firm must chose qualities for its product that differentiate it from is rivals.
FOCUS
Concentrates on a narrow segment
Cost advantage or differentiation is to be achieved within that segment.
Firm with focus strategy often enjoy high customer loyalty.
Needs of the group can be better serviced by focusing entirely on it.
COMPETITIVE STRATEGIES
Stuck in the middle
Pursuit of more than one generic strategy
Sustainability
Generic strategies and industry evolution
GENERIC STRATEGIES AND ORGANIZATIONAL
STRUCTURE
The corporations can adopt one of the three generic strategies:
Cost leadership
Differentiation
Focus
 Best cost
Differentiation Cost leadership strategy
1. STRATEGY: 1. STRATEGY: 1. STRATEGY:
Schedule or quality Cost efficiency Quality and cost
2. ORGANIZATION: 2. ORGANIZATION: 2. ORGANIZATION:
Flexible structure to Flexible structure to Flexible structure to
facilitate speed adapt to changes in ensure the best product
process improvement quality at the minimum
3. PROCESS: cost
3. PROCESS:
Flexible process to 3. PROCESS:
speed up projects or Highly standardized and
maximize quality built on template process Standardized but
4. CULTURE: flexible process
4. CULTURE:
Cost conscious 4. CULTURE:
Rewarding time to
market speed or quality Rewarding quality /
cost culture
SUMMARY
Competitive advantage describes the way a firm can choose and implement a generic
strategy to achieve and sustain competitive advantage. it addresses the interplay
between the types of competitive advantage cost and differentiation and the
scope of a firms activity.