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
 The Emergence of Competitive Advantage

How does competitive

advantage emerge?

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

Some firms
Resource heterogeneity Some firms faster have greater creative
among firms means and more effective and innovative
differential impact in exploiting change capability
 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
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
 Competitive Advantage in Different Industry Settings:
Trading Markets and Production Markets

SOURCE OF OPPORTUNITY
MARKET
IMPERFECTION OF FOR COMPETITIVE
TYPE
COMPETITION ADVANTAGE

None (efficient markets) None

TRADING Imperfect information Insider trading
MARKETS Transactions costs Cost minimization
Systematic behavioral trends Superior diagnosis
(e.g. chart analysis)
Overshooting Contrarianism

Identify potential barriers to

imitation (e.g. deterrence,
Barriers to imitation
preemption, causal ambiguity,
PRODUCTION resource immobility, etc.) &
MARKETS base strategy upon them.

Barriers to innovation Difficult to influence or

exploit.
 Sources of Competitive Advantage

COST
ADVANTAGE

COMPETITIVE
ADVANTAGE

DIFFERENTIATION
ADVANTAGE
 Porters Generic Strategies

SOURCE OF COMPETITIVE ADVANTAGE

Low cost Differentiation

Industry-wide COST DIFFERENTIATION

COMPETITIVE LEADERSHIP
SCOPE
Single Segment FOCUS
 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.
R&D. 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 R&D
quality. Qualitative measurement
and incentives. Strong
cross-functional
coordination.