CH3 - Competitive Advantage

Question 1

What is competitiveness?

Answer 1

Essentially the ability of an organisation, sector or economy to compete against others. No of firms in an industry, their strength and ease of entry for new firms has an impact on price, choice, profitability and likelihood of illegal collusive agreements

Question 2

Cima definition of competitive advantage?

Answer 2

Situations where an organisation exerts more competitive force on its competitors than they exert on it

Question 3

What key characteristics must competitive advantage have?

Answer 3

*It must be sustainable.
Over the long term not just immediate future. E.g. Competitor may enjoy short term competitive advantage by being 1st to market or by competing on price, but these benefits may not be sustainable in the longer term.

• being difficult to copy would help to be sustainable
• certain sources of competitive advantage are more sustainable than others. E.g. Patents and licences, branding and customer loyalty.

Question 4

What are porters 3 generic strategies through which an organisation can generate superior competitive performance?

Answer 4

1 - cost leadership- offering product and services of the same quality as competitors, but a lower price

2 - differentiation - charging higher prices by offering more innovative products, or products perceived as higher quality

3- focus - concentrating on a small part of the market

Question 5

What is bowman strategy clock and what are the points on it?

Answer 5

Diagram showing 8 strategic positions depending on the price and perceived value to the customer.

1 - low price, low value - Bargain basement approach, not many companies choose. Survival relies on high sales and continually attracting new customers.

2 - low price - similar to 1, but differs in that it’s not focused on inferior products, just on lower prices than competitors for equivalent products.

3 - hybrid - low cost, but higher perceived value. Often seen in small local business. Companies here can build up reputation and customer loyalty for offering reasonable goods at fair prices.

4 - Differentiation - same as porter. Customer accept price increases as they value the product. E.g. Apple

5 - Focused differentiation - companies operate on high margins and highly targeted markets. Consumers willing to pay high prices as they value uniqueness and exclusivity of the product.

6 - Risky high margin - gamble on increased prices without any increase to perceived value. Higher profitability enjoyed is short term.

7 - monopoly pricing - can only be achieved when there is only one company or very limited choice in the market.

8 - loss of market share - not really sustainable position. Involves attempting to sell an inferior product at a price associated with a superior product. A company pursuing the strategy will lose market share. If you have a low value product, the only way you will sell it is on its price.

Question 6

Which strategies on bowman’s clock aren’t really viable in truly competitive marketplaces?

Answer 6

6- risky high margin
7- monopoly pricing
8- loss of market share

When price is greater than perceived value, there will alway be competitors offering better quality products at lower prices.

For sustainable long term strategy you must align price and value correctly

Question 7

What is the positioning based view of strategy?

Answer 7

competitive advantage stemming from the organisations position in relation to its competitors.

Know as “outside in” view because it’s concerned with adapting the organisation to fit with its environment.

Positioning approach view takes that high profits result from:

• high market share in relation to rivals
• differentiated product
• low costs

Question 8

What are the criticisms of the positioning view of strategy formulation?

Answer 8

Competitive advantages gained this way are not sustainable. They are too easily copied, environments are too dynamic to enable positioning to be effective. Markets continually changing due to faster product life cycle, impact of IT, global competition.

It is easier to change the environment than it is to change the organisation. Supporters of the positioning view seem to suggest that organisation can have it’s shape and size changed at will to fit the environment.

Question 9

What is the resource based view on strategy?

Answer 9

Sees competitive advantage stemming from some unique resource (things an organisation has at its disposal) or competence (things an organisation can do effectively)possessed by a company.

Called “inside out” view because company must go in search of environments that enable it to harness its internal competencies.

Profitability sustained due to unique resources that cannot be easily copied

Question 10

Barney(1991) indentified 4 criteria for unique resources. What are they?

Answer 10

Valuable -must be able to exploit opportunities or neutralise threats.

Rare - competitors must not have them too

Imperfectly imitable- competitors must not be able to duplicate

Non substitutability- must not be possible for a rival to find a substitute.

Question 11

Resources are combined together to achieve a competence. There are two types of competence. What are they?

Answer 11

Threshold competence- actions and processes you must be good at just to be considered by the customer.

Core competence- something you’re able to do that is very difficult for competitors to emulate. According to resource based view, core competencies are the key to competitive advantage.

Question 12

What are the characteristics of core competences?

Answer 12

• provides potential access to a wide variety of markets
• increases perceived customer benefits
• hard for competitors to imitate

Prahalad and Hameln work on core competences focuses on the strategic intent of an organisation to leverage its internal capabilities and core competences to confront competition. This is sometimes referred to as strategic stretch.

Question 13

What can threaten core competences?

Answer 13

• not monitoring marketplace to ensure core competences are still valid
• failure to invest in them.

Question 14

What are the main points when considering resource based view vs positioning view?

Answer 14

Positioning view relies on predicting the future of the market. Some markets volatile and make estimating changes impossible in longer term.

Resource view is for the organisation to identity core competences and build strategies around what they do best, and what competitors find hard to copy.

In practice more organisations are tending towards resource based view because

• strategic management should focus on developing core competences
• greater likelihood of implementation. Basing a strategy on present resources will reduce the disruption and expenditure involved in implementation.
• it will avoid the firm losing site of what it is good at

Question 15

To carry out resources based strategy a company should carry out internal analysis to identify the things it’s good at. Which 2 key techniques can be used?

Answer 15

Resource audit

Porters value chain model

Note :
Internal analysis is part of rational approach and findings feed into the strengths and weaknesses on the corporate appraisal (SWOT)

Question 16

Why carry out a resource audit and how would you do it?

Answer 16

Why -To assess strategic capability of the organisation. A resource audit analyses how resources are being deployed to create competences and the processes through which these competences are linked

How

1. Identify resources available
   * Physical or operational (land, machinery, IT systems)
   * Human resources (labour, knowledge)
   * Financial resources
   * intangibles (patents, goodwill)
2. Identity resources as basic or unique
   Basic- similar to competitors, easy to copy
   Unique-more a company has the stronger its competitive position

Key is to know what is available and how it will help. Also organisation needs to know what is lacking and how things may change in future.

3. Classify competences

Threshold- minimum requirement. Attaining avoids competitive disadvantage, necessary to enter a particular market.

Core- what can we do better than competitors?

OVER TIME CORE COMPETENCES CAN BECOME THRESHOLD AS CUSTOMER EXPECTATIONS DEVELOP AND ORGANISATIONS BATTLE FOR COMPETITIVE ADVANTAGE

Question 17

The 2nd model for internal analysis is porters value chain model. Explain what this is?

Answer 17

This is a model of value activities, those activities that procure inputs and then process the inputs and add value to them in some way, to generate outputs for customers, and the relationship between those activities.
The value changing can be used to design a competitive strategy. By exploiting linkages in the value chain and improving activities, an organisation can gain competitive advantage.

Question 18

What does “primary activities” refer to in porters value chain model, and what are they?

Answer 18

Activities involved in the creation of the product or delivery of service. They add value to the product or service.

Inbound logistics- receiving, storing handling raw material inputs e.g. JIT could give a cost advantage

Operations - transformation of raw materials into finished goods services. E.g. Using skilled craftsmen could give quality advantage

Outbound logistics- storing and distributing finished goods to customers e.g. Outsourcing delivery could give a cost advantage

Sales and marketing- involves making the customer aware of the product or service and providing them with opportunities to buy. E.g. Sponsoring a celebrity could enhance product image

Service - involves activities that occur after point of sale. Installation, training and repair. E.g. M&S approach to returns give a perceived quality advantage

Question 19

What does “support activities” refer to in porters value chain model, and what are they?

Answer 19

This activities that help primary activities go more smoothly

Infrastructure - how organisations is organised. E.g. Bulk centralised purchasing could result in cost savings.

Technology development - is concerned with how the organisation uses technology. E.g. Automated production could enable more output

Human resource management - all staff matters- recruitment, appraisal, training and dismissal e.g. Employers expert buyers could enable a supermarket to purchase better quality fruit than competitors.

Procurement- purchasing including negotiation of contracts. Not restricted to raw materials

Question 20

In porters value chain, what does linkages refer to?

Answer 20

Value activities are interdependent and are connected by linkages. They exist when the way in which one activity is perform affects the effectiveness of other activities. E.g. Better quality production (operations) reduce the need/cost of after sales service.

I.T can help indentify where better info and systems are needed to improve or integrate the linkages.

Competitors can often copy individual parts of the value chain, but it is difficult to copy the linkages