Chapter 16 - Strategic Elements of Competitive Advantage Flashcards
Define the term industry
group of firms that produce products that are close substitutes for each other
Describe Porters five forces modell (Branchenstrukturanalyse mit dem 5 Forces Modell)
Force 1: Threat of New Entrants
* New entrants mean downward pressure on prices and reduced profitability
* Barriers to entry determines the extent of threat of new industry entrants
Force 2: Threat of Substitute Products
* Availability of substitute products places limits on the prices market leaders can charge
* High prices induce buyers to switch to the substitute
Force 3: Bargaining Power of Buyers
* Buyers=manufacturers and retailers, not consumers
* Buyers seek to pay the lowest possible price
* Buyers have leverage over suppliers when:
– They purchase in large quantities (enhances supplier dependence on buyer)
– Suppliers’ products are commodities
– Product represents significant portion of buyer’s costs
– Buyer is willing and able to achieve backward integration
Force 4: Bargaining Power of Suppliers
* When suppliers have leverage, they can raise prices high enough to affect the profitability of their customers
* Leverage accrues when
– Suppliers are large and few in number
– Supplier’s products are critical inputs, are highly differentiated, or carry switching
costs
– Few substitutes exist
– Suppliers are willing and able to sell product
Force 5: Rivalry Amogn Competitors
* Refers to all actions taken by firms in the industry to improve their positions and gain advantage over each other
– Price competition
– Advertising battles
– Product positioning
– Differentiation
Describe Barriers to Entry in context of Porters 5 forces Modell
Economies of Scale
– Refers to the decline in per‐unit product costs as the absolute volume of production per period increases
Product differentiation
– The extent of a product’s perceived uniqueness
Capital requirements
– Required investment for manufacturing, R&D, advertising, field sales and service, etc.
Switching costs
– Costs related to making a change in suppliers or products
Distribution channels
– Are there current distribution channels available with capacity?
Government policy
– Are there regulations in place that restrict competitive entry?
Cost advantages independent of scale economies
– Is there access to raw materials, large pool of low‐cost labor, favorable locations, and government subsidies?
Competitor response
– How will the market react in anticipation of increased competition within a given market?
Explain when competitive advantage is achieved and the two ways to achieve
Achieved when there is a match between a firm’s distinctive competencies and the factors critical for success within its industry
Two ways to achieve competitive advantage
– Generic strategies—four types
– Strategic intent—also four types
Name the four types of generic strategies to achieve competitive advantage
Broad market strategies
– Cost Leadership—low price
– Product Differentiation—premium price
Narrow market strategies
– Cost Focus—low price
– Focused Differentiation—premium price
Explain cost leadership as a generic broad market strategy to achieve competitive advantage
- Based on a firm’s position as the industry’s low‐cost producer
- Must construct the most efficient facilities
- Must obtain the largest market share so that its per unit cost is the lowest in the industry
- Only works if barriers exist that prevent competitors from achieving the same low costs
Explain product differentiation as a generic broad market strategy to achieve competitive advantage
- Product that has an actual or perceived uniqueness in a broad market has a differentiation advantage
- Extremely effective for defending market position
- Extremely effective for obtaining aboveaverage financial returns; unique products command a premium price
Explain cost focus as a generic narrow market strategy to achieve competitive advantage
- Firm’s lower cost position enables it to offer a narrow target market and lower prices than the competition
- Sustainability is the central issue for this strategy
– Works if competitors define their target market more broadly
– Works if competitors cannot define the segment even more narrowly
Explain focused differentiation as a generic narrow market strategy to achieve competitive advantage
- The product not only has actual uniqueness but it also has a very narrow target market
- Results from a better understanding of customer’s wants and desires
- Ex.: High‐end audio equipment
Name the four types of strategic intent to achieve competitive advantage
Created on the continuous improvement principles of W.E. Deming
- Building layers of advantage
- Searching for loose bricks
- Changing the rules of engagement
- Collaborating
Explain “searching for loose bricks” as a strategic intent to achieve competitive advantage
Search for opportunities in the defensive walls of competitors whose attention is narrowly focused
– Focused on a market segment
– Focused on a geographic area to the exclusion of others
Explain “changing the rules of engagement” as a strategic intent to achieve competitive advantage
Refuse to play by the rules set by industry leaders
Example Xerox and Canon
– Xerox employed a huge direct sales force; Canon chose to use product dealers
– Xerox built a wide range of copiers; Canon standardized machines and components
– Xerox leased machines; Canon sold machines
Explain “collaboration” as a strategic intent to achieve competitive advantage
- Use the know‐how developed by other companies
- Licensing agreements, joint ventures, or partnerships
Explain “building layers of advantage” as a strategic intent to achieve competitive advantage
- A company faces less risk if it has a wide portfolio of advantages
- Successful companies build portfolios by establishing layers of advantage on top of one another
- Illustrates how a company can move along the value chain to strengthen competitive advantage
When does Global Competition and National Competitive Advantage occur and what are pro and con effects
- Global competition occurs when a firm takes a global view of competition and sets about maximizing profits worldwide
- The effect is beneficial to consumers because prices generally fall as a result of global competition
- While creating value for consumers, it can destroy the potential for jobs and profits
