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
Name and explain 5 factor conditions (Porters Diamond Model)
Human Resources
– the quantity of workers available, skills possessed by those workers, wage levels, and work ethic
Physical Resources
– the availability, quantity, quality, and cost of land, water, minerals, and other natural resources
Knowledge Resources
– the availability within a nation of a significant population having scientific, technical, and market‐related knowledge
Capital Resources
– the availability, amount, cost, and types of capital available; also includes savings rate, interest rates, tax laws, and government deficit
Infrastructure Resources
– this includes a nation’s banking, healthcare, transportation, and communication systems
Name and explain 4 demand conditions (Diamond Model)
Composition of Home Demand
–determines how firms perceive, interpret, and respond to buyer needs
Size and Pattern of Growth of Home Demand – large home markets offer opportunities to achieve economies of scale and learning in familiar, comfortable markets
Rapid Home Market Growth
– another incentive to invest in and adopt new technologies faster and build large, efficient facilities
Products being pushed or pulled
– do a nation’s people and businesses go abroad and then demand the nation’s products and services in those second countries?
Explain related and supporting industries (Diamond Model)
- The advantage that a nation gains by being home to internationally competitive industries in fields that are related to, or in direct support of, other industries
- Contact and coordination with suppliers that optimize the value chain
Example: Non‐U.S. sales of PCs from H‐P, Lenovo, Dell, Acer have bolstered demand for software from Microsoft
Explain domestic rivalry as a type of “Firm Strategy, Structure and Rivalry” (Diamond Model)
DOMESTIC RIVALRY in a single national market is a powerful influence on competitive advantage
– The absence of significant domestic rivalry can lead to complacency (Selbstgefälligkeit) in the home firms and eventually cause them to become noncompetitive in the world markets
– Differences in management styles, organizational skills, and strategic perspectives also create advantages and disadvantages for firms competing in different types of industries
Explain chance as a type of “Firm Strategy, Structure and Rivalry” (Diamond Model)
CHANCE events are occurrences that are beyond control of firms, industries & usually governments; they create major discontinuities
– War
– Exchange rate swings
– Price fluctuation of inputs, like oil
Explain government as a type of “Firm Strategy, Structure and Rivalry” (Diamond Model)
GOVERNMENT is also an influence on determinants by virtue of its roles as a consumer, policy maker, and commerce regulator
What are current issues in competitive advantage?
Today’s business environment, market stability is undermined by:
– Short product life cycles
– Short product design cycles
– New technologies
– Globalization
-> Result is an escalation and acceleration of competitive forces
- In today’s world, in order to achieve a sustainable advantage, companies must seek a series of unsustainable advantages
- The role of marketing is innovation and the creation of new markets
- Innovation begins with abandonment (Verzicht) of the old and obsolete
Define and compare hypercompetition and competition in contect of current issues in competitive advantage
HYPERCOMPETITION is a term used to describe a dynamic competitive world in which no action or advantage can be sustained for long
COMPETITION unfolds in a series of dynamic strategic interactions in four areas: cost quality, timing and know‐how, and barriers to entry
Describe how competition in cost/quality occurs
Cost/Quality occurs via 7 dynamic strategic interactions:
– price wars
– quality & price positioning
– “the middle path”
– “cover all niches”
– outflanking & niching
– the move toward ultimate value marketplace
– escaping the ultimate value marketplace by restarting the cycle
Describe timing & Know How in context of competition
- Second arena for hypercompetition
- Firms with first‐mover skills has achieved a timing advantage
- Technology knowledge achieves a know‐how advantage
Descirbe Entry Barriers in context of competition
The third arena for hypercompetition is high barriers to entry
– Build a geographic stronghold
– Target the stronghold of competitors in other countries
– Incumbents (Amtsinhaber) make short‐term counter‐responses to guerilla attacks
– The Incumbent responds to the invader (“EIndringling”) by creating new hurdles
The flagship firm - A collection of 5 partners:
- Key suppliers do some tasks better than the flagship (eg. manufacturing)
- Key customers (e.g. car dealers)
- Key consumers (e.g. car buyers)
- Selected competitors like Global Strategic Partnership
- Non-business infrastructure: universities, governments, trade unions that supply intabgibles like technology and intellectual property
Describe the Blue Ocean Strategy
Two categories of competitive spaces:
1. Red Oceans
- are existing markes where the players understand the rules
2. Blue Oceans are markets or indurstries that do no currently exist
Better to avoid the red ocean of cost cutting and imitation and create new space without hybercompetitive forces (e.g. eBay, Wii)
