Chapter 5: Competitive advantages and strategies Flashcards
CONCEPT OF COMPETITIVE ADVANTAGE AND STRATEGY: Competitive advantage:
any aspect of the firm that distinguishes it from others and places it in a relatively better position for competing.
CA depends on luck or good fortune too.
3 requirements to fulfil to get a Competitive Advantage:
- CA must be related to a key factor of success in the market
- CA must be substantial to make a difference
- CA must be sustainable
CONCEPT OF COMPETITIVE ADVANTAGE AND STRATEGY:Competitive strategy
manner in which a firm faces its competitors in order to outperform them. Involves the actions a firm undertakes in order to gain a CA.
2 basic Competitive Advantage: (PORTER)
- Cost leadership
- Differentiation
PORTER: “stuck in the middle”= not having either of the 2 basic CA. DAY explains this phenomenon:
- Differentiation generally means higher cost so that you get that special different characteristic. And vice-versa: lower cost means less differentiation.
- Gaining CA means getting more resources/capabilities, making it difficult to achieve both at once.
- Neither cheap, neither good à either compete on cost or value. Otherwise disappear.
- Example of products that are “stuck in the middle”: IBM computers. What happens? The company then disappears.
- Example: happening to airlines.
CREATING AND SUSTAINING A COMPETITIVE ADVANTAGE: CA can be external and internal to a firm
- External aspects: if the markets were to involve perfect competition*, there would be no platform for creating a CA. Include: ability to detect change, responding quickly and flexibly, better exploitation of opportunities.
- Internal aspects:include: efficiency, quality, innovation, capacity for customer satisfaction.
Perfect competition
product homogeneity, equal pricing, complete information on all agents, absence of entry barriers
Firm needs a response capability
needs to know how to detect changes.
According to HILL & JONES, sustaining a CA depends on 3 factors:
- Barriers to imitation= obstacles that stop other competitors from reproducing the CA.
They act as a protection and defence to the CA.
RUMELT: “isolating mechanisms”= .
Include: causal ambiguity, knowledge, experience, assets, culture…
- Competitor capabilities= ability competitor has to imitate CA.
Identification, incentives/disincentives, diagnosis, acquisition of resources.
- Industry dynamism= dynamic environments, reinforce advantage, seek new advantage.
COST LEADERSHIP ADVANTAGE
Cost leadership exists when: firm’s costs are lower than its competitors’ for a product or service of similar comparable quality.
SOURCES OF COST ADVANTAGE
CA comes from experience effect.
Experience effect comes from learning effect.
Learning effect= time taken to produce one unit of product. The more units made, the less time is used up, lowering costs.
Experience effect= generalisation of learning effect. Applies to all activities where costs can be lowered.
True overall cost of a product diminishes as accumulated output increases.
- Thanks to learning effect
- Improvements to process
- Redesign of product
Other sources of cost advantage/reducing costs: (GRANT)
-
Economies of scale
- Input-output relationship
- High market share
- Specialisation
- Learning economies= related to experience effect: implementation of organisational routines in firm and improvements to staff skills.
- New process technology or product redesign: simplifies production.
- Conditions for accessing raw materials
- Firm’s location
- High bargaining power with suppliers
- Partner relationships with customers or suppliers
- Cost controls
- Rapid adjustment of production capacity
- Organizational slack or X-inefficiency
BARRIERS TO IMITATION AND CONDITIONS OF APPLICATION
Barriers may arise from:
- Scarcity of difficulty access to certain cost factors (location, distribution networks, suppliers…)
- Impossibility of imitation: due to complex decision processes
Conditions of application to cost leadership strategy: when nothing else can be done to differentiate product from competitors’, then prices must be brought down. So cost leadership strategy is appropriate response to this.
RISKS OF THE COST ADVANTAGE
- Constant monitoring of costs à because of waste of time?
- Excessive use of the experience effect à can lead to over standardised products, failure to detect changes, difficulty in accepting innovation, etc.
- Appearance of substitute products
- Imitation by competitors
- Inflation of costs à example of oil price going up because of its scarcity
- Segments à competitors may be focused in certain segments making their costs even lower
EXTENDING PORTER’S COMPETITIVE STRATEGIES: THE STRATEGY CLOCK
Johnson proposes extended version of Porter: Strategy Clock:
Depends on 2 criteria:
- Price
- Value
: “no frills”
2: low prices
3: hybrid: quality price ratio: good relationship between the quality offered and the price paid
4: differentiation
5: segmented/focused differentiation
6: risky high margins: can be sustained only if firm has a monopoly
7: monopoly pricing: can be sustained only if firm has a monopoly
8: loss of market share
