Assignment 20
Competitive Advantage
Perspectives of Michael Porter
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How a firm can actually create and sustain a competitive advantage in its industry
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Two Basic Types
- Cost leadership
- Differentiation
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Value Chain
- Identify which activities contributing to cost leadership and differentiation
- Analyze the source of competitive advantage
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Value Chain
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Inbound Logistics�
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Service�
Marketing and Sales�
Outbound Logistics�
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Margin�
Operations�
Procurement�
Supporting Activities�
Firm Infrastructure�
Human Resource Management�
Technology Development�
Primary Activities�
Primary Activities
- Inbound Logistics
Receiving, storing, and disseminating inputs. E.g., warehousing, inventory control
- Operations
Transforming inputs into the final product form
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Primary Activities
- Outbound Logistics
Collecting, storing and distributing the product to buyers
- Marketing and Sales
Providing a means and incentive which allow buyers to purchase the product
- Service
Providing service to enhance or maintain the value of the product
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Primary Activity Focus by Industry
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| Industry | Inbound Logistics | Operations | Outbound Logistics | Marketing & Sales | Service |
| Distributor | X | X | |||
| Restaurant | X | NA | |||
| Corporate Lending | X | ||||
| Xerox | X |
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Support Activities
- Procurement
Function of purchasing inputs used in the value chain
- Technology Development
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Support Activities
- Human Resource Management
- Firm Infrastructure
planning, finance, accounting, legal, etc.
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Competitive Scope
- Four scopes may affect value chain
- Ex. The value chain serves minicomputer requires extensive sales assistance, less hardware performance – different from what serves small business
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Competitive Scope
- Segment Scope
Differences required to serve different product or buyer segment
- Vertical Scope
Division of activities between a firm and its suppliers, channels, and buyers
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Competitive Scope
- Geographic Scope
Different geographic areas
- Industry Scope
Interrelationships among business units
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“Generic” Competitive Advantage
- Cost Leadership
- Differentiation
- Focus
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Competitive Strategies
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| Competitive Advantage | |||
| Lower Cost | Differentiation | ||
| Competitive Scope | Broad Target | Cost Leadership | Differentiation |
| Narrow Target | Cost Focus | Differentiation Focus |
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Cost Leadership Strategy
Steps to achieve cost leadership
- Make cost assignment
- Identify cost drivers
- Understand cost dynamics
- Control cost drivers
- Reconfigure the value chain
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Operating Cost Assignment
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Purchased Operating Inputs�
Firm Infrastructure (9%)�
Operations (67%)�
Inbound Logistics (3%)�
(27%)�
(40%)�
Procurement (1%)�
Human Resources Management (2%)�
Technology Development(9%)�
Marketing & Sales (6%)�
Outbound Logistics (1%)�
Margin (5%)�
Service (1%)�
Human Resource Costs�
Asset Assignment
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Firm Infrastructure (16%)�
Operations (67%)�
Inbound Logistics�
(38%)�
(8%)�
Procurement (2%)�
Human Resources Management (1%)�
Technology Development(2%)�
Marketing & Sales (1%)�
Outbound Logistics (1%)�
Service (2%)�
(15%)�
(6%)�
Liquid Assets�
Fixed Assets�
(5%)�
(2%)�
Why cost assignment
- Understand the firm’s cost structure
- Find cost drivers of each cost segment
- Match cost structure to buyer’s value chain
- Configure and reconfigure the cost structure
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Cost Leadership – Cost Drivers
Factors affect costs.
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Cost Leadership – Cost Drivers
- Economies or diseconomies of scale
- Learning and spillover
- Pattern of capacity utilization
- When fixed cost high, capacity utilization is important
- Linkages
How other activities are performed
- Linkages within the Value Chain
- Vertical Linkages
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Cost Leadership – Cost Drivers
- Interrelationships
With other business units within a firm
- Integration
Vertical integration in a value activity
- Timing
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Cost Leadership – Cost Drivers
- Discretionary policies
Policies that reflect a firm’s strategy
- Location
- Institutional factors
e.g., government regulations, financial incentives, unionization, etc.
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Identify Cost Drivers
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Cost Dynamics
- What cause the change of cost drivers
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Cost Dynamics
- Industry real growth
- Differential scale sensitivity
- Different learning rates
- Differential technological change
- Relative inflation of costs
- Aging
- Market adjustment
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How to Achieve Cost Advantage
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composition of a firm�s value chain versus competitors��
Cost Advantage�
a firm�s relative position vis-�-vis the cost drivers of each activity�
Reconfigure the value chain�
Control cost drivers�
achieve�
Cost Position�
Analyze Cost Advantage
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Your cost Advantage�
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Margin�
Operations�
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Firm Infrastructure�
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Human Resource Management�
Technology Development�
Procurement�
Inbound Logistics�
Outbound Logistics�
Marketing and Sales�
Service�
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Control Cost Drivers
- E.g., control scale – gain the appropriate firm size
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Reconfigure the Value Chain
- Reconfiguration of the value chain presents the opportunity to fundamentally restructure a firm’s cost, compared to settling for incremental improvements.
- By altering the basis of competition in a way that favors a firm’s strengths, it may change the important cost drivers in a way that favors a firm.
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Steps in Strategic Cost Analysis
Identify the appropriate value chain and assign costs and assets to it.
Diagnose the cost drivers of each value activity and how they interact.
Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences.
Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain and/or downstream value.
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Cost Focus
A firm dedicates its efforts to a well-chosen segment of an industry can often lower its costs significantly.
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Differentiation
- Emphasize on a unique source of differentiation in the Value Chain, rather than on products or markets only
- Differentiation base on buyers’ value, not only difference that buyers do not value
- Should consider the cost of differentiation
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Uniqueness�
Buyers� Value�
Differentiation�
Identify Sources of Differentiation
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Margin�
Your strength which can lead to differentiation and then improve buyers� value�
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Drivers of Uniqueness
- Policy Choices
- Linkages
- Linkages within the value chain
- Supplier linkages
- Channel linkages
- Timing
Be the first
- Location
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Drivers of Uniqueness
- Interrelationship
Sharing a value activity with sister business units. E.g., sharing a sales force for both insurance and other financial products
- Proprietary learning
- Integration – e.g., integrating online systems to current ordering systems
- Scale
- Institutional factors – e.g., “Madame’s route”
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Why buyers purchase?
Purchasing Criteria
- User criteria – firms to meet them by lowering cost or raising buyer performance
- Signaling criteria – telling buyers what benefits to get
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Differentiation for creating Buyer Value by
- Lowering buyer cost
- Raising buyer performance
- Signaling the value
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- Linking the firm’s value chain to the buyer’s value chain
Through
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Steps in Differentiation
Determine who the real buyer is
Identify the buyer’s value chain and the firm’s impact on it
Determine ranked buyer purchasing criteria
Assess the existing and potential sources of uniqueness in a firm’s value chain
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Steps in Differentiation
Identify the cost of existing and potential sources of differentiation
Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating
Test the chosen differentiation strategy for sustainability
Reduce cost in activities that do not affect the chosen forms of differentiation
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Discussion:
Red Ocean to Blue Ocean
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Porter�s Strategy�
BOS�
BPR�
Porter�s Strategy�
BOS�
Other Discussion
- Creative Industries
- Supply Chain Management
- What is “Buyer’s Value Chain”?
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Primary
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Purchased Operating Inputs
Human Resource Costs
Firm Infrastructure (16%)
Operations (67%)
Inbound Logistics
(38%)
(8%)
Procurement (2%)
Human Resources
Management (1%)
Technology Development(2%)
Marketing & Sales (1%)
Outbound
Logistics (1%)
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(15%)
Liquid Assets
Fixed Assets
(5%)
(6%)
(2%)
Cost Position
composition of a
firm’s value
chain versus
competitors’
Cost Advantage
a firm’s relative
position vis-à-vis
the cost drivers
of each activity
Reconfigure the
value chain
Control cost
drivers
achieve
Your cost
Advantage
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UniquenessBuyers’ ValueDifferentiation
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Your strength which can
lead to differentiation and
then improve buyers’ value
Porter’s
Strategy
BOSBPR
Porter’s
Strategy
BOS