7031SR- GROUP- 1
MN7031 Topic 3 – How Does A Company Create Competitive Advantage?
londonmet.ac.uk
Daniel Jones
Module Overview
Business Simulation – Cesim Global Challenge
1. How and Why Do Businesses Grow?
2. How Do We Diagnose Company Strategy?
5. How Do We Make Sense of the VUCA External Environment?
8. Does Your Simulation Company Need A New Strategy?
10. Why DO Firms Undertale Acquisitions, Mergers and Alliances?
7. How Is Your Simulation Company Performing?
11. How Do Companies Innovate Successfully?
12. Does Strategic Alignment Matter?
4. Why Are Some Industries More Profitable Than Others?
3. How Does A Company Create Competitive Advantage?
6. How Do We Identify future opportunities and threats?
9. Summative Assessment Presentations
Today’s Agenda
Lecture
Sources of competitive advantage
Positioning – Porter’s Generic Strategies
Low cost and differentiation
Efficiency and economies of scale
Learning effects
Strategy creation
Mature industries
Declining Industries
Blue Ocean Theory
First mover advantages
Simulation
Round 1
Strategy in Firms
1st Goal of a firm: survive
Rate of return above the cost of capital
How do we make money?
Industry Attractiveness
Where do we compete?
Competitive Advantage
How do we compete?
Corporate Strategy
Scope of business
Big choices; sustainability, structure etc
(Top management)
Business Strategy
Markets, segments, (Divisional
management)
Resources, Capabilities and Competencies and the Link to Competitive Advantage
Hill et al, 2015
Able to do things
Able to do things successfully or efficiently
Distinctive Competencies
Competitive advantage is based upon distinctive competencies. Distinctive competencies are firm-specific strengths that allow a company to differentiate its products from those offered by rivals, and/or achieve substantially lower costs than its rivals.
Resources
A company’s resources can be divided into two types:.
Tangible resources are physical entities, such as land, buildings, manufacturing plants, equipment, inventory, and money.
Intangible resources are nonphysical entities that are created by managers and other employees, such as brand names, the reputation of the company, the knowledge that employees have gained through experience. We could also include the intellectual property of the company, including patents, copyrights, and trademarks.
Valuable resources are more likely to lead to a sustainable competitive advantage if they are rare, in the sense that competitors do not possess them, and difficult for rivals to imitate; that is, if there are barriers to imitation.
Capabilities
Capabilities refer to a company’s resource-coordinating skills and productive use.
These skills reside in an organisation’s rules, routines, and procedures.
More generally, a company’s capabilities are the product of its organisational structure, processes, control systems, and hiring strategy. They specify how and where decisions are made within a company, the kind of behaviours the company rewards, and the company’s cultural norms and values.
Resources, Capabilities, and Competencies
The distinction between resources and capabilities is critical to understanding what generates a distinctive competency.
A company may have firm-specific and valuable resources, but unless it also has the capability to use those resources effectively, it may not be able to create a distinctive competency. Additionally, it is important to recognize that a company may not need firm-specific and valuable resources to establish a distinctive competency so long as it has capabilities that no other competitor possesses.
In sum, for a company to possess a distinctive competency, it must—at a minimum— have either:
(1) a firm-specific and valuable resource, and the capabilities (skills) necessary to take advantage of that resource, or
(2) a firm-specific capability to manage resources (as exemplified by Nucor).
Distinctive competencies shape the strategies that the company pursues, which lead to competitive advantage and superior profitability. However, it is also very important to realise that the strategies a company adopts can build new resources and capabilities or strengthen the existing resources and capabilities of the company, thereby enhancing the distinctive competencies of the enterprise.
I worked for 10 years for Capgemini, a firm that had a wide range of technology capabilities that enabled it to provide the design and build large and complex IT systems successfully. These capabilities, combined with the intangible resources of the firm, gave Capgemini a distinctive competence in Systems Integration. At the time. however. Capgemini lacked the ability to win large IT service contracts and was losing market share in services to EDS.
I moved to EDS to understand the companies deal making Competence, which was very strong, but embedded in a relatively small number of people. Unfortunately the EDS delivery capability, particularly System Integration, was far less strong than Capgemini.
Ultimately Capgemini acquired the deal making competence mainly through selective recruitment of key people, but EDS failed to with a number of over-ambitious projects because it lacked the necessary capabilities and some key resources; for example the right project management culture, to create the necessary delivery competence.
Sources of Competitive Advantage
Hill et al, 2015
What Is Quality and How Does A Firm Deliver It Consistently?
Strong governance to define the organisation's aims and translate them into action
robust systems of assurance to make sure things stay on track
a culture of improvement to keep getting better.
Fit for purpose
Intangibles
Four factors help a company to build and sustain competitive advantage:
superior efficiency
quality
innovation
and customer responsiveness
I am going to focus on quality and innovation.
Firstly quality – a simple way to understand quality if “fitness for purpose”. Does the product have the necessary attributes to satisfy my needs?
When customers evaluate the quality of a product, they commonly measure it against two kinds of attributes: those related to quality as excellence and those related to quality as reliability.
From a quality-as-excellence perspective, the important attributes are things such as a product’s design and styling, its aesthetic appeal, its features and functions. This is an are that Apple particularly understand.
With regard to quality as reliability, a product can be said to be reliable when it consistently performs the function it was designed for, performs it well, and rarely, if ever, breaks down. Apple in recent years have been less successful in this respect, as have a number of highly respected firms – Boeing, Toyota and Samsung currently to name but a few.
When products are reliable, less employee time is wasted making defective products, or providing substandard services, and less time has to be spent fixing mistakes—which means higher employee productivity and lower unit costs. Thus, high product quality not only enables a company to differentiate its product from that of rivals, but, if the product is reliable, it also lowers costs.
Innovation refers to the act of creating new products or processes. There are two main types of innovation: product innovation and process innovation.
Product innovation is the development of products that are new to the world or have superior attributes to existing products.
Process innovation is the development of a new process for producing products and delivering them to customers.
Innovation is linked very much to culture. In an organisation where there is a strong desire for centralised control, innovation will be less likely to occur. There is a tension then between control and creativity.
Components of A Business Model
Determining Competitive Scope
Positioning A Business
Where and How to compete?
Bases of competitive advantage:
Price, Features, Bundling
Efficiency
Quality
Innovation
Customer responsiveness
Availability
Image and relations
Porter’s three generic competitive advantages:
operational excellence
product leadership
customer intimacy
Stuck in
the Middle
Low Cost Airlines
“What is the key indicator of an airline's cost efficiency?”
cost per available seat kilometer is the main cost indicator, i.e. the cost of flying one passenger, one kilometer.
Business Model Canvas – Low Cost Airline
Key Partners
Terminal Operators
Aircraft Maintenance
Catering
Aircraft suppliers
Air traffic control
Government
Key Activities
Marketing
Scheduling
Aircraft turnaround
Staff training and motivation
Key Resources
Staff – non-unionised, flexible
Terminal slots
Aircraft
Reputation
Value Propositions
Low seat price
Every thing else is an extra
High seat density
Transparent pricing
Friendly staff
Reliable
Safe
Cost Structure
Low fixed cost
Outsource for scale economies
Low margins – utilisation is key
Above average staff rewards
Revenue Streams
Ticket sales
Seat reservation
Baggage
In-flight Sales – food, drink, duty free, entertainment
Customer Segments
Price sensitive
Business travellers
Families
Young Independent Travellers
Channels
Online only
Customer Relationships
Online
Inflight – cabin crew
Terminal Staff
Are there Really Only 3 Business Level Strategies?
Strategies of Differentiation
Price Differentiation – charge a lower or higher price
Image Differentiation – marketing is sometimes used to feign differentiation where it does not otherwise exist
Support differentiation – during selling e.g. fast delivery, after-sales service, or providing a related or complementary product or services
Quality Differentiation – make it better
Design Differentiation – offer something truly different
Undifferentiation Strategy – the copycat approach
Scope Strategies
Unsegmented – one size fits all
Segmentation – comprehensive or selected segments
Niche – focus on a single segment
Customising – each customer represents a unique segment
Lampel J, Mintzberg H, Quinn J, and Ghoshal S. (2014). The strategy process. 5th ed. Harlow: Pearson.
Low Cost Versus Differentiated Companies
Low-cost companies
Charge low prices and still make profits
Absorb cost increases from suppliers
Offer deep discount prices for buyers
Differentiated companies
Withstand pricing pressure from powerful buyers and increase prices without buyer resistance
Absorb price increases from suppliers and pass them to customers without losing market share
Withstand substitute goods, as a result of brand loyalty
Comparison of Market Segmentation Approaches
Standardisation Strategy
Associated with lower costs than a segmented strategy
Segmentation
Strategy
Involves customisation of product offerings, which drive up costs as:
Focus
Strategy
Attempts to attain economies of scale through high sales volume
Achieving economies of scale is difficult
Production and delivery costs tend to be high
Have a higher cost structure as:
New product features and functions need to be added
Attaining economies of scale is difficult
Lowering Costs Through Functional Strategy and Organisation
Achieve economies of scale and learning effects
Adopt lean production and flexible manufacturing technologies
Implement quality improvement methodologies to produce reliable goods
Streamline processes
Use information systems to automate business process
Differentiation Through Functional-Level Strategy and Organisation
Customise product offering and marketing mix to different market segments
Design product offerings that have a high perceived quality regarding their:
Functions
Features
Performance
Reliability
Handle and respond to customer queries and problems promptly
Efficiency and Economies of Scale
Efficiency and Economies of scale
Efficiency - Measured by the quantity of inputs that it takes to produce a given output
Economies of scale: Reductions in unit costs attributed to a larger output
Ability to spread fixed costs over a large production volume and produce in large volumes
To achieve greater division of labor and specialization
Diseconomies of scale: Unit cost increases associated with a large scale of output
Learning Effects
Cost savings that come from learning by doing
More significant when a technologically complex task is repeated, as there is more to learn
Diminish in importance after a period of time
Triggered by changes in a company’s production system
Simulation
Developing and launching new products or features
Manufacturing a new phone
Commissioning new plants
Experience Curve
Systematic lowering of the cost structure, and consequent unit cost reductions - occur over the life of a product
A product’s per-unit production costs decline each time its accumulated output doubles - accumulated output - Total output of a product since its introduction
Useful in industries that mass-produce a standardised output
Hill et al, 2015
The Origins of the BCG Matrix
Examples of Price Declines
The BCG Matrix – Market Share Leadership = Profit Leadership?
Flexible Production Technology
Reduces setup times for complex equipment
Increases the use of individual machines through better scheduling
Improves quality control at all stages of the manufacturing process
Increases efficiency and lower unit costs
Enables better customisation of product offerings
Tradeoff Between Costs and Product Variety
Hill et al, 2015
3D Printing – Additive Manufacturing
Adidas Printed Trainers
Aerospace Components
Strategy Creation
Two Perspectives On Shaping The Business Model
The Outside-in Perspective
Firms should take their environment as the starting point when determining their strategy – externally oriented and market-driven
Strategy begins with an analysis of the environment to identify market opportunities
Insights into markets and industries is essential
Firms that are market-driven are often the first
to realise that new resources and/or activities need to be developed - ‘first mover advantage’
We take portable music for granted these days. Any commuter in any big city in the world is more likely than not to have a pair of earbuds or headphones on as they walk, bike, or ride to their destination. The thing is, personal portable music didn't exist for most of human history, at least not in any mainstream fashion. Not until the Sony Walkman came along.
The first of Sony's iconic portable cassette tape players went on sale on this day, July 1st, back in 1979 for $150. As the story goes, Sony co-founder Masaru Ibuka got the wheels turning months before when he asked for a way to listen to opera that was more portable than Sony's existing TC-D5 cassette players. The charge fell to Sony designer Norio Ohga, who built a prototype out of Sony's Pressman cassette recorder in time for Ibuka's next flight.
After a disappointing first month of sales, the Walkman went on to become one of Sony's most successful brands of all time, transitioning formats over the years into CD, Mini-Disc, MP3 and finally, streaming music. Over 400 million Walkman portable music players have been sold, 200 million of them cassette players. Sony retired the classic cassette tape Walkman line in 2010, and was forced to pay a huge settlement to the original inventor of the portable cassette player, Andreas Pavel. But the name lives on today in the form of new MP3 players and Sony's Walkman app. They heyday of the Walkman may be over, with kids today baffled and disgusted by the relative clumsiness of cassettes. But the habit it spawned — listening to music wherever and whenever you want — is bigger than ever.
http://www.theverge.com/2014/7/1/5861062/sony-walkman-at-35
The Inside-Out Perspective
Strategy should be built around a company’s strengths
Successful companies build up a strong resource base which offers them access to unfolding market opportunities in the medium and short term
The starting point is which resource base it wants to have
Importance of a firm’s competences over its physical assets
But – companies with competence specialisation may be locked in by past choices and cannot adapt to a changing market
Fragmented Industry
Composed of a large number of small- and medium-sized companies
Reasons for fragmentation
Lack of scale economies
Brand loyalty in the industry is primarily local
Low entry barriers due to lack of scale economies and national brand loyalty
Focus strategy works best for a fragmented industry
Can competitive advantage in the industry be created by consolidation e.g. by chaining and franchising?
Stages in the Industry Life Cycle
Hill, C., Jones, G. & Schilling, M. (2015) Strategic Management; Theory & Cases: an integrated approach, 11e, Stamford, Cengage
Embryonic Industries
An embryonic industry refers to an industry just beginning to develop (for example, personal computers and biotechnology in the 1970s, wireless communications in the 1980s, Internet retailing in the late 1990s, and AI today).
Growth at this stage is slow because of factors such as buyers’ unfamiliarity with the industry’s product, high prices due to the inability of companies to reap any significant scale economies, and poorly developed distribution channels.
Rivalry in embryonic industries is based not so much on price as on educating customers, opening up distribution channels, and perfecting the design of the product.
Growth Industries
Once demand for the industry’s product begins to increase, the industry develops the characteristics of a growth industry. In a growth industry, first-time demand is expanding rapidly as many new customers enter the market. We can see this happening today in the taxi ride platform industry, with now numerous companies seeking to grow their marker share – Uber, Gett, Juno, Kabbee, Hailo etc
Industry Shakeout
Explosive growth cannot be maintained indefinitely. Sooner or later, the rate of growth slows, and the industry enters the shakeout stage. In the shakeout stage, demand approaches saturation levels: more and more of the demand is limited to replacement because fewer potential first-time buyers remain.
Expect this soon in taxi app platforms!
Mature Industries
The shakeout stage ends when the industry enters its mature stage: the market is totally saturated, demand is limited to replacement demand, and growth is low or zero. Typically, the growth that remains comes from population expansion, bringing new customers into the market, or increasing replacement demand.
As a result of the shakeout, most industries in the maturity stage have consolidated and become oligopolies.
Declining Industries
Eventually, most industries enter a stage of decline: growth becomes negative for a va- riety of reasons, including technological substitution (for example, air travel instead of rail travel), social changes (greater health consciousness impacting tobacco sales), demographics (the declining birth rate damaging the market for baby and child products), and international competition (low-cost foreign competition helped pushed the U.S. steel industry into decline).
It is important to remember that the industry life-cycle model is a generalization and that the time span of these stages can also vary significantly from industry to industry.
A criticism of industry models is that they overemphasize the importance of industry structure as a determinant of company performance, and underemphasize the importance of variations or differences among companies within an industry or a strategic group.
Research by Richard Rumelt and his associates, for example, suggests that industry structure explains only about 10% of the variance in profit rates across companies.
Strategies to Deter Entry In Mature Industries
Product proliferation strategy - Catering to the needs of all market segments to deter entry by competitors
Limit price strategy - Charging a price that is
lower than that required to maximise profits in the short run
above the cost structure of potential entrants
Strategic commitments - Investments that signal an incumbent’s long-term commitment to a market or a segment of the market
Strategies to Manage Rivalry
Price signaling - Companies increase or decrease product prices to:
Convey their intentions to other companies
Influence the price of an industry’s products
Price leadership - When one company assumes the responsibility for determining the pricing strategy that maximises industry profitability
Non-price competition - Use of product differentiation strategies to deter potential entrants and manage rivalry within an industry
Market penetration - a company concentrates on expanding market share in its existing product markets
Product development - Creation of new or improved products to replace existing products
Market development - When a company searches for new market segments to increase the sale of its existing products
Product proliferation - Large companies in an industry have a product in each market segment
Capacity Control
Companies devise strategies to control or benefit from capacity expansion programs
Factors causing excess capacity
New technologies that produce more than the old ones
New entrants in an industry
Economic recession that causes global overcapacity
High growth of demand in an industry that triggers rapid expansion
Strategy Selection in a Declining Industry
Hill et al, 2015
Cheque Processing
Camera Film
Blue Ocean Strategy
Companies can build competitive advantage by redefining their product offering through value innovation - creating a new market space
Blue Ocean - Wide open market space where a company can chart its own course
Red Ocean – fiercely competitive
W. Chan, K, & Mauborgne, R 2005, 'Blue Ocean Strategy: FROM THEORY TO PRACTICE', California Management Review, 47, 3, pp. 105-121, Business Source Complete, EBSCOhost, viewed 10 August 2016.
A New Value Proposition
Reduce
Create
Raise
Eliminate
References
De Wit, B. (2017). Strategy An International Perspective. 6th ed. Andover: Cengage
Grant, R.M. 2012. Contemporary strategy analysis : text and cases 8th ed. New York: John Wiley and Sons Ltd.
Hill, C., Jones, G. & Schilling, M. (2015) Strategic Management; Theory & Cases: an integrated approach, 11e, Stamford, Cengage
Porter, M.E., 2008. The Five Competitive Forces That Shape Strategy. Harvard Business Review 86, 78–93.
Reeves,M, Moose,S and Venema,V. (2014). BCG Classics Revisited: The Growth Share Matrix. Available: https://www.bcg.com/publications/2014/growth-share-matrix-bcg-classics-revisited.aspx. Last accessed 26th November 2019.