7Communication, Negotiation, and Decision-Making

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CONTEMPORARY STRATEGY ANALYSIS

tenth edition

Robert M. Grant

John Wiley & Sons Ltd., 2019

Chapter 7

The Nature and Sources of

Competitive Advantage

How is competitive advantage established?
How s competitive advantage sustained?
Cost analysis
Differentiation analysis
Combining cost and differentiation strategies

The Nature and Sources of Competitive Advantage

OUTLINE

How does competitive

advantage emerge?

External sources of

change e.g.:

Changing customer demand
Changing prices
Technological change

Internal sources

of change

Resource heterogeneity

among firms means

differential impact

Some firms faster

and more effective

in exploiting change

Some firms

have greater creative

and innovative

capability

The Emergence of Competitive Advantage

HOW IS COMPETITIVE ADVANTAGE ESTABLISHED?

Innovatory strategies may involve:

Creating whole new markets/industries (e.g. Craig McCaw and wireless telephony services; My Space and Facebook in social networking)
Creating new customer segments (e.g. AirAsia in low-cost air travel in SE Asia; Nintendo’s Wii games console;)
New sources of competitive advantage
Reconfiguring the value chain: Zara in fashion clothing; Southwest in airlines; Cemex in cement; IKEA in furniture
Reconceptualizing the product: Cirque du Soleil in circuses; Starbucks in coffee shops; Apple in computers (iPad)
New performance combinations : e.g. Low prices with quality (Virgin Atlantic); low prices and style (H&M, Primark, Target)

STRATEGIC INNOVATION: creating customer value from new products, experiences, or modes of product delivery

Competitive Advantage from Internally-Generated Change: Strategic Innovation

HOW IS COMPETITIVE ADVANTAGE ESTABLISHED?

Historical Origins of Business Model Innovations

HOW IS COMPETITIVE ADVANTAGE ESTABLISHED?

Business model innovation	Origin
Free content supported by paid advertising	US commercial radio, early 1920s
Platform business models	The first platform businesses were auction houses: Sotheby’s, 1744; Christies, 1766.
Shared-ownership models	Began with real estate timeshares during 1960s. Currently: Airbnb, Zipcar, Netjets
Franchising	Singer Sewing Machine Company created global network of franchised dealers in 1880s
Consumer cooperatives	The Rochdale Society of Equitable Pioneers, 1844
Microfinance	Muhammad Yunus’s Grameen Bank, 1970s
Tied products (razor-and-blades) model	Introduced by Gillette’s competitors in 1910
Mail order	Montgomery Ward, 1872

Blue Oceans are uncontested market spaces such as: new customer segments for or reconceptualizations of existing products, or novel recombinations of product attributes.

The Strategy Canvas can help identify blue ocean strategies by exploring new combinations of product attributes. E.g. Cirque du Soleil.

Price

Low

High

Performing animals

Humor

Acrobatics

Thrills/danger

Dance

Costumes

Music

Visual experience

Comfort

Attractive venue

Appeal to children

Appeal to adults

Cirque du Soleil

Traditional circus

Blue Ocean Strategy

HOW IS COMPETITIVE ADVANTAGE ESTABLISHED?

Resource acquisition

Isolating Mechanism

Obscure superior performance

Deterrence: signal aggressive intentions to imitators
Pre-emption: exploit all available investments opportunities

Rely upon multiple sources of competitive advantages to create “causal ambiguity”

Base competitive advantage upon resources and capabilities that are immobile and difficult to replicate

Sustaining Competitive Advantage Against Imitation

Requirement for Imitation

Identification

Incentives for imitation

Diagnosis

HOW IS COMPETITIVE ADVANTAGE SUSTAINED?

Competitive Advantage in Different Industry Settings:
Trading Markets and Production Markets

HOW IS COMPETITIVE ADVANTAGE SUSTAINED?

Source of imperfection of competition	Opportunity for competitive advantage
TRADING MARKETS	None (efficient markets) Imperfect information Transactions costs Systematic behavioral trends Overshooting	None Insider trading Cost minimization Superior diagnosis (e.g. chart analysis) Contrarianism
PRODUCTION MARKETS	Barriers to imitation Barriers to innovation	Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, etc.) and base strategy upon them. Difficult to influence or exploit.

COST

ADVANTAGE

DIFFERENTIATION

ADVANTAGE

COMPETITIVE

ADVANTAGE

Similar product

at lower cost

Price premium

from unique product

Sources of Competitive Advantage

TYPES OF COMPETITIVE ADVANTAGE

Porter’s Generic Strategies

Low cost

Differentiation

Industry

-wide

Single

segment

SOURCE OF COMPETITIVE ADVANTAGE

COMPETITIVE

SCOPE

TYPES OF COMPETITIVE ADVANTAGE

COST LEADERSHIP	DIFFERENTIATION
F O C U S

Experience Curve for the Ford Model T, 1909-1920

0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 32

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

Cumulative units of production (millions)

Unit cost

(1958 $s)

1909

1910

1911

1912

1913

1920

1918

1915

1914

Note: The figure shows an 85% experience curve, i.e. unit costs declined by approximately 15% with each doubling of cumulative volume.

COST ANALYSIS

100K 200K 500K 1,000K 5 10 50

Accumulated unit production Accumulated units

(millions) (millions)

1960 Yen

15K 20K 30K

Price Index

50 100 200 300

70% slope

75%

Japanese clocks & watches, 1962-72

UK refrigerators, 1957-71

Examples of Experience Curves

COST ANALYSIS

If all firms in an industry have the same experience curve, then:

Change in relative costs over time = f (relative market share)

PIMS data show that market share is positively related to profitability:

BUT: - Association does not imply causation

- Costs of acquiring market share offset the returns to market

ROS (%)

-2 0 5 10

0-10 10-20 20-30 30-40 over 40

Market Share (%)

The Importance of Market Share

COST ANALYSIS

PRODUCTION TECHNIQUES

PRODUCT DESIGN

INPUT COSTS

CAPACITY UTILIZATION

RESIDUAL EFFICIENCY

ECONOMIES OF LEARNING

ECONOMIES OF SCALE

Organizational slack; Motivation &

culture; Managerial efficiency

Ratio of fixed to variable costs
Speed of capacity adjustment

Location advantages
Ownership of low-cost inputs
Non-union labor
Bargaining power

Standardizing designs & components
Design for manufacture

Process innovation
Reengineering business processes

Increased dexterity
Improved organizational routines

Indivisibilities
Specialization and division of labor

Drivers of Cost Advantage

COST ANALYSIS

Units of output

per period

Minimum

Efficient Plant Size: the point

where most scale economies are exhausted

Cost per

unit of

output

Sources of scale economies:

- technical input/output relationships

- indivisibilities

- specialization

Economies of Scale:

The Long-Run Cost Curve for a Plant

COST ANALYSIS

Some of the World’s Most Expensive New Product Development Projects

COST ANALYSIS

Product	Lead company	Estimated development cost	Launch date
F-35 Lightening II joint strike fighter	Lockheed Martin	$240 billion	2012
B-2 Spirit “stealth bomber”	Northrup Grumman	$23 billion	December 1993
A380 “super-jumbo”	Airbus Industrie	$19 billion	October 2007
787 Dreamliner	Boeing	$16–18 billion	3rd Quarter 2010
Windows Vista	Microsoft	$7 billion	January 2007
PlayStation 3	Sony	$7 billion	November 2006
Iridium satellite communication system	Motorola/Iridium Satellite LLC	$6 billion	July 1999
Ford Contour/Mondeo	Ford Motor Company	$6 billion	October 1992

10 20 50 100 200 500 1,000

Annual sales volume (millions of cases)

Advertising Expenditure ($ per case)

0.02 0.05 0.10 0.15 0.20

Coke

Pepsi

Seven Up

Dr. Pepper

Sprite

Diet Pepsi

Tab

Fresca

Diet Rite

Diet 7-Up

Schweppes

SF Dr. Pepper

Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main brands incur lower advertising costs per unit of sales than their smaller rivals.

Scale Economies in Advertising: U.S. Soft Drinks

COST ANALYSIS

Distrib-ution,

Testing, Quality control

Asse-mbly

Component

manufact-

ure

R&D, Design

Engineer-ing

Purch-asing

Using the Value Chain for Cost Analysis:
Automobile Manufacture

Sales,

Market-ing

Dealer support, Customer service

Stages of the analysis:

Identify the main value chain activities
Allocate total costs between value chain activities
Identify the cost drivers at each stage of the value chain
Identify linkages between activities
Identify opportunities for cost reduction

COST ANALYSIS

DOES DIFFERENTIATION IMPLY SEGMENTATION?

—Not necessarily, depends upon the differentiation strategy:

BROAD SCOPE DIFFERENTIATION Appealing to what is common between different customers (McDonalds, Honda, Gillette)

FOCUSED DIFFERENTIATION Appealing to what distinguishes different customer groups (MTV, Harley-Davidson, Armani)

DIFFERENTIATION: concerns choices of how a firm distinguishes

its offerings from those of its competitors (i.e. How the firm competes)

SEGMENTATION: concerns choices of which customers, needs,

localities a firm targets (i.e. Where the firm competes)

The Nature of Differentiation:
Differentiation and Segmentation

DIFFERENTIATION ANALYSIS

THE PRODUCT

THE CUSTOMER

What needs does it satisfy?

By what criteria do they choose?

What motivates them?

What are key attributes?

How do patterns of customer preferences link to product attributes

What price premiums do product attributes command?

What are demographic, sociological, psychological drivers of customer behavior?

FORMULATE DIFFERENTIATION STRATEGY

Select product positioning in relation to product attributes
Select target customer group
Ensure customer/ product compatibility
Evaluate costs and benefits of differentiation

Analyzing Differentiation: The Demand Side

DIFFERENTIATION ANALYSIS

Multidimensional Scaling: maps consumer perceptions of competing products along key differentiating variables
Conjoint Analysis: uses estimates of consumer preferences for particular product attributes to forecast demand for new products that comprise different bundles of product attributes
Hedonic Price Analysis: estimates the price that consumers will pay for particular product attributes

Techniques for Analyzing Product
Attributes and Positioning

DIFFERENTIATION ANALYSIS

High

Low

High

EFFECTIVENESS

GENTLENESS

Tylenol

Bufferin

Excedrin

Bayer

Anacin

Private label aspirin

Differentiation in Pain Relievers:
Multidimensional Scaling of Competing Products

DIFFERENTIATION ANALYSIS

Sources of uniqueness:

Product features and product performance
Complementary services (such as credit, delivery, repair)
Intensity of marketing activities (advertising; promotion)
Technology embodied in design and manufacture
Quality of purchased inputs
Procedures that impact the customer experience (e.g. the, rigor of quality control, service procedures, frequency of sales visits)
Skill and experience of employees
Location (e.g. with retail stores)
Degree of vertical integration (allows control over inputs and intermediate processes)

Analyzing Differentiation on the Supply Side

DIFFERENTIATION ANALYSIS

Key to successful differentiation: consistency of all aspects of the firm’s relationship with its customers.

Product Integrity: the total balance of product features

Internal integrity: consistency between function and structure
External integrity: fit between the product and customers’ objectives, values,

and lifestyle

Successful differentiation strategies achieve consistency of internal and external integrity (e.g. Harley-Davidson, Apple, Starbucks)

Product Integrity

DIFFERENTIATION ANALYSIS

Linkages:

1. Distinctive can design can assist canners’ marketing activities.

2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.

3. Frequent, reliable delivery can permit canner to adopt JIT can supply.

4. Efficient order processing system can reduce customers’ ordering costs.

5. Competent technical support can increase canner’s efficiency of plant utilization.

Supplies of steel

& aluminum strip

Service & technical support

Sales

Distribution

Inventory holding

Manufacturing

Design Engineering

Inventory holding

Purchasing

Distribution

Marketing

Canning

Processing

Inventory holding

Purchasing

CANNER

CAN MAKER

Using Value Chains Linkages to Identify Differentiation Opportunities: Can Manufacture

DIFFERENTIATION ANALYSIS

Features of Cost Leadership and

Differentiation Strategies

COMBINING COST AND DIFFERENTIATION STRATEGIES

Generic strategy	Key strategy elements	Resource and organizational requirements
Cost leadership	Scale-efficient plants Design for manufacture Control of overheads and R&D Process innovation Outsourcing/offshoring Avoiding marginal customers	Access to capital Process engineering skills Frequent reports Tight cost control Specialization of jobs and functions Incentives linked to quantitative targets accounts
Differentiation	Emphasis on branding advertising, design, service, quality, and new product development	Marketing abilities Product engineering skills Cross-functional coordination Creativity Research capability Incentives linked to qualitative performance targets