Strategic Management/ Business Policy Power Point Set #5 EMBA 544

Business Strategy and Competitive Advantage A business-level strategy is an integrated and coordinated set of commitments and actions designed to provide value to customers and gain a competitive advantage by utilizing core competencies in specific individual product markets.

Business Strategy and Competitive Advantage Two fundamental questions: How do you generate advantage? How do you sustain advantage? Key idea for sustainability is “barriers to imitation.” How long will it be before the first rival imitates the first mover? How fast does new imitation occur once it starts? These two factors determine appropriability.

Business Strategy and Competitive Advantage Consider three strategies in terms of two fundamental principles (that is, generating advantage and sustaining advantage): Market Share Learning curves Corporate Culture

Business Strategy and Competitive Advantage Does market share generate competitive advantage? The computer industry is an excellent example of the lack of correspondence between market share and profit rates. IBM was a clear market leader in terms of market share but had only mediocre profit performance relative to its rivals. Market share is no guarantee of success.

Business Strategy and Competitive Advantage Does market share generate competitive advantage? Perhaps high market share causes high profit rates. But it could equally well be that there is a third factor (e.g., good service capabilities at Caterpillar), unobserved by us, that causes both high profitability and high market share. In this case, we would see a correlation between profitability and market share but no causal explanation.

Business Strategy and Competitive Advantage Does market share generate competitive advantage? Market share can generate advantage when there are significant economies of scale. How can we sustain competitive advantage? Invest in large and specialized assets (commitments) that make exit difficult. These “exit barriers are entry barriers.”

Business Strategy and Competitive Advantage When can market share work to generate and sustain an advantage? Scale economies combined with high exit costs may make market share a defensible advantage.

Business Strategy and Competitive Advantage How does a learning curve effect generate an advantage? To the extent that the firm is first in the market, it may, through the operation of the learning curve, have lower costs than new rivals. Thus, learning curve effects may meet our first criterion of giving initial relative advantage.

Business Strategy and Competitive Advantage What about the imitation issues for sustaining advantage? Learning curve effects can lead to sustained competitive advantage: If the learning curve effects remain within the firm; and If the learning curve effects persist in the face of technological change.

Business Strategy and Competitive Advantage Corporate Culture “An organization’s culture is a complex set of beliefs and ways of doing things that influence the organization’s perspective on itself and the world around it.” Set of formal rules and structures that govern the way in which people relate to one another at the workplace. The set of myths and traditions that help define the ideology of the organization. The style of the organization’s leader.

Business Strategy and Competitive Advantage How can corporate culture generate advantage? An organization’s culture creates value because it allows that organization to strike deals with its suppliers, customers, and employees that are not available to other firms. Thus, culture is an organizational asset.

Business Strategy and Competitive Advantage How can corporate culture be a source of sustained competitive advantage? Corporate culture is hard for another firm to imitate. In fact, an organization may have difficulty in replicating its own culture in other geographic areas. “Invisible” or intangible assets like corporate culture are often the only sustainable source of competitive advantage, primarily because such advantages are so difficult to imitate.

Business Strategy and Competitive Advantage An organization’s knowledge or expertise can lead to sustainable advantage if: The knowledge is tacit rather than articulable; Tacit Knowledge: “We know more than we can tell.” Tacit Skills: Riding a bike, swimming, “learning by doing” which is critical for maintaining a manufacturing base The knowledge is not observable in use; The knowledge is (socially) complex, rather than simple.

Sustainable Competitive Advantage: Costly Duplication: Historical Conditions Uncertainty Social Complexity Property Rights Protection

Where To Use Cost Advantage: Mature Industries High Fixed Costs of Entry Homogeneous Customer Preferences Innovation Emphasis on Process Vs. Product Proprietary Process Technology MES high in Relation to Total Demand

Differentiation Advantage Differentiation Advantage, a concept developed by economist Joan Robinson, occurs when a firm is able to obtain from its differentiation a price premium in the market which exceeds the cost of providing differentiation.

Sustaining A Price Premium - Where To Use A Differentiation Strategy Quality Performance Product Features Reliability Durability Conformance to standards Serviceability Aesthetics Perceived Quality

Sustaining A Price Premium - Where To Use A Differentiation Strategy Service (Pre- and Post-Sale) Timeliness, Courtesy, Consistency, Convenience, Completeness, Accuracy Brand Image and Reputation First-mover advantages Bundling Of Features Bundling Of Services Linkages with other firms (alliances) Packaging

Creating Differentiation Advantage Defining The Customer Learning About Customer Needs Designing Products and Services To Meet Customer Needs Delivering Products and Services To The Customer Providing After-Sales Service Awareness Of Costs Being “Customer-Driven” Implies A Radically Different Management & Organization Strategy As Compared With The “Cost Driven” Company!

Creating Differentiation Advantage - Differentiation Advantage and Advertising Types Of Advertising Consumer Education Brand Identification Advertising As An Investment Entry Barriers Consumer ” Search” Costs The Costs Of Advertising Demographics Costs Of Delivery