1. The Nature and Sources of Competitive Advantage
OUTLINE
The emergence of competitive advantage
Sustaining competitive advantage
Competitive advantage in different market settings
Types of competitive advantage: cost and differentiation 1

2. The Emergence of Competitive Advantage
How does competitive
advantage emerge?
External sources of
change e.g.:
Changing customer demand
Changing prices
Technological change
Internal sources
of change
Some firms
have greater creative
and innovative
capability
Resource heterogeneity
among firms means
differential impact
Some firms faster
and more effective
in exploiting change 2

3. Competitive Advantage from Internally-Generated Change: Strategic Innovation
Characteristics of innovatory strategies:
Associated with new entrants to an industry (e.g. Nucor in steel, IKEA in furniture, Enron in energy, Home Depot in DIY, Dell in PCs)
Reconcile conflicting performance goals (e.g. Toyota’s lean production system combines low cost, high quality, and flexibility. Richardson Sheffield in kitchen knives is low cost, innovative and customer responsive.)
Reconfiguring the value chain e.g.---
Nike’s system for manufacturing and distributing shoes totally different from traditional shoe manufacturer
Southwest Airlines simplification of the normal airline value chain
Zara’s system of design, manafacture, and distribution 3

4. Sustaining Competitive Advantage Against Imitation
REQUIREMENT FOR IMITATION
ISOLATING MECHANISM
Identification - Obscure superior performance
- Deterrence--signal aggressive
Incentives for imitation intentions to imitators
- Pre-emption--exploit all available
investment opportunities
- Rely upon multiple sources of
Diagnosis competitive advantage to create
“causal ambiguity”
- Base competitive advantage upon
Resource acquisition resources and capabilities that are
immobile and difficult to replicate 4

5. Competitive Advantage in Different Market Settings
MARKET TYPE
SOURCE OF IMPERFECTION
OF COMPETITION
OPPORTUNITY FOR
COMPETITIVE ADVANTAGE
TRADING
MARKETS
None (efficient markets)
Imperfect information availability
Transactions costs
Systematic behavioral trends
Overshooting
None
Insider trading
Cost minimization
Superior diagnosis
(e.g.... chart analysis)
Contrarianism
Barriers to imitation
Barriers to innovation
Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility,barriers to resource replication) & base strategy upon them.
Difficult to influence or exploit.
PRODUCTION
MARKETS 5

6. Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets
SOURCE OF
IMPERFECTION
OF COMPETITION
OPPORTUNITY
FOR COMPETITIVE
ADVANTAGE
MARKET
TYPE
TRADING
MARKETS
None (efficient markets)
Imperfect information availability
Transactions costs
Systematic behavioral trends
Overshooting
None
Insider trading
Cost minimization
Superior diagnosis
(e.g.... chart analysis)
Contrarianism
Barriers to imitation
Barriers to innovation
Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility,barriers to resource replication) & base strategy upon them.
Difficult to influence or exploit.
PRODUCTION
MARKETS 5

7. Sources of Competitive Advantage
COST
ADVANTAGE
Similar product
at lower cost
COMPETITIVE
ADVANTAGE
Price premium
from unique product
DIFFERENTIATION
ADVANTAGE 6

8. Porter’s Generic Strategies
SOURCE OF COMPETITIVE ADVANTAGE
Low cost Differentiation
Industry-wide COST DIFFERENTIATION
COMPETITIVE LEADERSHIP
SCOPE
Single Segment F O C U S 8

9. Features of Cost Leadership and Differentiation Strategies
Generic strategy Key strategy elements Resource & organizational
requirements
COST Scale-efficient plants Access to capital. Process
LEADERSHIP Design for manufacture engineering skills. Frequent
Control of overheads & reports. Tight cost control.
R&D. Avoidance of Specialization of jobs and
marginal customer functions. Incentives for
accounts quantitative targets.
DIFFERENTIATION Emphasis on branding Marketing. Product
and brand advertising, engineering. Creativity.
design, service, and Product R&D
quality. Qualitative measurement and incentives. Strong cross-functional coordination. 7