What determines a firm’s competitiveness?
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What determines a firm’s competitiveness? Business strategy How to compete – looks at how a firm competes within an industry or market. Also known as competitive strategy Corporate strategy Where to compete – defines the scope of the firm in terms of The industry it is in

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What determines a firm’s competitiveness?

  • Business strategy

    • How to compete – looks at how a firm competes within an industry or market. Also known as competitive strategy

  • Corporate strategy

    • Where to compete – defines the scope of the firm in terms of

      • The industry it is in

      • The customer groups it targets

      • The countries and localities in which it operates

      • The vertical range of activities it undertakes


Business Strategy

Sources of competitive advantage:

  • External

    • Examples include: changing customer demand, changing prices, technological change

    • How a firm takes advantage of changes in its external environment depends on its ability to anticipate the changes and the speed by which it can react to the changes

  • Internal

    • Firms can create competitive advantage through innovation of productsand processes

    • Examples include: creating new industries, new customer segments


Two ways firms create competitive advantage:

  • Cost leadership

    • Broadly defined as supplying the same product or service at a lower cost

    • Characteristics:

      • Existence of economies of scale and scope

      • Efficient production

      • Simpler product design

      • Lower input costs

      • Low-cost distribution

      • Little R&D or brand advertising

      • Tight cost control system


Two ways firms create competitive advantage:

  • Differentiation

    • Broadly defined as supplying a unique product or service at a cost lower than the price premium customers are willing to pay

    • Characteristics:

      • Superior product quality

      • Superior product variety

      • Superior customer service

      • More flexible delivery

      • Investment in brand image

      • Investment in R&D and advertising


Corporate Strategy

  • Product scope

    • Many different products in many different industries – the tools of competitive strategy analysis above can be used to analyze how the firm can compete in each industry

  • Geographical scope

    • The firm sells (or produces, or both) its products in many different countries.

  • Vertical scope

    • Backward – the firm produces its own components or other inputs

    • Forward – the firm takes over activities previously undertaken by its customers


  • Sources:

    • Palepu and Healy, Business Analysis and Valuation Using Financial Statements, 4th ed.

    • Grant, Contemporary Strategy Analysis, 7th ed.


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