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What determines a firm’s competitiveness? Business strategy

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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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slide1

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
slide2

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
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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
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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
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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
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Sources:

    • Palepu and Healy, Business Analysis and Valuation Using Financial Statements, 4th ed.
    • Grant, Contemporary Strategy Analysis, 7th ed.
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