Strategies for Competitive Advantage. Chapter 6. The Nature of Competitive Advantage. What is competitive advantage? Competitive advantage is the reason a purchase is actually made at a profitable price and that one supplier is chosen over the other various alternatives.
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Strategies for Competitive Advantage Chapter 6
The Nature of Competitive Advantage • What is competitive advantage? • Competitive advantage is the reason a purchase is actually made at a profitable price and that one supplier is chosen over the other various alternatives. • Competitive advantage occurs at the intersection of two distinct sets of forces: • External: customers, industry environment, macro, etc. • Internal: firm capabilities and resources
Focusing on Transactions • “Transactions represent key linking pins between goals and objectives, the competitive environment, a firm’s resources and capabilities, and a firm’s performance.” • Customer decisions reflect their own individual values and judgments, influenced by the variety of options available. • As a result, what appears to be an advantage on paper can often fail to translate into an advantage in the marketplace.
Focusing on Transactions • Determined by the Customer • A Reflection of Context • Episodic
Determined by the Customer • Customers determine value based on: • Attributes that are valuable, rare, inimitable, and difficult to substitute. • The challenge is that customer tastes vary and change; so creating value for them is like hitting a moving target. • Competitive advantage then is an ongoing pursuit of trial and error, learning, and adaptation, where customers are ultimately the arbiters of success.
A Reflection of Context • Customers reveal their judgments about value and competitive advantage through their purchasing decisions. • These purchasing decisions reflect the conditions in which they take place. • Changes exogenous to buyers/sellers—conditions changed outside of the buyer-seller relationship • Technological change
Episodic • Competitive advantage occurs in particular instances, when particular products and services are valued and scarce, with no immediate or acceptable substitutes, in the eyes of customers. • Changes in any of the conditions have the potential to change the nature of the competitive advantage. • So, no competitive advantage is completely safe or completely insurmountable.
Focusing on Transactions • Demand Curves • Mathematical functions used to illustrate the relationship between consumption and price • Shift periodically based on: • Changes in disposable income • Changes in expectation • Changes in tastes and preferences • Changes in the prices of related goods (complementary and substitute goods) • Changes in demographics (e.g. population size, composition, etc.)
Focus Differentiation Low Cost Types of Competitive Advantage In his 1980 work, Porter argued for three types of competitive advantage.
Types of Competitive Advantage Better represented as…
Types of Competitive Advantage • More commonly known as “Porter’s generic strategies” • Customers, acting rationally and to the best of their ability, seek the best value in relation to their own interests (BIG ASSUMPTION) • The best value offers the greatest level of consumer surplus. • Consumer surplus reflects: • Use value • Transaction cost / price
Differentiation • Focuses on high use value. • High use value increases the desirability of the product or service, even when the price is high. • Differentiation leverages inelastic demand. • Consider, for example, Nordstroms or Market Street.
Low Cost • Focuses on lowering the costs to the buyer. • Lower costs increase the desirability of the product or service, even when use value is identical to or lower than other products of services. • Low cost then leverages elastic demand. • Consider, for example, Wal-Mart or Chevrolet.
Focused Differentiation • Requires offering unique features that fulfill the demand requirements of a narrow market • Some focused differentiators focus on a particular sales channel (e.g. internet only) • Others target a limited demographic group (e.g. Sandals resorts—couples only, no kids) • Consider, for example, Natural Grocer or Land Rover
Focused Low Cost • Requires competing based on price to a narrow target market • Charges lower prices relative to other firms in that target market • Consider, for example, RedBox or Papa Murphy’s Pizza
Differentiation, Low Cost, and Performance • Generic strategies are equifinal • Each of the generic strategies can lead to competitive advantage and financial success. • Because of various operational differences in these two strategies, each will produce different patterns of financial success.
Differentiation, Low Cost, and Performance • Consider the following:
Final Thoughts & Caveats • Monopoly, Limits to Competition, and Competitive Advantage • Strategic management can be seen as a process of cultivating small, pseudo-monopolies. • Even monopoly profits are limited by the resource constraints of the buyers but profits are certainly easier to achieve and sustain. • Strategic management can be viewed as a process where firms seek to attract customers and to limit competition, in effect creating for themselves monopoly-like conditions.
Final Thoughts & Caveats • Monopoly, Limits to Competition, and Competitive Advantage • Gain a measure of power over elastic consumers by limiting the range of options that consumers can consider. That power then yields above market prices and margins. • Gain a measure of power by making consumers less elastic, thereby limiting the options that they will consider. This monopoly power yields above market prices and margins because customers see higher use value in the particular brand of the specific providers.
Final Thoughts & Caveats • Stuck in the Middle • Remember that all competition is local. • Simply because a firm is not the lowest cost provider anywhere does not mean that it cannot be the lowest cost provider for some groups of customers. • Because a firm is not the most differentiated among all providers does not mean that it is not the most differentiated for some groups of customers.
Final Thoughts & Caveats • Stuck in the Middle • It can be helpful to think of these two strategies as combinations of two basic types of effort. Such a combination is best represented by the concept of a production possibilities frontier.
Final Thoughts & Caveats • The Dynamic Capabilities Perspective • Competitive advantage is not static. • Firms can acquire competitive advantage and then lose it, even though industry conditions remain attractive. • Maintaining competitive advantage requires managing a dynamic process, where demand is constantly shifting and adapting, where competitors are moving into and out of the market, imitating one another and innovating themselves, and creating and refining new alternatives from which customers can choose.
Final Thoughts & Caveats • The Dynamic Capabilities Perspective • What can we learn from the example of Home Depot and Lowe’s? • What could either firm do differently?