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Gaining and Sustaining Competitive Advantage. Firm’ strategy should develop and exploit valuable, rare and costly-to-imitate resources, leading to sustained competitive advantage and above normal performance. Preliminaries. Strategy formulation , not implementation

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gaining and sustaining competitive advantage

Gaining and SustainingCompetitive Advantage

Firm’ strategy should develop and exploit valuable, rare and costly-to-imitate resources, leading to sustained competitive advantage and above normal performance

preliminaries
Preliminaries
  • Strategy formulation, not implementation
  • No ‘silver bullet’, ‘magic formula’
  • A bit of luck
  • Proactive vs. reactive
the many definitions of strategy
The Many Definitions of Strategy
  • …a firm’s theory about how to compete successfully. (J. Barney)
  • …the way to achieve organizational objectives. (Hatten & Hatten)
  • …commitments and actions designed to exploit core competencies and gain competitive advantage. (Hitt, Ireland & Hoskisson)
  • …a plan that specifies which choices (the player) will make in every possible situation. (Von Neumann & Morgenstern)
strategy and competitive advantage
Strategy and Competitive Advantage
  • Competitive advantage - when strategy (1) is consistent with underlying economic processes, (2) creates value, and (3) is unique or rare.
  • Competitive parity - when strategy (1) is consistent with underlying economic processes, (2) creates value, but (3) is not unique or rare
  • Competitive disadvantage – when strategy fails to create economic value.
general model of strategic management
General Model of Strategic Management

Company Profile( SWOT )

Mission

Objectives

Strategies

Tactics

Industry & Environmental Analysis ( SWOT )

general model of strategic management1
General Model of Strategic Management
  • Mission - Fundamental purpose, how firm differs from its rivals
  • Objectives - Measurable performance targets, financial and/or strategic
  • Strategies – means, plans or commitments to achieve a firm’s mission and objectives
  • Tactics - Actions or policies to implement strategy
  • Company Profile – strengths and weaknesses of a firm
  • Environmental Analysis – opportunities, threats, characteristics and trends of the industry and society
mission statements
Mission Statements
  • Benefits of having a mission statement
    • unanimity of purpose
    • employee motivation
    • culture / focal identity
    • allocating resources
  • Disadvantages of mission statement?
  • Improved performance?
  • Why don’t all companies have mission statements?
typical components of a mission statement
Typical Components of a Mission Statement
  • Primary market or technology
  • Goals: growth, profitability, survival
  • Basic beliefs, company philosophy
  • Public image, self-concept
  • Customers
  • Quality
geisinger s mission statement
Geisinger’s Mission Statement

“Enhancing quality of life through an integrated health service organization based on a balanced program of patient care, education, research and community service.”

nike s mission statement
Nike’s Mission Statement

“To bring inspiration and innovation to every athlete in the world.”

southwest airline s mission statement
Southwest Airline’s Mission Statement

‘The mission of Southwest Airlines is dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit”.

dell s mission statement
Dell’s Mission Statement

Dell's mission is to be the most successful computer company in the world at delivering the best customer experience in markets we serve. In doing so, Dell will meet customer expectations of:

  • Highest quality
  • Leading technology
  • Competitive pricing
  • Individual and company accountability
  • Best-in-class service and support
  • Flexible customization capability
  • Superior corporate citizenship
  • Financial stability
unlv s mission statement
UNLV’s Mission Statement

The University of Nevada, Las Vegas, located in the vibrant and dynamic city of Las Vegas and surrounded by the Mojave Desert, is emerging as a premier urban university. UNLV’s development embraces the traditional values of higher education adapted for the global community of the 21st century. The university increasingly will concentrate its resources on programs that are student centered, demonstrably excellent, and responsive to the needs of the local and regional community.

UNLV promotes an environment that encourages the full personal and professional development of those it serves and of those who serve the university. UNLV assists students in meeting the intellectual and ethical challenges of responsible citizenship and a full and productive life through opportunities to acquire the knowledge and common experiences that enhance critical thinking, leadership skills, aesthetic sensitivity, and social integrity.

The university provides traditional and professional academic programs for a diverse student body and encourages innovative and interdisciplinary approaches to teaching, learning, and scholarship. Recognizing the individuality of each student, UNLV simultaneously engenders collegial relationships and a sense of community among its members. UNLV embraces the interdependence of quality instruction, scholarly pursuits, and substantive involvements in campus and community life.

The university offers artistic, cultural, and technical resources and opportunities to the broadest possible community. It promotes research programs and creative activities by students and faculty that respond to the needs of an urban community in a desert environment.

UNLV is committed to developing a synergy between professional and liberal studies, between undergraduate education and graduate programs, and between superior teaching and meaningful research. UNLV increasingly is a dynamic resource for, and partner with, the community that it serves.

items examined in the company profile
Items Examined in the Company Profile

The general strengths and weaknesses of a firm

  • Performance and Financial position
  • Leadership
  • Org. structure
  • Culture
  • Strategic issues by functional area
  • Value chain
industry and environmental analysis
Industry and Environmental Analysis

Opportunities, threats, characteristics and trends of the industry and society

  • Industry characteristics analysis
  • Porter’s Five Forces Model
  • Stage of industry evolution
  • Stakeholder analysis
  • Environmental assessment
  • Competitor analysis
setting objectives
Setting Objectives
  • Purpose of setting Objectives is to:
    • convert mission into performance targets
    • create yardsticks to track performance
    • establish goals that require stretch
    • push firm to be inventive, focused
setting objectives1
Setting Objectives
  • Set challenging but achievable objectives, but guard against:
    • Complacency
    • Drift
    • Internal confusion
    • Status quo performance
  • Financial and strategic objectives
financial objectives
Financial Objectives
  • Objectives that relate to improving firm’s financial performance
  • Examples
    • increase ROI from 15% to 20%
    • maintain AA bond rating
    • increase earnings growth from 10% to 15%
    • Other examples?
strategic objectives
Strategic Objectives
  • Improvement in competitiveness or market position
  • Examples
    • Increase market share from 15% to 18%
    • Surpass rivals on customer service
    • Achieve lower cost than competitors
    • Achieve technological superiority
    • Other examples?
types of strategies
Types of Strategies
  • Business strategies (competitive)
  • Corporate strategies (alliances, M & A)
  • Porter’s generic strategies – “ …the general strategic orientation of the firm.”
    • Cost leadership
    • Differentiation
    • Focus or niche
  • Emergent strategies
tactics
Tactics
  • Actions to implement strategy
  • Policies and procedures to get line employees to follow the firm’s strategy
  • “Messy” issues of strategy implementation, not formulation
measuring performance

Measuring Performance

Organizational performance is a complicated concept – multiple methods, each with different uses and flaws

measures of how well present strategy is working
Measures of How WellPresent Strategy is Working
  • “Performance Test” (Thompson & Strickland)
    • Strategy fits firm’s environment
    • Builds competitive advantage
    • Improves strategy performance measures
  • Common measures of strategy performance
    • Change in firm’s market share
    • Trend in profit margins relative to rivals or industry average
    • Composite measures of financial strength
    • Trend in firm’s stock price
    • Firm’s reputation with its customers
    • Product quality
    • Service quality
    • Employee satisfaction / morale
adjusted accounting measures of performance
Adjusted Accounting Measures of Performance
  • Return on invested capital (ROIC)
  • Economic profit (EP)
  • Market value added (MVA)
  • Tobin’s q

Note: these measures can be difficult to compute

and more appropriate to finance than

strategy. Our interest is in developing

an intuitive understanding – how they

compare, contrast and can be used.

return on invested capital
Return on Invested Capital
  • The return or profit a firm makes on the investment it has in its operations

+ current assets

+ fixed assets

- net other assets (other assets – other liabilities)

- non-interest bearing current liabilities (A.P.)

Invested capital

economic profit
Economic Profit
  • Reports, in dollar terms, the actual economic profit the firm made

EP = Invested capital x (ROIC – WACC)

note: ROIC and WACC are percentage terms.

If the difference is positive, EP will also be

positive.

market value added
Market Value Added
  • Measure that characterizes the long-term performance of a firm

market value of equity

+ market value of debt

- economic book value

MVA

note: this measure is also difficult to calculate,

especially determining the amount invested

in the firm since inception.

tobin s q
Tobin’s q
  • Ratio of a firm’s market value to replacement cost of its assets

q = firm market value / firm book value

where market value of common stock

+ market value of preferred stock

+ book value of short-term debt

+ book value of long=term debt

firm market value

make meaningful comparisons
Make Meaningful Comparisons
  • Industry and sector data often readily available
  • Comparison with past performance
  • Stage of industry evolution
  • Benchmarking with competitors
  • US and industry averages
  • Industry success factors
evaluating environmental threats

Evaluating Environmental Threats

A firm’s strategy should neutralize

environmental threats.

general model of strategic management2
General Model of Strategic Management

Company Profile( SWOT )

Mission

Objectives

Strategies

Tactics

Industry & Environmental Analysis ( SWOT )

evaluating environmental threats1
Evaluating Environmental Threats
  • Origins of the Structure – Conduct – Performance Model
  • Tools to evaluate environmental threats
    • Industry characteristics analysis
    • Stakeholder analysis
    • Porter’s Five Forces Model
    • Competitor analysis
the structure conduct performance model
The Structure – Conduct – Performance Model

Number of competing firms, homogeneity of products, cost of entry and exit

Industry Structure

Price taking, product differentiation, tacit collusion, exploit market power

FirmConduct

Firm: above, normal, belowSociety: social welfare implications

Performance

type of industry perfect competition
Type of Industry = Perfect Competition

Large number of firms, homogeneous products,low cost of entry and exit

Industry Structure

Price taking

FirmConduct

Firm: normalSocial welfare: maximized

Performance

Industry Examples?

type of industry monopolistic competition
Type of Industry = Monopolistic Competition

Large number of firms,heterogeneous products,low cost of entry and exit

Industry Structure

Cost leadership,Product differentiation

FirmConduct

Firm: above normalSocial welfare: less than perfect competition

Performance

Industry Examples?

type of industry oligopoly
Type of Industry = Oligopoly

Small number of firms,costly entry and exit

Industry Structure

FirmConduct

Many options, including collusion

Firm: above normalSocial welfare: less than monopolistic competition

Performance

Industry Examples?

type of industry monopoly
Type of Industry = Monopoly

Only one competing firm,costly entry

Industry Structure

FirmConduct

Uses market power to set prices

Firm: above normalSocial welfare: less than oligopoly

Performance

Industry Examples?

industry characteristics analysis
Market size

Market growth rate

Number and size of rivals

Scope of rivalry

Number and size of buyers

Number and size of suppliers

Substitute products

Ease of entry / exit

Distribution channels

Economies of scale

Learning curve

Capacity utilization

Average industry profitability

Pace of technological change

Industry Characteristics Analysis
stakeholder analysis
Stakeholder Analysis

People or groups who have an interest, claim, or stake in how well the firm performs

shareholders managers

employees customers

suppliers government

unions community

general public

evaluating environmental threats porter s five forces model
Evaluating Environmental Threats:Porter’s Five Forces Model

What determines the degree of industry competitionand profitability?

Threat ofentry

Threat of rivalry

Threat ofsuppliers

Industry profitability

Threat of buyers

Threat of substitutes

porter s five forces model barriers to entry
Porter’s Five Forces Model Barriers to Entry
  • Economies of scale
  • Product differentiation
  • Cost advantages independent of size

(Technology, know-how, access to raw materials, geographic locations, learning curve)

  • Contrived deterrence
  • Government policy
  • Capital requirements *
  • Switching costs *
  • Access to distribution channels *

* Some disagreement among scholars

porter s five forces model intensity of rivalry
Porter’s Five Forces Model Intensity of Rivalry
  • Many competitors
  • Similar in size
  • Slow rate of industry growth
  • Product lacks differentiation
  • Capacity added in large increments
  • High level of fixed costs
  • Exit barriers are high
  • Reputation or past history
porter s five forces model substitute products
Porter’s Five Forces Model Substitute Products
  • Products that appear to be different but satisfy the same need
  • Customer switching costs are low
    • good examples butter vs. margarine

calculators vs. slide rules

tape b/u vs. CD burner

    • bad examples Coke vs. Pepsi

Honda vs. Toyota

porter s five forces model bargaining power of buyers customers
Porter’s Five Forces Model Bargaining Power of Buyers/Customers
  • Small number of buyers
  • Purchase products that are standard or undifferentiated
  • Industry products represent a large share of buyer’s total cost
  • Unimportant to final quality of product
  • Product does not save the buyer money
  • Buyer may integrate backward
porter s five forces model bargaining power of suppliers
Porter’s Five Forces Model Bargaining Power of Suppliers
  • Supplier has few competitors
  • Supplier offers a unique product
  • Substitutes not readily available
  • Supplier can integrate forward
  • Firm or industry purchases represent small share of supplier’s total sales
evaluating environmental opportunities

Evaluating Environmental Opportunities

A firm’s strategy should exploit

environmental opportunities

general model of strategic management3
General Model of Strategic Management

Company Profile( SWOT )

Mission

Objectives

Strategies

Tactics

Industry & Environmental Analysis ( SWOT )

evaluating environmental opportunities1
Evaluating Environmental Opportunities
  • Separation of opportunities and threats
  • Tools to evaluate environmental opportunities
    • Industry structure
    • Industry evolution
    • Strategic group analysis
    • Environmental assessment
environmental opportunities and stage of industry evolution
Environmental Opportunities andStage of Industry Evolution

Determinants of success may differ depending on the stage of industry evolution

Emerging

Newly formed – innovations,

changes in demand, needs

Rapid increases in capacity and

unit sales, dominant technology

emerges

Growth

Maturity

Slowing growth rate, increased

competition, experienced

customer base.

Decline

Consistent decline in unit sales,

overcapacity

strategies and stage of industry evolution emerging
Strategies and Stage of Industry Evolution: Emerging

What does it take to succeed in the

Introduction / Emerging stage?

  • Technological leadership
    • Experience curve
    • Dominant technology
  • Preempt strategically valuable assets
  • Create customer switching costs / loyalty

Industry Examples?

strategies and stage of industry evolution growth stage
Strategies and Stage of Industry Evolution:Growth Stage

What does it take to succeed in the growth stage?

  • Marketing and promotion aimed at brand recognition
  • Expanding the product line
  • Financial strength to accommodate growth
  • Strong marketing channels

Industry Examples?

strategies and stage of industry evolution mature
Strategies and Stage of Industry Evolution:Mature

What does it take to succeed in the mature stage?

  • Product refinement – extensions, packaging
  • Emphasis on process innovation
    • Lower costs
    • Higher quality
  • Differentiation / emphasis on service
  • Horizontal integration
  • International expansion

Industry Examples?

strategies and stage of industry evolution decline
Strategies and Stage of Industry Evolution:Decline

What does it take to succeed in the declining stage?

  • Market leadership
  • Focus on growth segments – niche strategy
  • Emphasize production and distribution efficiency
  • Gradually harvest the business
    • Prune the product line
    • Preferred customer selection
    • Defer equipment maintenance and repair
  • Divestment

Industry Examples?

environmental opportunities and strategic group analysis
Environmental Opportunities andStrategic Group Analysis

Strategic group – a subset of firms in an industry that appear to compete on similar dimensions.

Examples: Mercedes, Acura, Lexus

Timex, Casio, Polar

Nike, New Balance, Asics

Plotting a strategic group map:

(1) Identify relevant dimensions

(2) Locate firms

(3) Group nearby firms

(4) Look for potential opportunities

strategic group map athletic shoes
Strategic Group Map – Athletic Shoes

Nike

Quality

Asics

NB

Converse

Keds

Number of Models

environmental assessment
Environmental Assessment

Monitoring early signals, changes or trends in the firm’s external environment; anticipating or forecasting these trends; assessing how these changes or trends will affect firm operations.

Major components:

  • Demographics
  • Economic
  • Political / legal
  • Socio-cultural
  • Technological
evaluating firm strengths and weaknesses

Evaluating Firm Strengths and Weaknesses

A firm’s strategy should exploit firm strengths while avoiding or correcting weaknesses

three traditional perspectives on firm strengths and weaknesses
Three Traditional Perspectives on Firm’Strengths and Weaknesses
  • Theories of distinctive competence
    • General managers – their decisions have great impact
      • Pros – high appeal and validity
      • Cons – positive traits are ambiguous
    • Institutional leadership - creates vision, organization and structure
      • Pros – intuition, strong appeal
      • Cons – sr. managers not only source of advantages
three traditional perspectives on firm strengths and weaknesses1
Three Traditional Perspectives on Firm’Strengths and Weaknesses
  • Ricardian Economics
    • Little role for management
    • “Original, indestructible gifts of nature” (land)
    • Inelastic supply function
    • High quality factors of production
    • Pros: quantitative, testable theory

numerous resources are inelastic

    • Cons: natural shift in demand curve

other contributing factors

three traditional perspectives on firm strengths and weaknesses2
Three Traditional Perspectives on Firm’Strengths and Weaknesses
  • Penrose’s Theory of Firm Growth
    • administrative framework
    • bundle of productive, heterogeneous resources
    • Pros: introduced heterogeneity

broad definition of ‘productive resource’

    • Cons:

Other theories of the firm

  • Population Ecology
  • Transaction cost
  • Agency theory
resource based view of the firm
Resource Based View of the Firm
  • Dominant theoretical perspective
  • Resources, capabilities, competencies
  • Assumptions
    • Resource heterogeneity
    • Resource immobility
    • Firms are bundles of productive resources
      • Financial capital
      • Physical capital
      • Human capital
      • Organizational capital
discovering sustained competitive advantage the vrio framework
Discovering Sustained Competitive Advantage:The VRIO Framework
  • Value – when resources and capabilities enable the firm to respond to threats and opportunities
  • Rarity – when resource is controlled by a small number of competing firms
  • Imitability – the degree that the resource can be duplicated or substituted
  • Organization – how the firm is structured, organized and managed to exploit valuable, rare and costly to imitate resources.
  • Some examples
applying the vrio framework
Applying the VRIO Framework

* Assumes firm is organized to exploit resource

strategy implications of the resource based view
Strategy Implications of the Resource-based View
  • Broader responsibility for competitive advantage
  • Better to exploit firm’s existing valuable, rare and costly to imitate resources, rather than mimic other successful firms
  • Relative cost of difficult to implement strategy should be compared to its value
  • Socially complex resources can be source of competitive advantage
  • Firm’s structure, control systems and compensation policies should change if they conflict with firm’ resources or capabilities
limitations of vrio framework
Limitations of VRIO Framework
  • Sustained competitive advantage and unexpected environmental change (Shumpeterian revolutions)
  • Managerial influence – imitability paradox
  • Unit of analysis shifts from industry to intra-firm (consider value chain example)
generic strategy cost leadership

Generic Strategy: Cost Leadership

A cost-leadership strategy attempts to gain competitive advantage by reducing production or service costs below those of competitors

sources of cost advantages
Sources of Cost Advantages
  • Economies of scale
    • Specialized machines
    • Cost of plant and equipment
    • Employee specialization
    • Overhead
  • Diseconomies of scale
    • Physical limits to efficient size
    • Managerial diseconomies
    • Worker motivation
    • Distance to markets and suppliers
sources of cost advantages cont d
Sources of Cost Advantages (cont’d.)
  • Learning curve

(learning curve v. economies of scale)

  • Access to factors of production

(land, labor, capital, raw materials)

  • Technological hardware

(other than what is used for production)

  • Technological software
  • Policy choices

(choices about which products/services to offer)

cost leadership and porter s five forces
Cost Leadership and Porter’s Five Forces
  • Reduces threat of entry – how?
  • Reduces threat of rivalry – how?
  • Reduces threat of substitutes – how?
  • Reduces threat of suppliers – how?
  • Reduces threat of buyers – how?
cost leadership and vrio framework which sources of cost advantages are rare
Learning curve

Factors of production

Technological software

Diseconomies of scale

Policy choices

Economies of scale

Technological hardware

Cost Leadership and VRIO FrameworkWhich Sources of Cost Advantages Are Rare?

More likely to be rare

Less likely to be rare

cost leadership and vrio framework which sources of cost advantages are costly to duplicate
Technological software

Factors of production

Policy choices

Technological hardware

Learning curve

Diseconomies of scale

Economies of scale

Cost Leadership and VRIO FrameworkWhich Sources of Cost AdvantagesAre Costly to Duplicate?

Costly to duplicate

Less costly to duplicate

why are these sources costly to duplicate
Source of Advantage

Technological software

Factors of production

Policy choices

Technological hardware

Learning curve

Diseconomies of scale

Economies of scale

Why Are These Sources Costly to Duplicate?
cost leadership and vrio framework organizing to implement cost leadership
Cost Leadership and VRIO FrameworkOrganizing to Implement Cost Leadership
  • Simple U-form structure

(few layers, small staff, narrow range of business)

  • Tight management control systems

(close supervision, quantitative goals, cost-leadership orientation)

  • Compensation policies

(reward for cost reduction, incentives for all)

generic strategy product differentiation

Generic Strategy: Product Differentiation

A product differentiation strategy attempts to gain competitive advantage by increasing the perceived value of products or services relative to that of the competition

bases of product differentiation
Bases of Product Differentiation
  • Product features
  • Intra-firm linkages
  • Timing
  • Location
  • Product mix
  • Inter-firm linkages
  • Reputation
  • Product customization
  • Product complexity
  • Consumer marketing
  • Distribution channels
  • Service and support

Conceptual

Empirical

product differentiation and vrio framework which bases are costly to duplicate
Reputation

Distribution channels

Intra-firm linkages

Timing

Location

Service and support

Inter-firm linkages

Product customization

Product mix

Consumer marketing

Product complexity

Product features

Product Differentiation and VRIO FrameworkWhich Bases Are Costly to Duplicate?

Costly to duplicate

Less costly to duplicate

implementing both cost leadership and product differentiation strategies
The Pros…..

Product differentiation leads to increased sales, which lead to economies of scale, learning and other cost reductions

Empirical research supports dual strategies

Porter has backed off the “stuck in the middle” argument

The Cons…..

Requires different organizational structures

Management control systems differ

Differences in compensation policy design

Implementing Both Cost Leadership andProduct Differentiation Strategies
strategic alliances

Strategic Alliances

Types of alliances, sustained competitive advantage, and “cheating” in alliances.

types of strategic alliances
Types of Strategic Alliances

Alliances

    • exist whenever two or more independent firms cooperate to develop, manufacture or market products or services
    • are governance mechanisms between the spot market and organizational hierarchy
    • rapidly growing form of governance
  • Non-equity Alliances
  • Equity Alliance
  • Joint Venture
motivations for strategic alliances economies of scope
Motivations for Strategic Alliances:Economies of Scope
  • Economies of scale
  • Learning from competitors
  • Sharing risks and costs
  • Facilitate tacit collusion
  • Low-cost market entry
  • Low-cost industry entry
  • Low-cost exit
  • Managing uncertainty
cheating in alliances
“Cheating” in Alliances
  • Adverse selection – partner misrepresents skills and abilities
  • Moral hazard – partner has high quality skills and abilities, but invests lower quality than promised
  • Holdup – partner exploits “transaction-specific investments that other partner(s) make

Some examples…

strategic alliances and sustained competitive advantage
Strategic Alliances andSustained Competitive Advantage

Evaluation of competitive advantage follows VRIO framework.

  • Value: NPV ( firm A + firm B ) > NPV ( A ) + NPV ( B ) i.e., synergy exists
  • Rare: depends on the number of competing firms as well as the benefits.
  • Imitability: alliances can be imitated by direct duplication and substitution
  • Organization: to minimize “cheating”; the key to success
organizational tools to manage alliances
Organizational “Tools” to Manage Alliances
  • Explicit contracts
  • Legal sanctions
  • Equity investment
  • Firm reputation
  • Joint venture
  • Trust
selecting appropriate strategies

Selecting Appropriate Strategies

Strategy should neutralize threats,exploit opportunities and strengths,address firm’ weaknesses

types of strategies1
Business level

Vertical integration

Cost leadership

Product differentiation

Flexibility

Tacit collusion

Generic Strategies

Corporate strategies

Strategic alliance

Corporate diversification

Mergers and acquisitions

International strategies

Types of Strategies
strategies to avoid
Strategies To Avoid
  • Follow the leader
  • Hit another home run
  • Arms race
  • Do everything
  • Losing hand / Sunk cost
  • Stuck in the middle
some final thoughts on selecting the best strategy
Some Final Thoughts on Selecting the Best Strategy
  • Re-examine SWOT analysis
    • compare expected outcomes to objectives
    • construct corporate scenarios
  • Consider other behavioral factors
    • Current or past strategy
    • Degree of external dependence
    • Attitudes toward risk
    • Internal politics
    • Timing
    • Competitive reaction