Ben Reeves – a061527041 04/12/2008

Competitive Advantage
An Introduction to and Example of Porter’s Competitive
Advantage
Ben Reeves

STRATEGIC MARKETING
ACE 3002
1444 Words
Ben Reevesa061527041 04/12/2008

Competitive Advantage

Competitive advantage determines the position a business will

occupy against its competitors, it is a key factor in the success of
any business. A company will seek to gain a positive and
sustainable advantage in its industry. Porter Outlines 3 forms of
competitive strategy:

• Cost: This is the most clearly defined Strategy a company will

seek, and examples can be seen in most industries. It is
simply when a company seeks to produce the same product
more efficiently and at a lower cost than it’s competitors. This
can be achieved through economies of scale, innovations in
production & distribution, lower raw materials cost.

Example: Local furniture manufacturer will hand

machine parts requiring a large time investment, more
waste and mistakes all adding to the cost. Ikea have
machines, which can mass-produce products quickly
with little waste and can purchase raw materials in bulk
for a discount. Ikea will have a significant cost
advantage.

Often a company seeking a cost leadership strategy will aim

for a broad market scope in order to satisfy economies of
scale.

• Differentiation: The 2nd generic strategy is when a company

seeks to make its products and services attractive to buyers
by other factors than cost. Of course It depends on what
values customers perceive to be important, but a firm can
achieve differentiation by number of factors, this includes:
product innovation, unique design, strong brand image,
method of delivery to consumers; Often a firm is rewarded for
it’s uniqueness by charging a premium price. A firm choosing
this strategy can achieve above average margins when the
additional product price exceeds the additional production
costs. A successful strategy therefore involves differentiating
into area where the premium price is the greatest, but the
extra costs incurred are minimum.

Example: Ferrari differentiates themselves from fiat by

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emphasising the quality, image, look, sound, uniqueness

of their product.

• Focus: A focus strategy is one in which a firm concentrates on

a small segment of the market. By focusing on a small
segment it is hoped that it can optimize its marketing mix in
order to obtain a competitive advantage within that segment,
although overall in a broad scope it will not. Contained within
a focus strategy is the two advantages previously mentioned,
cost & differentiation. The target segment must have buyers
with unusual needs or no advantage will be available. If the
firm achieves one of these advantages although the market
scope may be small the firm will likely perform above average
as segmentation focus often has higher margins than a broad
scope.

Example: Saga holidays specifically targets the over

50’s age bracket in the hope of gaining a niche
advantage

“It is better to have a small share of not a lot than a large

share of nothing”

These 3 strategies are defined along two axes strategic scope and
strategic strength. Strategic Scope is the size and breadth of the
target market. Strategic Strength is the core strengths of the firm,
it’s ability to innovate and operate efficiently. Porters Generic
Strategies can be illustrated as follows:
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Porter’s theories of competitive advantage can be seen in many

industries, research has shown that firms with high market share
were often very profitable, but also so were firms with low market
share. Porter found that it was the firms with moderate market
share were the worst performers he calls this “stuck in the middle”.
Firms who don’t have a niche market but have not become cost
leaders have no competitive advantage and therefore perform
below average.
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Home Computer Manufacture

The industry I will be looking at is Laptop & Desktop computer

manufacturers. The firms I will be looking at are: Dell, Gateway,
Apple Macintosh, and Alienware.

Dell: Dell is the Market cost leader; It has used innovations in

manufacturing (Just in time production) and out sources the majority
of it’s components from the cheapest available chip manufacturers.
All Dell orders are handled over the phone or Internet requiring that
it does not need retail stores and therefore not incurring high costs.
Dell also positions its assembly factories as close to customers as
possible reducing delivery costs. These factors have allowed Dell to
produce high quality computers with the low manufacturing costs
which in turn have contributed to it’s success with the largest
Market share

Apple: Apple has pursued a Differentiation strategy. They

manufacture almost all the components their selves even if there is
a cheaper alternative, which could be out sourced this Includes the
operating system called Mac OSX instead of Windows, which the
other manufacturers use. They invest a lot of money in design,
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brand image (For example placing retail stores on premium high

streets) trying to differentiate themselves from the competition by
creating a “Mac” experience or way of life. This allows them to
charge high premiums for their product, meaning that even though
they sell less volume they are still extremely profitable. Apple is also
great at innovating and adapting to its market, for example it used
to manufacture it’s own processors but eventually the cost became
greater than the value placed on it by the customers, so it switched
to Intel manufactured chips.

Alienware: Alienware is a comparatively small company which

Sells performance gaming computers. It has successfully focused its
strategy at a very small segment of the market with very high
premiums. Alienware sells some laptops upwards of $5000; in
contrast Dell laptops can be bought for $400, more than 10x
cheaper. Alienware out source top of the range components from
chip manufacturers (In the same way Dell do their outsourcing) and
assemble them in their own distinctly designed cases. In fact Dell’s
and Alienware’s strategy are similar in many respects, no retail
stores, customized production, online orders. The difference
between them is Alienware has decided to focus on the gaming
niche which is considerably smaller than Dell’s scope.

Gateway: Gateway was one of the first modern home computer

manufacturers, founded in 1985. However in recent years it has
failed to form a competitive advantage and would be classified by
Porter as “Stuck in the Middle”. While the computer market was still
in early stages there was room for gateway to succeed, however as
the market has matured gateway have been unable to sustain their
advantage. Therefore it has been pushed out the market by
stronger competition and has performed badly in recent years. In
fact in October 2007 Gateway declared bankruptcy and was bought
by a rival computer manufacturer (Acer).
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Quantifying the cost advantages

For this I will use Apple & Dell, Values in millions

The components required for computer manufacture evolve at a

rapid rate and therefore the manufacturing process is still quite
complex. I therefore predict my Learning curve value to be 15%

(Dell – $57,420 / Apple – $9,602 ) – 1 = 4.98 * 15

= 74.7%

Dell will therefore have costs 75% lower than Dell, showing how
efficient Dell is as Cost leader.
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Overall competitive advantage

Revenue per market share = Total Revenue / Market share

Cost per Unit = Total Cost / Number of Units

Total Cost = Revenue – Profit

----------------

Apple:

Revenue per market share = $9,602 Million / 6.4%

= $1500.3 per %

Total Cost = $9,602 - $1,343

= $8259

Cost per Unit = $8,259/ 6,3

= $1,376

Profit per Unit = $1,343 / 6.3

= $213

Dell:

Revenue per market share = $57, 420 Million / 29.7%

= $1933

Total Cost = $57, 420 - $9, 516

= $47, 904

Cost per Unit = $47, 904/ 42

= $1140.6
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Profit per Unit = $9,516 / 42

= $227

Dell has a 28% Differentiation advantage over apple.

Dell has a 21% Cost Advantage over apple

Based on results it is clear that Dell’s competitive strategy is

stronger than Apple’s. A 28% Differentiation strategy advantage
means apple has to invest 28% more than Dell in order to achieve
the same market share growth. It shows that the majority of
customers in the market value cost differentiation greater than
Apple’s choice of product differentiation. Apple has to work harder
in order to persuade people to buy its product. This is expected as
even though Apple is perusing a differentiation strategy it is clear
that the largest and most easily targeted area of the market is still
cost based.

Dell Also has a 21% Cost Advantage, meaning that they

are 21% more competent at producing units than apple. This is due
to as explained before apple manufacturing it’s components in
house rather than out-sourcing.

I was expecting to see Apple have a higher profit per unit

value than Dell. However the extra cost of Advertising, Production &
Distribution incurred by apple in order to differentiate it’s self has
negated the sale at premium price.

The strategies adopted by Dell since it’s foundation in

1984 have allowed the firm to maintain a sustained competitive
advantage. Cost leadership and broad scope have been the key to
its success. Dell has strived for cost leadership by innovations in
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production and distribution lowering it’s manufacturing costs. Dell

has also positioned itself in the broadest market scope by offering
nearly every product available in the market (high end, low end, pc
‘s, desktops, servers). Not only that but Dell has further increased
the breadth of it’s market by allowing customers to customise the
product they need before they purchase meaning they can cater for
specialist orders as well.

Gateway and Dell were founded within a year of each

other initially with similar goals. However it is only Dell, which has
managed to innovate and maintain a competitive advantage, that is
the market leader today and Gateway which has since declared
bankruptcy.
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Bibliography

August 28, 2007 Austin American Statesman, page D1.

Competitive Advantage,
CREATING AND SUSTAINING SUPERIOR
PERFORMANCE, By Michael E. Porter, ISBN: 0-684-84146-0

Dell Financial data -

http://www1.euro.dell.com/content/topics/global.aspx/about_dell/inv
estors/financials/index?~ck=ln&c=uk&l=en&lnki=0&s=corp

Gateway Financial data - http://www.hoovers.com/gateway,-inc./--

ID__16706,period__A--/free-co-fin-income.xhtml

Apple Income statement - http://finance.yahoo.com/q/is?

s=AAPL&annual
Ben Reevesa061527041 04/12/2008

Appendix 1 - Home Computer Market 2006

Apple Mac:

Revenue: $9,602 Million

Profit: $1,343 Million ~

Units Sold 6.3 Million

Market Share: 6.4%

Margin: 14.9%

~ Estimated As a large part of Apple sales are from other

industries. Mac sales account for %42 of Total Revenue, however
final profit is difficult to determine

Gateway:
Revenue $3,980 Million

Profit: $9.6 Million

Market Share: 6.1%

Margin: 0.2%

Dell:

Revenue $57, 420 Million

Profit: $9, 516 Million

Units Sold 38.7 million

Market Share: 29.7%

Margin: 4.8%

Alienware:

Revenue $170 Million

Profit: $51 Million ~

Market Share: < 1%

Margin: 30% ~