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External and Internal Analysis and Competitive Advantage

In this lecture, we focus


Companys present strategy
Internal strength and weakness and
external opportunity and threat
Five generic competitive strategy
Competitive advantage and strategy for
Diversification

External and Internal Analysis and Competitive Advantage

Performance can be evaluated by


Growth of sales
Acquiring new and retaining
Cost (low cost?)
existing customers
Profit margin
Quality (superior
Trends on return on investment
quality?)
(ROI)
Customer based
Efficiency in production cost,
(broad or narrow
defects rate, inventory,
segment)
distribution, supply chain
management
Product-distribution
Image and reputation
(logistic, inventory
Considerations for Present
Strategy:

strategy)

External and Internal Analysis and Competitive Advantage

Basis of developing strategy


SWOT analysis is based on the principle that
Strategy making efforts aim at producing a
good fit between companys resource
capability (balance of resource strength
and weakness) and its external situation
(market opportunities and threats to
profitability and market standing)
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Strategy Formulation
Managers analyze the current situation to
develop strategies achieving the mission.
SWOT analysis: a planning to identify:

Organizational Strengths and Weaknesses.

Strengths: manufacturing ability, marketing skills.


Weaknesses: high labor turnover, weak financials.

Environmental Opportunities and Threats.

Opportunities: new markets.


Threats: economic recession, competitors

External Analysis
Analyzing the dynamics of the industry in
which an organization competes to help
identify:
Opportunities: conditions in the environment
that a company can take advantage to
become more profitable

Threats: conditions in the environment that


endanger the integrity and profitability of the
companys business
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The Computer Sector: Industries and Segments

Porter's Five Forces Model


Potential
Entrants

Threat of
Entry
Bargaining
Power
Competitive
Rivalry

Suppliers
Bargaining
Power

Buyers

Threat of
Entry

Substitutes
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Risk of Entry by Potential Competitors


Potential for entry: how easy is it for new firms to
enter the industry?
Easy entry leads to lower prices and profits.

Barriers to entry
Brand loyalty
Absolute cost advantage
Superior production operations and processes
Control of particular inputs required for production
Access to cheaper funds because existing companies
represent lower risks than new entrants
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Risk of Entry by Potential Competitors

Barriers to entry
Economies of scale
Cost reductions from mass production of standardized output
Discounts on bulk purchases of inputs
Advantages of spreading fixed costs over a large production
volume
Cost savings from marketing and advertising for a large
volume of output

Customer switching costs


Government regulation

Rivalry Among Established Companies

Level of Rivalry in an industry: how intense


is current competition with competitors?
Increased competition results in lower
profits.
Industry competitive structure
Fragmented vs. consolidated (oligopoly or
monopoly)
Industry growth
Fixed (or storage) cost
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The Bargaining Power of Buyers


Power of Buyers: If there are only a few buyers, they can
bargain down prices.

Buyers are most powerful when


The industry that is supplying a particular product or
service is composed of many small companies and the
buyers are large in size and few in number (when WalMart is a buyer)
Buyers purchase in large quantities
The supply industry depends on the buyers for a large
percentage of its total orders
Switching costs are low
It is economically feasible for buyers to play one supplier
against another
Buyers can threat to produce the product themselves
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The Bargaining Power of Suppliers


Power of Suppliers: If there are only a few suppliers of
important items, supply costs rise.

Suppliers are most powerful when


There are few substitute for the supplier's products
(raw materials)
Switching costs are high for companies/consumers
switching to a different supplier
Suppliers can threat to compete directly with buyers by
entering their industry
Supplier's contribution to quality or service of the industry
products is high
Total industry cost contributed by suppliers is high
Buyers cannot threat to enter the suppliers industry
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Importance of the industry to supplier's profit

Substitute Products
Substitutes: More available substitutes tend to
drive down prices and profits.
Many substitute products
Are a threat and limit the price that companies in one
industry can charge for their product, and thus industry
profitability

Few or weak close substitutes


Gives the industry the opportunity to raise prices and earn
additional profits

Substitute producer's profitability & aggressiveness


Substitute price-value
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Market Feasibility and Strategy Development

Sixth Force: Complementors


When complementors are important and their
number is increasing
Demand and profits in the industry are boosted

When complementors are weak


Industry growth can slow and profits can be limited

Example: Hotel and Tourism


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External and Internal Analysis

Internal analysis
Identify organizational strengths and
weaknesses
Sources of competitive advantage:
superior efficiency
quality
innovation, and
responsiveness to customers
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Competitive Advantage

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Internal Analysis
Identifying strength and weakness of company
Managers must understand
The role of resources, capabilities, and distinctive
competencies in the process by which companies
create value and profit

The importance of superior efficiency, innovation,


quality, and responsiveness to customers
The sources of their companys competitive
advantage (strengths and weaknesses)
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Distinctive Competences and Competitive Advantage

Distinctive competencies

Firm-specific strengths that allow a


company to gain competitive
advantage by differentiating its
products and/or achieving lower costs
than its rivals
Arise from resources and capabilities
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The Role of Resources


Resources
Capital or financial, physical, social or human,
technological, and organizational factor

A firm-specific and difficult to imitate resource


is likely to lead to distinctive competency (for
Grameen Optical Fiber Network from Railway)

A valuable resource that creates strong


demand for a firms products may lead to
distinctive competency
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The Role of Capabilities


Capabilities
A companys skills at coordinating and using its
resources

Capabilities are the product of organizational


structure, processes, and control systems

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RESOURCE-BASED APPROACH TO STRATEGY ANALYSIS

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Value Creation per Unit

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Comparing Toyota and General Motors

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The Value Chain


A company is a chain of activities for
transforming inputs into outputs that
customers value

The transformation process is composed of


primary and support activities that add value
to the product
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The Value Chain: Primary and Support Activities

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KEY SUSSESS FACTOR MATRIX


External Factor Evaluation Matrix
Internal Factor Evaluation Matrix
List Key Factors
Assign relative weight
Assign a rating for strength/weakness or
opportunity/threat
Multiply each factors weight by companys
rating for that factor
Sum up the weighted scores
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KEY SUSSESS FACTOR MATRIX

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The Five Generic Competitive Strategies

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Low-Cost Provider Strategies


Keys to Success
Make achievement of meaningful lower costs
than rivals is the theme of firms strategy
Include features and services in product
offering that buyers consider essential
Find approaches to achieve a cost advantage
in ways difficult for rivals to copy or match
Pride Textile, Maruti Car

Low-cost leadership means low


overall costs, not just low
manufacturing or production costs!

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Low-Cost Advantage
Strategy
Option 1: Use lower-cost edge to
Underprice competitors and attract price-sensitive
buyers in enough numbers to increase total profits
Option 2: Maintain present price, be content with present
market share, and use lower-cost edge to
Earn a higher profit margin on each unit sold, thereby
increasing total profits

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Securing Cost Advantage


Approach 1
Do a better job than rivals in performing value
chain activities efficiently and cost effectively

Approach 2
Revamp value chain to bypass cost-producing
activities that add little value from buyers
perspective

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Approach 1: Controlling the Cost Drivers

Capture scale economies; avoid scale


diseconomies
Capture learning and experience curve effects
Manage costs of key resource inputs
Consider linkages with other activities in value chain

Find sharing opportunities with other business units


Compare vertical integration vs. outsourcing
Assess first-mover advantages vs. disadvantages
Control percentage of capacity utilization
Make prudent strategic choices related to
operations

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Approach 2: Revamping Value Chain


Make greater use of Internet technology
applications
Use direct-to-end-user sales/marketing methods
Simplify product design
Offer basic, no-frills product/service

Shift to a simpler, less capital-intensive, or more


flexible technological process
Find ways to bypass use of high-cost raw materials

Relocate facilities closer to suppliers or customers


Drop something for everyone approach and focus
on a limited product/service
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Success in Achieving Low-Cost Leadership


Scrutinize each cost-creating activity, identify cost drivers
Use knowledge about cost drivers to manage costs of each
activity down year after year
Find ways to restructure value chain to eliminate nonessential
work steps and low-value activities
Work diligently to create cost-conscious corporate cultures

Feature broad employee participation in continuous costimprovement efforts and limited perks for executives
Strive to operate with exceptionally small corporate staffs

Aggressively pursue investments in resources and capabilities


that promise to drive costs out of the business
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When Low-Cost Strategy Work Best

Price competition is vigorous


Product is standardized or readily available
from many suppliers
There are few ways to achieve differentiation
that have value to buyers
Most buyers use product in same ways
Buyers incur low switching costs
Buyers are large and have significant
bargaining power
Industry newcomers use introductory low
prices to attract buyers and build customer
base
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Pitfalls of Low-Cost Strategies


Being overly aggressive in cutting price
Low cost methods are easily imitated by rivals

Becoming too fixated on reducing costs and


ignoring
Buyer interest in additional features
Declining buyer sensitivity to price
Changes in how the product is used

Technological breakthroughs open up cost


reductions for rivals
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Low Cost and Differentiation

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Differentiation Strategies
Objective
Incorporate differentiating features that cause buyers to
prefer firms product or service over brands of rivals
(General Motors Automobiles in International
market, Retail superstore like Nandan, Agora,
Mina Bazar etc. in Bangladesh)

Keys to Success
Find ways to differentiate that create value for
buyers and are not easily matched or cheaply
copied by rivals
Not spending more to achieve differentiation than
price premium that can be charged
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Benefits of Successful Differentiation

A product / service with unique, appealing


attributes allows a firm (consider different
features of NSU and its premium price) to
Command
Increase
Build

a premium price and/or

unit sales and/or

brand loyalty

= Competitive Advantage
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Types of Differentiation Themes


Unique taste -- Dr. Pepper
Multiple/Friendly features -- Microsoft
Windows and Office
Wide selection and one-stop shopping -Home Depot and Amazon.com
Superior service -- FedEx, Ritz-Carlton
Service availability Dutch-Bangla Bank by
ATM booth
Spare parts availability -- Caterpillar
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Types of Differentiation Themes


More for your money -- McDonalds, WalMart, KFC in Bangladesh
Prestige Rolex, Harrods departmental
store
Quality manufacture General Motors,
Honda
Unique Fashion -- Aarong
Technological leadership -- 3M Corporation
Top-of-line image -- Ralph Lauren, Chanel,
Cross
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Differentiation: Keys to Competitive Advantage


Most appealing approaches to differentiation
Those hardest for rivals to match or imitate

Those buyers will find most appealing


Best choices to gain a longer-lasting, more profitable
competitive edge

New product innovation


Technical superiority
Product quality and reliability

Comprehensive customer service


Unique competitive capabilities
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Differentiation Opportunities in Value Chain


Differentiation Opportunities in Value Chain

Purchasing and procurement activities (Starbucks


in buying coffee beans)
Product R&D and product design activities (Omega,
Swiss Army, Swiss Legend--Swiss Watch)
Production process / technology-related activities
(Samsung)
Manufacturing / production activities (Toyota)
Distribution-related activities (Dell)
Marketing, sales, and customer service activities
(Rahimafrooz)
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Achieve Differentiation-Based Advantage


Approach 1

Incorporate product features/attributes that


lower buyers overall costs of using product (Hybrid car: Fuel
consumption low, Energy savings bulb)

Approach 2
Incorporate features/attributes that raise the
performance a buyer gets out of the product (Hybrid car: better
speed, Sony picture tube)

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Achieve Differentiation-Based Advantage


Approach 3

Incorporate features/attributes that enhance buyer satisfaction


in non-economic or intangible ways (Hybrid car: status, CK
brand handbags for women)

Approach 4
Compete on the basis of superior capabilities to serve
(CNN to cover breaking news, Unilever through
excellent distribution channel)

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Differentiation Strategy Work Best


There are many ways to differentiate a product
that have value and please customers

Buyer needs and uses are diverse


Few rivals are following a similar differentiation
approach
Technological change and product innovation are
fast-paced
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Pitfalls of Differentiation Strategies


Buyers see little value in unique attributes of
product
Appealing product features are easily copied by
rivals
Differentiating on a feature buyers do not perceive
as lowering their cost or enhancing their well-being

Over-differentiating such that product features


exceed buyers needs
Charging a price premium buyers perceive is too
high
Not striving to open up meaningful gaps in quality,
service, or performance features vis--vis rivals 47
products

Best-Cost Provider Strategies


Combine a strategic emphasis on low-cost with a
strategic emphasis on differentiation
Make an upscale product at a lower cost

Give customers more value for the money

Objectives
Deliver superior value by meeting or exceeding buyer
expectations on product attributes and beating their price
expectations (Toyota)
Be the low-cost provider of a product with good-toexcellent product attributes, then use cost advantage to
under price comparable brands
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Competitive Strength of Best-Cost Strategy


A best-cost providers competitive advantage
comes from matching close rivals on key product
attributes and beating them on price
Success depends on having skills and capabilities
to provide attractive performance and features
at a lower cost than rivals
A best-cost producer can often out-compete both
a low-cost provider and a differentiator when
Standardized features/attributes wont meet
diverse needs of buyers
Many buyers are price and value sensitive
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Focus / Niche Strategies


Involve concentrated attention on a narrow piece of
the total market

Objective
Serve niche buyers better than rivals

Keys to Success
Choose a market niche where buyers have
distinctive preferences, special requirements, or
unique needs
Develop unique capabilities to serve needs of target
buyer segment
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Defining Market Niche


Geographic uniqueness
Specialized requirements in using product
/service
Special product attributes appealing only to
niche buyers
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Focus Strategies
eBay
Online auctions
Porsche
Sports cars
Jiffy Lube International
Maintenance for motor vehicles
Pottery Barn Kids
Childrens furniture and accessories

KFC
Rich People

Bangla Link
Young group

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Focus / Niche Strategies


Approach 1
Achieve lower costs than
rivals in serving the segment --

A focused low-cost strategy (Bangla Link)


Approach 2
Offer niche buyers something
different from rivals --

Which hat
is unique?

A focused differentiation strategy (DomInno builders)


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Attractive for Focusing


Big enough to be profitable and offers good growth
potential
Not crucial to success of industry leaders
Costly or difficult for multi-segment competitors to
meet specialized needs of niche members
Focuser has resources and capabilities to effectively
serve an attractive niche
Few other rivals are specializing in same niche
Focuser can defend against challengers via superior
ability to serve niche members
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Generic Strategy: Which One to Use


Each positions a company differently in its market
and competitive environment
Each establishes a central theme for how company
will endeavor to out-compete rivals
Each creates some boundaries for maneuvering as
market circumstances unfold
Each points to different ways of experimenting with
the basics of the strategy
Each entails differences in product line, production
emphasis, marketing emphasis, and means to
sustain the strategy
The big risk Selecting a stuck in the middle strategy!
This rarely produces a sustainable competitive
advantage or a distinctive competitive position.

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Diversification
Diversification
As long as company has strong foothold on its
current industry, there is no urgency to pursue
diversification

It depends on
Partly on companys growth opportunity in
current industry
Partly on the opportunities to utilize its
resources, expertise, and capabilities in other
industries
The question is what kind and how much
diversification?
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Diversification
Diversification
The process of adding new businesses to the
company that are distinct from its established
operations

Vehicles for diversification


Internal new venturing
Starting a new business from scratch

Acquisitions
Joint ventures
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Beyond a Single Industry


Advantages of staying in a single industry
Focus resources and capabilities on
competing successfully in one area
Focus on what the company knows and does
best

Disadvantages of being in a single


industry
Danger of the industry declining
Missing the opportunity to leverage resources
and capabilities to other activities
Resting on laurels and not continually learning
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Portfolio of Distinctive Competencies


Reconceptualize the company as a
portfolio of distinctive competencies rather
than a portfolio of products (Sony from
Music to Kids games; Akiz from tobacco to
soft drinks)
Consider how those competencies might
be leveraged to create opportunities in
new industries
Existing product vs. self competencies
Existing industries in which a company
competes vs. new industries
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Establishing a Competency Agenda

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Single Business Strategy


Concentrate in single business: McDonalds
focuses in the fast food business.

Can become very strong, but can be risky.

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Profitability Through Diversification


Transferring competencies

Taking a distinctive competence developed


in one industry and applying it to an
existing business in another industry
The competencies transferred must involve
activities that are important for establishing
competitive advantage
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Cement Industry

Tobacco Industry

Transfer of Competencies at Akiz Group

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Profitability Through Diversification


Leveraging competencies
Taking a distinctive competence developed by a
business in one industry and using it to create a
new business in a different industry

Sharing resources: economies of scope


Cost reductions associated with sharing
resources across businesses

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Sharing Resources at Proctor & Gamble

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Diversification Strategies
Diversification: Organization moves into
new businesses and services.
Related diversification: firm diversifies in
similar areas to build upon existing divisions.
Synergy: two divisions work together to obtain more
than the sum of each separately.

Unrelated diversification: buy business in new


areas.

Build a portfolio of unrelated firms to reduce risk or


trouble in one industry. Very hard to manage.

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