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The Nature and Sources of Competitive Advantage

OUTLINE
The emergence of competitive advantage Sustaining competitive advantage Competitive advantage in different market settings Types of competitive advantage: cost and differentiation

The Emergence of Competitive Advantage


How does competitive advantage emerge?

External sources of change e.g.: Changing customer demand Changing prices Technological change

Internal sources of change

Resource heterogeneity among firms means differential impact

Some firms faster and more effective in exploiting change

Some firms have greater creative and innovative capability

Competitive Advantage from InternallyGenerated Change: Strategic Innovation

Characteristics of innovatory strategies: Associated with new entrants to an industry (e.g. Nucor in
steel, IKEA in furniture, Home Depot in DIY, Dell in PCs, American Apparel in casual clothing)

Reconcile conflicting performance goals (e.g. Toyotas lean


production system combines low cost, high quality, and flexibility. Retailers Primark and Target combine low cost with stylishness.)

Reconfiguring the value chain e.g.-- Nikes system for manufacturing and distributing shoes totally different from traditional shoe manufacturer Southwest Airlines simplification of the normal airline value chain Zaras system of design, manufacture, and distribution

Sustaining Competitive Advantage Against Imitation

REQUIREMENT FOR IMITATION Identification

ISOLATING MECHANISM - Obscure superior performance - Deterrence--signal aggressive intentions to imitators - Pre-emption--exploit all available investment opportunities - Rely upon multiple sources of competitive advantage to create causal ambiguity

Incentives for imitation

Diagnosis

Resource acquisition

- Base competitive advantage upon resources and capabilities that are immobile and difficult to replicate

Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets
SOURCE OF IMPERFECTION OF COMPETITION None (efficient markets) Imperfect information Transactions costs Systematic behavioral trends Overshooting OPPORTUNITY FOR COMPETITIVE ADVANTAGE None Insider trading Cost minimization Superior diagnosis (e.g. chart analysis) Contrarianism Identify potential barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, etc.) & base strategy upon them. Difficult to influence or exploit.

MARKET TYPE

TRADING MARKETS

Barriers to imitation PRODUCTION MARKETS Barriers to innovation

Sources of Competitive Advantage

COST ADVANTAGE COMPETITIVE ADVANTAGE DIFFERENTIATION ADVANTAGE

Porters Generic Strategies

SOURCE OF COMPETITIVE ADVANTAGE Low cost Differentiation Industry-wide COMPETITIVE SCOPE Single Segment FOCUS COST LEADERSHIP DIFFERENTIATION

Features of Cost Leadership and Differentiation Strategies


Generic strategy COST LEADERSHIP Key strategy elements
Scale-efficient plants. Design for manufacture. Control of overheads & R&D. Avoidance of marginal customer accounts. Emphasis on branding and brand advertising, design, service, and quality.

Resource & organizational requirements


Access to capital. Process engineering skills. Frequent reports. Tight cost control. Specialization of jobs and functions. Incentives for quantitative targets. Marketing. Product engineering. Creativity. Product R&D Qualitative measurement and incentives. Strong cross-functional coordination.

DIFFERENTIATION

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