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Competitive advantage


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Competitive advantage

  1. 1. Competitive Advantage Author: Michael Porter 1
  2. 2. How a firm can actually create and sustain a competitive advantage in its industry 2
  3. 3. Two Basic Types• Cost leadership• Differentiation 3
  4. 4. Value Chain• Identify which activities contributing to cost leadership and differentiation• Analyze the source of competitive advantage 4
  5. 5. Value Chain 5
  6. 6. Primary Activities• Inbound Logistics Receiving, storing, and disseminating inputs. E.g., warehousing, inventory control• Operations Transforming inputs into the final product form 6
  7. 7. Primary Activities• Outbound Logistics Collecting, storing and distributing the product to buyers• Marketing and Sales Providing a means and incentive which allow buyers to purchase the product• Service Providing service to enhance or maintain the value of the product 7
  8. 8. Primary Activity Focus by IndustryIndustry Inbound Operations Outbound Marketing Service Logistics Logistics & SalesDistributor X XRestaurant X NACorporate XLendingXerox X 8
  9. 9. Support Activities• Procurement Function of purchasing inputs used in the value chain• Technology Development 9
  10. 10. Support Activities• Human Resource Management• Firm Infrastructure planning, finance, accounting, legal, etc. 10
  11. 11. Competitive Scope• Four scopes may affect value chain• Ex. The value chain serves minicomputer requires extensive sales assistance, less hardware performance – different from what serves small business 11
  12. 12. Competitive Scope• Segment Scope Differences required to serve different product or buyer segment• Vertical Scope Division of activities between a firm and its suppliers, channels, and buyers 12
  13. 13. Competitive Scope• Geographic Scope Different geographic areas• Industry Scope Interrelationships among business units 13
  14. 14. “Generic” Competitive Advantage• Cost Leadership• Differentiation• Focus 14
  15. 15. Competitive Strategies Competitive Advantage Lower Cost Differentiation Broad Cost DifferentiationCompetitive Scope Target Leadership Narrow Cost Focus Differentiation Target Focus 15
  16. 16. Cost Leadership StrategySteps to achieve cost leadership• Make cost assignment• Identify cost drivers• Understand cost dynamics• Control cost drivers• Reconfigure the value chain 16
  17. 17. Operating Cost Assignment 17
  18. 18. Asset Assignment 18
  19. 19. Why cost assignment• Understand the firm’s cost structure• Find cost drivers of each cost segment• Match cost structure to buyer’s value chain• Configure and reconfigure the cost structure 19
  20. 20. Cost Leadership – Cost DriversFactors affect costs. 20
  21. 21. Cost Leadership – Cost Drivers• Economies or diseconomies of scale• Learning and spillover• Pattern of capacity utilization – When fixed cost high, capacity utilization is important• Linkages How other activities are performed – Linkages within the Value Chain – Vertical Linkages 21
  22. 22. Cost Leadership – Cost Drivers• Interrelationships With other business units within a firm• Integration Vertical integration in a value activity• Timing 22
  23. 23. Cost Leadership – Cost Drivers• Discretionary policies Policies that reflect a firm’s strategy• Location• Institutional factors e.g., government regulations, financial incentives, unionization, etc. 23
  24. 24. Identify Cost Drivers 24
  25. 25. Cost Dynamics• What cause the change of cost drivers 25
  26. 26. Cost Dynamics• Industry real growth• Differential scale sensitivity• Different learning rates• Differential technological change• Relative inflation of costs• Aging• Market adjustment 26
  27. 27. How to Achieve Cost Advantage 27
  28. 28. Analyze Cost Advantage 28
  29. 29. Control Cost Drivers• E.g., control scale – gain the appropriate firm size 29
  30. 30. Reconfigure the Value Chain• Reconfiguration of the value chain presents the opportunity to fundamentally restructure a firm’s cost, compared to settling for incremental improvements.• By altering the basis of competition in a way that favors a firm’s strengths, it may change the important cost drivers in a way that favors a firm. 30
  31. 31. Steps in Strategic Cost Analysis1. Identify the appropriate value chain and assign costs and assets to it.2. Diagnose the cost drivers of each value activity and how they interact.3. Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences.4. Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain and/or downstream value. 31
  32. 32. Cost FocusA firm dedicates its efforts to a well-chosen segment of an industry can oftenlower its costs significantly. 32
  33. 33. Differentiation• Emphasize on a unique source of differentiation in the Value Chain, rather than on products or markets only• Differentiation base on buyers’ value, not only difference that buyers do not value• Should consider the cost of differentiation 33
  34. 34. 34
  35. 35. Identify Sources of Differentiation 35
  36. 36. Drivers of Uniqueness• Policy Choices• Linkages – Linkages within the value chain – Supplier linkages – Channel linkages• Timing Be the first• Location 36
  37. 37. Drivers of Uniqueness• Interrelationship Sharing a value activity with sister business units. E.g., sharing a sales force for both insurance and other financial products• Proprietary learning• Integration – e.g., integrating online systems to current ordering systems• Scale• Institutional factors – e.g., “Madame’s route” 37
  38. 38. Why buyers purchase?Purchasing Criteria• User criteria – firms to meet them by lowering cost or raising buyer performance• Signaling criteria – telling buyers what benefits to get 38
  39. 39. Differentiation for creatingBuyer Value by• Lowering buyer cost• Raising buyer performance• Signaling the valueThrough• Linking the firm’s value chain to the buyer’s value chain 39
  40. 40. Steps in Differentiation1. Determine who the real buyer is2. Identify the buyer’s value chain and the firm’s impact on it3. Determine ranked buyer purchasing criteria4. Assess the existing and potential sources of uniqueness in a firm’s value chain 40
  41. 41. Steps in Differentiation5. Identify the cost of existing and potential sources of differentiation6. Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating7. Test the chosen differentiation strategy for sustainability8. Reduce cost in activities that do not affect the chosen forms of differentiation 41
  42. 42. Discussion:Red Ocean to Blue Ocean 42
  43. 43. 43