Competitive Advantage

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Competitive Advantage:

1 Competitive Advantage Author: Michael Porter

How a firm can actually create and sustain a competitive advantage in its industry:

2 How a firm can actually create and sustain a competitive advantage in its industry

Two Basic Types:

3 Two Basic Types Cost leadership Differentiation

Value Chain:

4 Value Chain Identify which activities contributing to cost leadership and differentiation Analyze the source of competitive advantage

Value Chain:

5 Value Chain

Primary Activities:

6 Primary Activities Inbound Logistics Receiving, storing, and disseminating inputs. E.g., warehousing, inventory control Operations Transforming inputs into the final product form

Primary Activities:

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

Primary Activity Focus by Industry:

8 Primary Activity Focus by Industry Industry Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Distributor X X Restaurant X NA Corporate Lending X Xerox X

Support Activities:

9 Support Activities Procurement Function of purchasing inputs used in the value chain Technology Development

Support Activities:

10 Support Activities Human Resource Management Firm Infrastructure planning, finance, accounting, legal, etc.

Competitive Scope:

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

Competitive Scope:

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

Competitive Scope:

13 Competitive Scope Geographic Scope Different geographic areas Industry Scope Interrelationships among business units

“Generic” Competitive Advantage:

14 “Generic” Competitive Advantage Cost Leadership Differentiation Focus

Competitive Strategies:

15 Competitive Strategies Competitive Advantage Lower Cost Differentiation Competitive Scope Broad Target Cost Leadership Differentiation Narrow Target Cost Focus Differentiation Focus

Cost Leadership Strategy:

16 Cost Leadership Strategy Steps to achieve cost leadership Make cost assignment Identify cost drivers Understand cost dynamics Control cost drivers Reconfigure the value chain

Operating Cost Assignment:

17 Operating Cost Assignment

Asset Assignment:

18 Asset Assignment

Why cost assignment:

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

Cost Leadership – Cost Drivers:

20 Cost Leadership – Cost Drivers Factors affect costs.

Cost Leadership – Cost Drivers:

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

Cost Leadership – Cost Drivers:

22 Cost Leadership – Cost Drivers Interrelationships With other business units within a firm Integration Vertical integration in a value activity Timing

Cost Leadership – Cost Drivers:

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.

Identify Cost Drivers:

24 Identify Cost Drivers

Cost Dynamics:

25 Cost Dynamics What cause the change of cost drivers

Cost Dynamics:

26 Cost Dynamics Industry real growth Differential scale sensitivity Different learning rates Differential technological change Relative inflation of costs Aging Market adjustment

How to Achieve Cost Advantage:

27 How to Achieve Cost Advantage

Analyze Cost Advantage:

28 Analyze Cost Advantage

Control Cost Drivers:

29 Control Cost Drivers E.g., control scale – gain the appropriate firm size

Reconfigure the Value Chain:

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.

Steps in Strategic Cost Analysis:

31 Steps in Strategic Cost Analysis Identify the appropriate value chain and assign costs and assets to it. Diagnose the cost drivers of each value activity and how they interact. Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences. Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain and/or downstream value.

Cost Focus:

32 Cost Focus A firm dedicates its efforts to a well-chosen segment of an industry can often lower its costs significantly.


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

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Identify Sources of Differentiation:

35 Identify Sources of Differentiation

Drivers of Uniqueness:

36 Drivers of Uniqueness Policy Choices Linkages Linkages within the value chain Supplier linkages Channel linkages Timing Be the first Location

Drivers of Uniqueness:

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”

Why buyers purchase?:

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

Differentiation for creating Buyer Value by:

39 Differentiation for creating Buyer Value by Lowering buyer cost Raising buyer performance Signaling the value Linking the firm’s value chain to the buyer’s value chain Through

Steps in Differentiation:

40 Steps in Differentiation Determine who the real buyer is Identify the buyer’s value chain and the firm’s impact on it Determine ranked buyer purchasing criteria Assess the existing and potential sources of uniqueness in a firm’s value chain

Steps in Differentiation:

41 Steps in Differentiation Identify the cost of existing and potential sources of differentiation Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating Test the chosen differentiation strategy for sustainability Reduce cost in activities that do not affect the chosen forms of differentiation

Discussion: Red Ocean to Blue Ocean:

42 Discussion: Red Ocean to Blue Ocean

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