Bpsm2

BUSINESS POLICY & STRATEGY

MODULE – 2

COMPETITIVE ADVANTAGECOMPETITIVE ADVANTAGE

Dr. MARAMRAJU PADMAKAR RAODr. MARAMRAJU PADMAKAR RAO

REFERENCES:REFERENCES:

““STRATEGIC MANAGEMENT”STRATEGIC MANAGEMENT”

----Charles W. L. Hill----Charles W. L. Hill

Gareth R. JonesGareth R. Jones

STRATEGIC PLANNING PROCESS

MISSION& GOALS

SWOT STRAT. CHOICE

EXTERNALOPP &

THREATS

INTERNALSTRENGTHSWEAKNESS

FUNCTIONALBUSINESSGLOBAL

CORPORATESTRATEGIES

CORP.PERFORM-

-ANCE

IMPL.IN FIRM

IMPL.ININDUSTRY

FEEDBACK

EXTERNAL ENVIRONMENTEXTERNAL ENVIRONMENTINDUSTRYINDUSTRY:: Group of companies offering product

or services that are close substitutes for each other i.e. product/service that satisfy the same basic customer need

INDUSTRY BOUNDARYINDUSTRY BOUNDARY:: Basic customer needs that are served by a market define the industry boundary.

SECTORSECTOR:: A group of closely related industries

EX:1. COMPUTER SECTOREX:1. COMPUTER SECTOR -------------Computer component industry-------------Computer component industry

-------------Computer hardware industry-------------Computer hardware industry

-------------Computer software industry-------------Computer software industry

2. TELECOMMUNICATIONS:2. TELECOMMUNICATIONS: --Telecommunication Equipment Ind. --Telecommunication Equipment Ind.

SECTORSECTOR -- Telecommunication Services Ind. -- Telecommunication Services Ind.

INDUSTRY COMPETITIVE ANALYSIS

Porter’s Five Forces ModelPorter’s Five Forces Model Strategic Group AnalysisStrategic Group Analysis Industry Life Cycle AnalysisIndustry Life Cycle Analysis

PORTER’S FIVE FORCES MODEL

RISK OF ENTRYBY POTENTIALCOMPETITORS

INTENSITY OFRIVALRY

AMONG FIRMS

BARGAININGPOWER OF SUPPLIERS

BARGAININGPOWER OF

BUYERS

THREAT OFSUBSTITUTES

1. RISK OF ENTRY: a) BRAND LOYALTY – by continuous ads,

patent protection, product innovation, high product quality

b) b) ABSOLUTE COST ADVANTAGE– – superior production operations, control of inputs like labor, material, equipment, skills, access to cheaper funds.

c) c) ECONOMICS OF SCALE – – cost reduction thro mass production, discounts on bulk purchase of raw materials, spreading fixed production costs, cost savings through spreading marketing & advertising over a large volume.

PORTER’S FIVE FORCES MODELPORTER’S FIVE FORCES MODEL

PORTER’S FIVE FORCES MODELPORTER’S FIVE FORCES MODEL … …contdcontd

d) d) Customer switching cost-----high switching charges locks the customer, higher barrier to exit

Ex: switching from one Operating system to anothere) e) Government Regulations --- --- lowers the barrier to

new entrants Ex: Telecom, Transport airlines

2) RIVERLRY AMONG THE ESTABLISHED FIRMS: Competitive struggle to gain market share

PRICE, PRODUCT DESIGN, ADVERTISING, PROMOTION SPENDING, DIRECT SELLING EFFORTS, AFTER SALES SERVICE AND SUPPORT

PORTER’S FIVE FORCES MODELPORTER’S FIVE FORCES MODEL …contd …contdINDUSTRY COMPETITIVE STRUCTUREINDUSTRY COMPETITIVE STRUCTURE a) Fragmented Industry:a) Fragmented Industry: Large no of small/ medium size Large no of small/ medium size

companies & none can determine industry price. Boom companies & none can determine industry price. Boom and bust cycles repeat, profits rise & fall, large no of and bust cycles repeat, profits rise & fall, large no of new entrantsnew entrants

Ex: Agriculture, Health clubsEx: Agriculture, Health clubs StrategyStrategy: minimize cost: minimize cost b) Consolidated Industry:b) Consolidated Industry: A small no of large cos A small no of large cos (OLIGOPOLY), one company competitive actions will (OLIGOPOLY), one company competitive actions will

lead to competitive reaction .May lead to competitive lead to competitive reaction .May lead to competitive spiral. Ex: Airlines, Automobiles, Aerospace, Pharmaspiral. Ex: Airlines, Automobiles, Aerospace, Pharma

StrategyStrategy: prices should be set by watching, interpreting, : prices should be set by watching, interpreting, anticipating and responding to each other behavioranticipating and responding to each other behavior

INDUSTRY DEMAND: High demand reduces competition Declining demand increased the rivalry

EXIT BARRIERS:EXIT BARRIERS: INVESTMENTS IN ASSETS LIKE

SPECIAL MACHINES HIGH FIXED COST OF EXIT EMOTIONAL ATTATCHMENT ECONOMIC DEPENDENCE ON THE

INDUSTRY THE NEED TO MAINTAIN EXPENSIVE

COLLECTION OF ASSETS



3. 3. BARGAINING POWER OF BUYERS:BARGAINING POWER OF BUYERS:Buyers are Powerful whenBuyers are Powerful when a) If industry composed of large small companies and buyers a) If industry composed of large small companies and buyers

are large and feware large and few b) If buyers purchase large quantitiesb) If buyers purchase large quantities c) When supply industry depends on buyers for a large c) When supply industry depends on buyers for a large

quantity of its total ordersquantity of its total orders d) When switching costs are lowd) When switching costs are low e) When it is economically feasible for buyers to purchase an e) When it is economically feasible for buyers to purchase an

input from several companiesinput from several companies f) When buyers can threaten to enter the industry and produce f) When buyers can threaten to enter the industry and produce

the product themselvesthe product themselvesEx: Suppliers of auto components for GM, Ford, Ex: Suppliers of auto components for GM, Ford, Daimler ChryslerDaimler Chrysler

PORTER’S FIVE FORCES MODELPORTER’S FIVE FORCES MODEL …contd …contd

4.BARGAINING POWER OF SUPPLIERS:4.BARGAINING POWER OF SUPPLIERS:Suppliers are powerful whenSuppliers are powerful whena)a) The product has few substitutes and is vital to the The product has few substitutes and is vital to the

company.company.b)b) When the industry is not an important customer to the When the industry is not an important customer to the

supplier.supplier.c)c) If the product of the supplier is unique or different.If the product of the supplier is unique or different.d)d) Suppliers can threaten to enter customer’s industry to Suppliers can threaten to enter customer’s industry to

produce products that would compete with those of the produce products that would compete with those of the industry.industry.

e)e) Firms in the industry can not threaten to enter their Firms in the industry can not threaten to enter their suppliers industry and make their own inputs.suppliers industry and make their own inputs.

Ex: Ex: PC manufacture: Intel CPU chips 85% of the chips PC manufacture: Intel CPU chips 85% of the chips needed for PCneeded for PC

The competitors can not match Intel’s price & scaleThe competitors can not match Intel’s price & scale

PORTER’S FIVE FORCES MODELPORTER’S FIVE FORCES MODEL …contd …contd

5. SUBSTITUTE PRODUCTS:5. SUBSTITUTE PRODUCTS:

--- Companies in coffee industry will have substitute --- Companies in coffee industry will have substitute products in tea or soft drinks.products in tea or soft drinks.

Existence of close substitutes will give strong competition Existence of close substitutes will give strong competition and the threat limits the priceand the threat limits the price

In case of no substitutes the companies can increase the In case of no substitutes the companies can increase the price and make profitsprice and make profits

COMPLIMENTORS:COMPLIMENTORS:

Products that add value to the products of the companies in Products that add value to the products of the companies in an industry.an industry.

Ex: Application software and the PC for better service to Ex: Application software and the PC for better service to the customer.the customer.



Strategic Groups within IndustryStrategic Groups within Industry HIGHHIGH

PRICES PRICES CHARGEDCHARGED

LOWLOW

LOW R & D SPENDING HIGHLOW R & D SPENDING HIGH

PROPRIETARYPROPRIETARYGROUPGROUPMERCKMERCKPFIZERPFIZEREli LillyEli Lilly

GENERICGENERICGROUPGROUP

FOREST LABSFOREST LABSCARTERCARTER

ICNICN

IMPLICATIONS OF THE IMPLICATIONS OF THE STRATEGIC GROUPSSTRATEGIC GROUPS

1.1. DIRECT SUBSTITUTES FOR EACH OTHER DIRECT SUBSTITUTES FOR EACH OTHER INSIDE THE GROUPINSIDE THE GROUP

2.2. RIVELVRY WITHIN ITS OWN STRATEGIC GROUPRIVELVRY WITHIN ITS OWN STRATEGIC GROUP3.3. EACH STRATEGIC GROUP FACE DIFFERENT EACH STRATEGIC GROUP FACE DIFFERENT

SET OF OPPORTUNITIES AND THREATSSET OF OPPORTUNITIES AND THREATS4.4. THE FIRMS IN THE PROPRIETARY GROUP CAN THE FIRMS IN THE PROPRIETARY GROUP CAN

CHARGE HIGHER PRICES DUE TO THE PATENTSCHARGE HIGHER PRICES DUE TO THE PATENTS5.5. THE FIRMS IN GENERIC GROUP ARE IN WEAKER THE FIRMS IN GENERIC GROUP ARE IN WEAKER

POSITION DUE TO NUMBER OF COMPETITORSPOSITION DUE TO NUMBER OF COMPETITORS6.6. MOBILITY BARRIERS DUE TO HIGH R&D COST, MOBILITY BARRIERS DUE TO HIGH R&D COST,

PRICE STRUCTURE etc.PRICE STRUCTURE etc.



INDUSTRY LIFE CYCLE INDUSTRY LIFE CYCLE ANALYSISANALYSIS*---Competitive Changes *---Competitive Changes During Industry EvolutionDuring Industry Evolution

1.1. EMBRYONIC INDUSTRIESEMBRYONIC INDUSTRIES

2.2. GROWTH INDUSTRIESGROWTH INDUSTRIES

3.3. INDUSTRY SHAKEOUTINDUSTRY SHAKEOUT

4.4. MATURE INDUSTRIESMATURE INDUSTRIES

5.5. DECLINING INDUSTRIESDECLINING INDUSTRIES

Industry Life CycleIndustry Life Cycle

DemandDemand

TimeTime

EmbryonicEmbryonic GrowthGrowth MaturityMaturity DeclineDeclineShakeShake outout

1.EMBRYONIC INDUSTRIES1.EMBRYONIC INDUSTRIES

a)a) Slow growth due to buyers unfamiliaritySlow growth due to buyers unfamiliarityb)b) High prices due to low scale of economicsHigh prices due to low scale of economicsc)c) Poorly developed distribution channelsPoorly developed distribution channelsd)d) Barrier to entry due to access to technologyBarrier to entry due to access to technologye)e) Based on the innovative efforts of the Based on the innovative efforts of the

companycompanyf)f) Rivalry on:Rivalry on: Educating customersEducating customers Opening of the distribution channelsOpening of the distribution channels Perfecting the design of the productPerfecting the design of the product Not on the priceNot on the price

EX: Personal Computers (APPLE)EX: Personal Computers (APPLE) Vacuum Cleaners (HOOVER)Vacuum Cleaners (HOOVER) Photo Copiers (XEROX)Photo Copiers (XEROX)

2.GROWTH INDUSTRIES2.GROWTH INDUSTRIES

a)a) Demand increasing rapidlyDemand increasing rapidlyb)b) Customers are becoming familiar with the ProductCustomers are becoming familiar with the Productc)c) Prices fall due to the attainment of the scale of Prices fall due to the attainment of the scale of

economicseconomicsd)d) Developing Distribution ChannelsDeveloping Distribution Channelse)e) Threat from Potential Competitors is the highestThreat from Potential Competitors is the highestf)f) Intensity of rivalry relatively low due to the Intensity of rivalry relatively low due to the

expanding Industryexpanding Industryg)g) Enables the Companies to expand their revenues Enables the Companies to expand their revenues

and profits without affecting the market share of and profits without affecting the market share of their competitorstheir competitors

3.INDUSTRY SHAKEOUT

The rate of growth slows down Demand approaches saturation Rivalry Intensifies between companies Emergence of excess production capacity Results in price war and price reduction Drives most inefficient companies into

bankruptcy Deters new entry

4.MATURE INDUSTRIES

Barriers to entry increases Threat of entry decreases Competition for market share increases Price war and prices decrease Companies focus on cost reduction and

develop on brand loyalty

5. DECLINING INDUSTRIES5. DECLINING INDUSTRIES

Growth becomes negative due to Growth becomes negative due to technological, social changes, technological, social changes, demographics and international competitiondemographics and international competition

Degree of rivalry increasesDegree of rivalry increases Excess capacity is createdExcess capacity is created Prices decreasePrices decrease Exit barriers play greater role in adjusting Exit barriers play greater role in adjusting

excess capacityexcess capacity

THE MACRO ENVIRONMENT*THE MACRO ENVIRONMENT*

1.1. ECONOMIC FORCESECONOMIC FORCES

2.2. TECHNOLOGICAL FORCESTECHNOLOGICAL FORCES

3.3. DEMOGRAPHIC FORCESDEMOGRAPHIC FORCES

4.4. SOCIAL FORCESSOCIAL FORCES

5.5. POLITICAL AND LEGAL FORCESPOLITICAL AND LEGAL FORCES

RISK OF ENTRYBY POTENTIALCOMPETITORS

INTENSITY OFRIVALRY

AMONG FIRMS

BARGAININGPOWER OF SUPPLIERS

BARGAININGPOWER OF

BUYERS

THREAT OFSUBSTITUTES

ECONOMIC FORCESECONOMIC FORCES

DEMO- SOCIALDEMO- SOCIAL

GRAPHIC FORCESGRAPHIC FORCES

FORCESFORCES

TECHNOLOGICAL FORCESTECHNOLOGICAL FORCES

1. ECONOMIC FORCES1. ECONOMIC FORCES

Growth Rate of economy—increased customer expenditure, low competitive pressures, expansion& more profits

Interest rates—directly affects demand, cost of capital

Currency Exchange rates—affects the competitiveness in the global market

Inflation Rates--- investment planning difficult, affects the real future value of returns

2. TECHNOLOGICAL FORCES2. TECHNOLOGICAL FORCES

Both Creative & destructive — opportunity Both Creative & destructive — opportunity & threat& threat

Lowers the barriers of entry, prices and Lowers the barriers of entry, prices and profits, Increases the intensity of rivalryprofits, Increases the intensity of rivalry

Ex: Effect of Internet on advertisingEx: Effect of Internet on advertising

Effect of biotechnology companies on Effect of biotechnology companies on

established pharmaceutical companiesestablished pharmaceutical companies

3. DEMOGRAPHIC FORCES:3. DEMOGRAPHIC FORCES:

No of women work force has increased from 44 No of women work force has increased from 44 to 60% --problems of equal pay, harassment of to 60% --problems of equal pay, harassment of women at work placewomen at work place

Changes in age distribution of populationChanges in age distribution of population --opportunity for orgns catering for old--opportunity for orgns catering for old Home health care and recreationHome health care and recreation Baby boomers create mkt for customer Baby boomers create mkt for customer

appliances like washing machines, dish appliances like washing machines, dish washers, dryers etcwashers, dryers etc

Saving for retirement creates more inflows into Saving for retirement creates more inflows into mutual funds and other savingsmutual funds and other savings

4. SOCIAL FORCES4. SOCIAL FORCES

Changing social moves and values --- Changing social moves and values --- creates both opportunity and threatcreates both opportunity and threat

Ex: Health ConsciousnessEx: Health Consciousness Miller Lite– low calorie beerMiller Lite– low calorie beer PepsiCo’s colas & fruit based softPepsiCo’s colas & fruit based soft drinksdrinks Tobacco industry – decline due toTobacco industry – decline due to customer awareness of the healthcustomer awareness of the health hazards of smokinghazards of smoking

5. POLITICAL & LEGAL FORCES5. POLITICAL & LEGAL FORCES

Political processes shape a society’s lawsPolitical processes shape a society’s laws Deregulation lowers the entry barriers leading to Deregulation lowers the entry barriers leading to

intense competition and fare warsintense competition and fare wars Govt regulations increase the entry barrierGovt regulations increase the entry barrier Financial support to politicians can help the cos to Financial support to politicians can help the cos to

influence the govt to pass laws favorable to it ---influence the govt to pass laws favorable to it --- Ex:Enron power --deregulationEx:Enron power --deregulation Imposition of import duty on Imposition of import duty on steel in USsteel in US

GLOBALIZATION OF INDUSTRY STRUCTURE

Surge in value and volume of Intl tradeSurge in value and volume of Intl trade Globalization of production ---improved in the Globalization of production ---improved in the

cost & quality of factors of production labor, cost & quality of factors of production labor, energy, land & capital resulting in lower cost energy, land & capital resulting in lower cost and boost profitsand boost profits

Globalization of Markets---National mkts are Globalization of Markets---National mkts are merging into one huge global marketmerging into one huge global market

Ex: Coca Cola, Citigroup Credit Cards, Blue Ex: Coca Cola, Citigroup Credit Cards, Blue jeans, Sony Play station, McDonald, Nokia jeans, Sony Play station, McDonald, Nokia phones, Microsoft Windowsphones, Microsoft Windows

IMPLICATIONS OF GLOBALIZATIONIMPLICATIONS OF GLOBALIZATION

Industry boundaries do not stop at Industry boundaries do not stop at national bordersnational borders

Shift from national markets to Global Shift from national markets to Global markets intensified the competitive rivalrymarkets intensified the competitive rivalry

Rate of Innovation has increased along Rate of Innovation has increased along with Competitive intensitywith Competitive intensity

Through the threat of entry and the Through the threat of entry and the intensity of rivalry has increased, it has intensity of rivalry has increased, it has created enormous opportunitiescreated enormous opportunities

NATIONAL COMPETITIVE NATIONAL COMPETITIVE ADVANTAGE*ADVANTAGE*

Attributes:Attributes:

Factor EndowmentsFactor Endowments Demand ConditionsDemand Conditions Relating and Supporting IndustriesRelating and Supporting Industries Firm Strategy, Structure and RivalryFirm Strategy, Structure and Rivalry

NATIONAL COMPETITIVE ADVANTAGE*NATIONAL COMPETITIVE ADVANTAGE*

NATIONALCOMPETITIVEADVANTAGE

FACTORCONDITIONS

INTENSITYOF

RIVALRY

LOCALDEMAND

CONDITIONS

COMPETITI-VENESS OFSUP. INDUS

1. Factor Endowments1. Factor Endowments::

BASIC FACTORS: Land, Labor, capital Land, Labor, capital and Raw Materialsand Raw Materials

ADVANCED FACTORS: Technological Know How, Managerial Sophistication, Physical Infrastructure like Roads, Railways and Ports

2.Local Demand Conditions:

Companies are more sensitive to the Companies are more sensitive to the needs of the closest customersneeds of the closest customers

Creates pressure for innovation and Creates pressure for innovation and qualityquality

High standards of product quality due to High standards of product quality due to sophisticated customerssophisticated customers

Ex: Cameras of Japan Cell phones of Nokia, Ericsson of Finland and Sweden

3.COMPETITIVENESS OF RELATED AND SUPPORTING INDUSTRIES:

Benefits of investments in advanced factors of Benefits of investments in advanced factors of production by the related & supporting production by the related & supporting industries will spill over in the industryindustries will spill over in the industry

Ex: Sweden—strength in fabricated steel products spilled over into specialty steel industry

Successful industries within a country tend to Successful industries within a country tend to be grouped into clusters of related industries be grouped into clusters of related industries Ex: German textile & apparel sector –High Ex: German textile & apparel sector –High quality cotton, wool, synthetic fiber, sewing quality cotton, wool, synthetic fiber, sewing machine needles and other textile machinerymachine needles and other textile machinery

4. INTENSITY OF RIVALRY:

German & Japan predominantly top German & Japan predominantly top management team consists of engineers management team consists of engineers emphasis on improving processes and product emphasis on improving processes and product designdesign

In US the top management contain mainly In US the top management contain mainly finance background— finance background— short term financial short term financial returns– loss of US competitiveness in many returns– loss of US competitiveness in many engineering based industriesengineering based industries

Rivalry induces companies to improve Rivalry induces companies to improve efficiencyefficiency

Creates pressure to innovate, improve quality, Creates pressure to innovate, improve quality, reduce costs & upgrade advanced factors reduce costs & upgrade advanced factors

STRATEGIC PLANNING PROCESS

MISSION& GOALS

SWOT STRAT. CHOICE

EXTERNALOPP &

THREATS

INTERNALSTRENGTHSWEAKNESS

FUNCTIONALBUSINESSGLOBAL

CORPORATESTRATEGIES

CORP.PERFORM-

-ANCE

IMPL.IN FIRM

IMPL.ININDUSTRY

FEEDBACK

INTERNAL ANALYSISINTERNAL ANALYSISWe should understandWe should understand ---------- How the value is created and profit generated?How the value is created and profit generated? What is the role of Resources, Capabilities and What is the role of Resources, Capabilities and

Distinctive competencies in this process?Distinctive competencies in this process? The importance of superior efficiency, The importance of superior efficiency,

innovation, quality and response to customersinnovation, quality and response to customers To analyze the sources of competitive To analyze the sources of competitive

advantage to identify what is driving the advantage to identify what is driving the profitabilityprofitability

How the strengths of the enterprise boost its How the strengths of the enterprise boost its profitability and the weaknesses lead to lower profitability and the weaknesses lead to lower profitability?profitability?

CRITICAL ISSUES IN CRITICAL ISSUES IN INTERNAL ANALYSISINTERNAL ANALYSIS

What factors influence the durability of What factors influence the durability of competitive advantage?competitive advantage?

Why do successful companies lose their Why do successful companies lose their competitive advantage?competitive advantage?

How can companies avoid failure and How can companies avoid failure and sustain the competitive advantage over a sustain the competitive advantage over a period of time?period of time?

GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE*

1.1. EFFICIENCYEFFICIENCY2.2. QUALITY AND RELIABILITYQUALITY AND RELIABILITY3.3. INNOVATIONINNOVATION4.4. RESPONSIVENESS TO CUSTOMERSRESPONSIVENESS TO CUSTOMERS---Differentiate its product offering & ---Differentiate its product offering &

creates greater customer perceived creates greater customer perceived valuevalue

---Lower its cost structure---Lower its cost structure

GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE

SuperiorQuality

Comp. Adv*Low Cost

.*Differentiation

SuperiorEfficiency

Superior Customer

Responsive--ness

SuperiorInnovation

1.EFFICIENCY: EFFICIENCY HELPS A COMPANY ATTAIN A EFFICIENCY HELPS A COMPANY ATTAIN A

COMPETITIVE ADVANTAGE THROUGH COMPETITIVE ADVANTAGE THROUGH LOWER COST STRUCTURELOWER COST STRUCTURE

EMPLOYEE PRODUCTIVITYEMPLOYEE PRODUCTIVITY CAPITAL PRODUCTIVITYCAPITAL PRODUCTIVITY PRODUCTIVITY OF R&D SPENDINGPRODUCTIVITY OF R&D SPENDING SALES FORCE PRODUCTIVITY SALES FORCE PRODUCTIVITY HIGH PRODUCTIVITY LEADS TO GREATER HIGH PRODUCTIVITY LEADS TO GREATER

EFFICIENCY AND LOWER COSTSEFFICIENCY AND LOWER COSTS

2. QUALITY & RELIABILITY: IF CUSTOMERS PERCEIVE GREATER VALUE IN THE IF CUSTOMERS PERCEIVE GREATER VALUE IN THE

ATTRIBUTES OF A SPECIFIC PRODUCT AS COMPARED TO ATTRIBUTES OF A SPECIFIC PRODUCT AS COMPARED TO COMPETITORSCOMPETITORS

HIGH QUALITY PRODUCTS INCREASES THE VALUE OF HIGH QUALITY PRODUCTS INCREASES THE VALUE OF THE PRODUCT IN THE EYES OF THE CUSTOMER &THE THE PRODUCT IN THE EYES OF THE CUSTOMER &THE COMPANY CAN CHARGE HIGH PRICECOMPANY CAN CHARGE HIGH PRICE

RELIABLE PRODUCTS GIVE RISE TO GREATER RELIABLE PRODUCTS GIVE RISE TO GREATER EFFICIENCY AND LOWER UNIT COST ie LESS EMPLOYEE EFFICIENCY AND LOWER UNIT COST ie LESS EMPLOYEE TIME IS WASTED MAKING DEFECTIVE PRODUCTS OR TIME IS WASTED MAKING DEFECTIVE PRODUCTS OR PROVIDING SUBSTANDARD SERVICESPROVIDING SUBSTANDARD SERVICES

IN MANY INDUSTRIES QUALITY & RELIABILITY HAS IN MANY INDUSTRIES QUALITY & RELIABILITY HAS BECOME AN ABSOLUTE IMPERATIVE FOR SURVIVALBECOME AN ABSOLUTE IMPERATIVE FOR SURVIVAL

3. INNOVATION : PRODUCT INNOVATION –Development of products –Development of products

that are new or have superior attributes to existing that are new or have superior attributes to existing products. Ex: Intel microprocessors, Cisco’s Routers, products. Ex: Intel microprocessors, Cisco’s Routers, Palm’s Hand held computer—increases company’s Palm’s Hand held computer—increases company’s pricing optionspricing options

PROCESS INNOVATION —Development of new —Development of new process for producing products& delivering to process for producing products& delivering to customers Ex: Toyota: Lean production system, Just in customers Ex: Toyota: Lean production system, Just in time inventory, self managing teams, reduced setup time inventory, self managing teams, reduced setup timestimes

Innovation makes a company UNIQUE as compared to Innovation makes a company UNIQUE as compared to its rivals and it can differentiate itself from its rivals.its rivals and it can differentiate itself from its rivals.

Innovation can reduce its unit costs far below those of Innovation can reduce its unit costs far below those of competitorscompetitors

4. RESPONSIVENESS TO CUSTOMERS 4. RESPONSIVENESS TO CUSTOMERS ::

Identifying and satisfying customer needs Identifying and satisfying customer needs better than the rivalsbetter than the rivals

Achieving superior quality and innovation leads Achieving superior quality and innovation leads to superior responsivenessto superior responsiveness

Customize goods and services unique Customize goods and services unique demands of the customersdemands of the customers

Fast response timeFast response time Superior design, superior after sales service Superior design, superior after sales service

and support allows a company to differentiate and support allows a company to differentiate --- helps to get brand loyalty, and company can --- helps to get brand loyalty, and company can charge a premium price for its products charge a premium price for its products

DISTINCTIVE COMPETENCIESDISTINCTIVE COMPETENCIES

ARE FIRM SPECIFIC STRENGTHS THAT ALLOW A COMPANY TO ARE FIRM SPECIFIC STRENGTHS THAT ALLOW A COMPANY TO DIFFERENCIATE ITS PRODUCTS AND ACHIEVE DIFFERENCIATE ITS PRODUCTS AND ACHIEVE SUBSTANTIALLY LOWER COSTS THAN ITS RIVALS THUS GAIN SUBSTANTIALLY LOWER COSTS THAN ITS RIVALS THUS GAIN COMPETITIVE ADVANTAGECOMPETITIVE ADVANTAGE

Ex: TOYOTO’S LEAN PRODUCTION SYSTEM CONSISTING OF Ex: TOYOTO’S LEAN PRODUCTION SYSTEM CONSISTING OF a) JUST IN TIME INVENTORY SYSTEMa) JUST IN TIME INVENTORY SYSTEM b) SELF MANAGING TEAMSb) SELF MANAGING TEAMS c) REDUCED SETUP TIMES FOR COMPLEX EQUIPMENTc) REDUCED SETUP TIMES FOR COMPLEX EQUIPMENT A STRATEGY IS THE DRIVER OF COMPETITIVE ADVANTAGE A STRATEGY IS THE DRIVER OF COMPETITIVE ADVANTAGE

AND PROFITABILITYAND PROFITABILITY

DISTINCTIVE COMPETENCIES ARISE FROMDISTINCTIVE COMPETENCIES ARISE FROM ----RESOURCES----RESOURCES ----CAPABILITIES----CAPABILITIES

STRATEGY, RESOURCES, CAPABILITIES AND COMPETENCIES

RESOURCES

DISTINCTIVECOMPETEN-

-CIES

CAPABILITIES

STRATEGIESCOMPETITIVEADVANTAGE

SUPERIORPROFITA-

-BILITY

RESOURCES:RESOURCES:

CAPITAL OR FINANCIAL, PHYSICAL, SOCIAL OR HUMAN, CAPITAL OR FINANCIAL, PHYSICAL, SOCIAL OR HUMAN, TECHNOLOGICAL AND ORGANIZATIONAL FACTOR TECHNOLOGICAL AND ORGANIZATIONAL FACTOR ENDOWMENTSENDOWMENTS

------------FIRM SPECIFIC AND DIFFICULT TO IMITATEFIRM SPECIFIC AND DIFFICULT TO IMITATE

------VALUABLE LEAD TO DISTINCTIVE COMPETENCY------VALUABLE LEAD TO DISTINCTIVE COMPETENCY AND CREATES STRONG DEMANDAND CREATES STRONG DEMAND

TANGIBLE RESOURCESTANGIBLE RESOURCES : : Land, buildings, plant, equipment, Land, buildings, plant, equipment, inventory and moneyinventory and money

INTANGIBLE RESOURCESINTANGIBLE RESOURCES: : Brand names, reputation of the Brand names, reputation of the company, knowledge gained by employee through experience & company, knowledge gained by employee through experience & intellectual property of the company including patents, copy rights intellectual property of the company including patents, copy rights and trade marksand trade marks

EX: Polaroid instant film processing – a valuable resource which EX: Polaroid instant film processing – a valuable resource which vanished with the invention of DIGITAL PHOTOGRAPHYvanished with the invention of DIGITAL PHOTOGRAPHY

CAPABILITIES:CAPABILITIES:

FIRM’S SKILLS AT COORDINATING ITS RESOURCES AND PUTTING THEM FOR PRODUCTIVE USE

PART OF ORGANIZATION’S RULES, ROUTINES, PROCEDURES THE PRODUCT OF ORGANIZATION’S STRUCTURE, PROCESSES,

AND CONTROL SYSTEMS DEPENDS ON THE CULTURAL NORMS AND VALUES INTANGIBLE

FOR DISTINCTIVE COMPETENCY A FIRM CAN HAVE

---A FIRM SPECIFIC AND VALUABLE RESOURCE AND THE CAPABILITIES NECESSARY TO TAKE ADVANTAGE OF THAT RESOURCE ( POLAROID)

--- A FIRM SPECIFIC CAPABILITY TO MANAGE RESOURCES(NUCOR)

A COMPANY’S DISTINCTIVE COMPETENCY IS STRONGEST WHEN IT POSESSES FIRM SPECIFIC & VALUABLE RESOURCES AND FIRM SPECIFIC CAPABILITIES TO MANAGE THE RESOURCES

COMPETITIVE ADVANTAGE AND VALUE CREATION

PROFITABILITY OF THE COMPANY DEPENDS ON:

THE AMOUNT OF VALUE CUSTOMER PLACES ON THE COMPANY’S PRODUCTS

THE PRICE THAT A COMPANY CHARGES FOR ITS PRODUCTS

THE COSTS OF CREATING THAT VALUE

VALUE CREATION:

V V –Value to consumer

P --Price

P C –Cost of Production

V – P…Consumer surplus

C P –C ..Profit Margin

V –C ..Value Created

V-P

P-C

C

ROOTS OF COMPETITIVE ADVANTAGE

RESOURCES

DISTINCTIVECOMPETEN-

-CIES

CAPABILITIES

SUPERIORFACTORS

VALUECREATION

SUPERIORPROFITA-

-BILITY

DIFFEREN-CIATION

LOW COST

THE DURABILITY OF COMPETITIVE ADVANTAGE*

BARRIERS TO IMITATION

CAPABILITY OF THE COMPETITORS

DYNAMISM OF THE INDUSTRY ENVIRONMENT.

BARRIERS TO IMITATION: BARRIERS TO IMITATION: ARE FACTORS THAT MAKE IT DIFFICULT FOR A COMPETITOR TO COPY A COMPANY’S DISTINCTIVE COMPETENCIES

IMITATING RESOURCES: TANGIBLE RESOURCES LIKE FIRM SPECIFIC AND TANGIBLE RESOURCES LIKE FIRM SPECIFIC AND

VALUABLE TANGIBLE RESOURCES –VISIBLE TO VALUABLE TANGIBLE RESOURCES –VISIBLE TO ALL COMPETITORSALL COMPETITORS

INTANGIBLE RESOURCES LIKE BRAND NAME, INTANGIBLE RESOURCES LIKE BRAND NAME, MARKETING AND TECHNOLOGICAL KNOW HOW , MARKETING AND TECHNOLOGICAL KNOW HOW , PATENTS. INVENTIONS AROUND PATENTS CAN PATENTS. INVENTIONS AROUND PATENTS CAN BE DONEBE DONE

IMITATING CAPABILITIES: IMITATING THE CAPABILITIES IS DIFFICULTIMITATING THE CAPABILITIES IS DIFFICULT

CAPABILITY OF COMPETITORS:

STRATEGIC COMMITMENT: IMITATION BECOMES DIFFICULT DUE TO IMITATION BECOMES DIFFICULT DUE TO

STRATEGIC COMMITMENT OF THE COMPETITORSSTRATEGIC COMMITMENT OF THE COMPETITORS

ABSORPTIVE CAPACITY: ABILITY OF THE ENTERPRISE TO ABILITY OF THE ENTERPRISE TO

IDENTIFY,VALUE, ASSIMILATE AND USE NEW IDENTIFY,VALUE, ASSIMILATE AND USE NEW KNOWLEDGEKNOWLEDGE

Ex: Ex: TOYOTA’S LEAN PRODUCTION SYSTEM COULD NOT BE IMITATED BY GENERAL MOTORS DUE TO INTERNAL INERTIA

INDUSTRY DYNAMISM: THE MOST DYNAMIC INDUSTRIES HAVING THE MOST DYNAMIC INDUSTRIES HAVING

HIGH RATE OF PRODUCT INNOVATIONHIGH RATE OF PRODUCT INNOVATION RAPID RATE OF INNOVATION MEANS RAPID RATE OF INNOVATION MEANS

SHORTENING OF THE PRODUCT LIFE SHORTENING OF THE PRODUCT LIFE CYCLES AND THE COMPETITIVE CYCLES AND THE COMPETITIVE ADVANTAGE IS FLEETINGADVANTAGE IS FLEETING

Ex: Ex: HIGH DEGREE OF INNOVATION IN PERSONAL COMPUTER CREATED A TURBULENT ENVIRONMENT. APPLE COMPUTER LOST TO IBM , IBM HAS LOST TO COMPAQ . COMPAQ HAS LOST TO DELL

AVOIDING FAILURE & SUSTAINING COMPETITIVE ADVANTAGE

INERTIA:INERTIA: Companies find it difficult to Companies find it difficult to change their strategies and structures to change their strategies and structures to adapt to the changing competitive adapt to the changing competitive conditionsconditions

Capabilities are difficult to change like Capabilities are difficult to change like procedures and processesprocedures and processes

PRIOR STRATEGIC COMMITMENTSPRIOR STRATEGIC COMMITMENTS THE ICARUS PARADOXTHE ICARUS PARADOX

Rising and Falling Rising and Falling CompaniesCompanies

CRAFTSMAN:CRAFTSMAN: Texas Instruments & Texas Instruments & Digital Equipment corporation Engineering Digital Equipment corporation Engineering Excellence & ignored the market realitiesExcellence & ignored the market realities

BUILDERS:BUILDERS: ITT & Gulf Western –enchanted by ITT & Gulf Western –enchanted by Diversification beyond the Profitable limitDiversification beyond the Profitable limit

PIONEER:PIONEER: Wang Labs– Brilliant innovator ended Wang Labs– Brilliant innovator ended up with novel and useless innovationsup with novel and useless innovations

SALESMAN:SALESMAN: P&G , Chrysler Marketing ability to P&G , Chrysler Marketing ability to sell anything– Ignored product Development and sell anything– Ignored product Development and manufacturing excellence---Inferior Productsmanufacturing excellence---Inferior Products

STEPS TO AVOID FAILURE

FOCUS ON THE BUILDING BLOCKS OF COMPETITIVE ADVANTAGE

INSTITUTE CONTINUOUS IMPROVEMENT AND LEARNING

TRACK BEST INDUSTRIAL PRACTICE AND USE BENCH MARKING

THE ROLE OF LUCK

Assignment on Module -2Assignment on Module -2 --To be submitted by 17--To be submitted by 17thth Jan 2011 Jan 2011

Taking the example of any company/ Taking the example of any company/ organization describe its Resources, organization describe its Resources, Capabilities and by adopting the suitable Capabilities and by adopting the suitable strategies how it’s competitive advantage strategies how it’s competitive advantage got affected ?got affected ?

Bpsm2

Business

industry price

suppliers industry

fragmented industry

supply industry

coffee industry

customers industry

industry feedback

industry high prices