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BUSINESS POLICY & STRATEGY MODULE – 2 COMPETITIVE ADVANTAGE Dr. MARAMRAJU PADMAKAR RAO

REFERENCES: “ STRATEGIC MANAGEMENT” ----Charles W. L. Hill Gareth R. Jones

STRATEGIC PLANNING PROCESS MISSION & GOALS SWOT STRAT. CHOICE EXTERNAL OPP & THREATS INTERNAL STRENGTHS WEAKNESS FUNCTIONAL BUSINESS GLOBAL CORPORATE STRATEGIES CORP. PERFORM- -ANCE IMPL. IN FIRM IMPL.IN INDUSTRY FEEDBACK

EXTERNAL ENVIRONMENT INDUSTRY : 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 BOUNDARY : Basic customer needs that are served by a market define the industry boundary. SECTOR : A group of closely related industries EX:1. COMPUTER SECTOR -------------Computer component industry -------------Computer hardware industry -------------Computer software industry 2. TELECOMMUNICATIONS: --Telecommunication Equipment Ind. SECTOR -- Telecommunication Services Ind.

INDUSTRY COMPETITIVE ANALYSIS Porter’s Five Forces Model Strategic Group Analysis Industry Life Cycle Analysis

PORTER’S FIVE FORCES MODEL RISK OF ENTRY BY POTENTIAL COMPETITORS INTENSITY OF RIVALRY AMONG FIRMS BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS THREAT OF SUBSTITUTES

RISK OF ENTRY: a) BRAND LOYALTY – by continuous ads, patent protection, product innovation, high product quality b) ABSOLUTE COST ADVANTAGE – superior production operations, control of inputs like labor, material, equipment, skills, access to cheaper funds. 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 MODEL

PORTER’S FIVE FORCES MODEL …contd d) Customer switching cost- -- high switching charges locks the customer, higher barrier to exit Ex: switching from one Operating system to another 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 MODEL …contd INDUSTRY COMPETITIVE STRUCTURE a) Fragmented Industry: Large no of small/ medium size companies & none can determine industry price. Boom and bust cycles repeat, profits rise & fall, large no of new entrants Ex: Agriculture, Health clubs Strategy : minimize cost b) Consolidated Industry: A small no of large cos (OLIGOPOLY), one company competitive actions will lead to competitive reaction .May lead to competitive spiral. Ex: Airlines, Automobiles, Aerospace, Pharma Strategy : prices should be set by watching, interpreting, anticipating and responding to each other behavior INDUSTRY DEMAND: High demand reduces competition Declining demand increased the rivalry

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 PORTER’S FIVE FORCES MODEL …contd

PORTER’S FIVE FORCES MODEL …contd 3. BARGAINING POWER OF BUYERS: Buyers are Powerful when a) If industry composed of large small companies and buyers are large and few b) If buyers purchase large quantities c) When supply industry depends on buyers for a large quantity of its total orders d) When switching costs are low e) When it is economically feasible for buyers to purchase an input from several companies f) When buyers can threaten to enter the industry and produce the product themselves Ex: Suppliers of auto components for GM, Ford, Daimler Chrysler

PORTER’S FIVE FORCES MODEL …contd 4.BARGAINING POWER OF SUPPLIERS: Suppliers are powerful when The product has few substitutes and is vital to the company. When the industry is not an important customer to the supplier. If the product of the supplier is unique or different. Suppliers can threaten to enter customer’s industry to produce products that would compete with those of the industry. Firms in the industry can not threaten to enter their suppliers industry and make their own inputs. Ex: PC manufacture: Intel CPU chips 85% of the chips needed for PC The competitors can not match Intel’s price & scale

PORTER’S FIVE FORCES MODEL …contd 5. SUBSTITUTE PRODUCTS: --- Companies in coffee industry will have substitute products in tea or soft drinks. Existence of close substitutes will give strong competition and the threat limits the price In case of no substitutes the companies can increase the price and make profits COMPLIMENTORS: Products that add value to the products of the companies in an industry. Ex: Application software and the PC for better service to the customer.

Strategic Groups within Industry HIGH PRICES CHARGED LOW LOW R & D SPENDING HIGH PROPRIETARY GROUP MERCK PFIZER Eli Lilly GENERIC GROUP FOREST LABS CARTER ICN

IMPLICATIONS OF THE STRATEGIC GROUPS DIRECT SUBSTITUTES FOR EACH OTHER INSIDE THE GROUP RIVELVRY WITHIN ITS OWN STRATEGIC GROUP EACH STRATEGIC GROUP FACE DIFFERENT SET OF OPPORTUNITIES AND THREATS THE FIRMS IN THE PROPRIETARY GROUP CAN CHARGE HIGHER PRICES DUE TO THE PATENTS THE FIRMS IN GENERIC GROUP ARE IN WEAKER POSITION DUE TO NUMBER OF COMPETITORS MOBILITY BARRIERS DUE TO HIGH R&D COST, PRICE STRUCTURE etc.

INDUSTRY LIFE CYCLE ANALYSIS *---Competitive Changes During Industry Evolution EMBRYONIC INDUSTRIES GROWTH INDUSTRIES INDUSTRY SHAKEOUT MATURE INDUSTRIES DECLINING INDUSTRIES

Industry Life Cycle Demand Time Embryonic Growth Maturity Decline Shake out

1.EMBRYONIC INDUSTRIES Slow growth due to buyers unfamiliarity High prices due to low scale of economics Poorly developed distribution channels Barrier to entry due to access to technology Based on the innovative efforts of the company Rivalry on: Educating customers Opening of the distribution channels Perfecting the design of the product Not on the price EX: Personal Computers (APPLE) Vacuum Cleaners (HOOVER) Photo Copiers (XEROX)

2.GROWTH INDUSTRIES Demand increasing rapidly Customers are becoming familiar with the Product Prices fall due to the attainment of the scale of economics Developing Distribution Channels Threat from Potential Competitors is the highest Intensity of rivalry relatively low due to the expanding Industry Enables the Companies to expand their revenues and profits without affecting the market share of their 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 INDUSTRIES Growth becomes negative due to technological, social changes, demographics and international competition Degree of rivalry increases Excess capacity is created Prices decrease Exit barriers play greater role in adjusting excess capacity

THE MACRO ENVIRONMENT* ECONOMIC FORCES TECHNOLOGICAL FORCES DEMOGRAPHIC FORCES SOCIAL FORCES POLITICAL AND LEGAL FORCES

ECONOMIC FORCES DEMO- SOCIAL GRAPHIC FORCES FORCES TECHNOLOGICAL FORCES RISK OF ENTRY BY POTENTIAL COMPETITORS INTENSITY OF RIVALRY AMONG FIRMS BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS THREAT OF SUBSTITUTES

1. 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 FORCES Both Creative & destructive — opportunity & threat Lowers the barriers of entry, prices and profits, Increases the intensity of rivalry Ex: Effect of Internet on advertising Effect of biotechnology companies on established pharmaceutical companies

3. DEMOGRAPHIC FORCES: No of women work force has increased from 44 to 60% --problems of equal pay, harassment of women at work place Changes in age distribution of population --opportunity for orgns catering for old Home health care and recreation Baby boomers create mkt for customer appliances like washing machines, dish washers, dryers etc Saving for retirement creates more inflows into mutual funds and other savings

4. SOCIAL FORCES Changing social moves and values --- creates both opportunity and threat Ex: Health Consciousness Miller Lite– low calorie beer PepsiCo’s colas & fruit based soft drinks Tobacco industry – decline due to customer awareness of the health hazards of smoking

5. POLITICAL & LEGAL FORCES Political processes shape a society’s laws Deregulation lowers the entry barriers leading to intense competition and fare wars Govt regulations increase the entry barrier Financial support to politicians can help the cos to influence the govt to pass laws favorable to it --- Ex:Enron power --deregulation Imposition of import duty on steel in US

GLOBALIZATION OF INDUSTRY STRUCTURE Surge in value and volume of Intl trade Globalization of production ---improved in the cost & quality of factors of production labor, energy, land & capital resulting in lower cost and boost profits Globalization of Markets---National mkts are merging into one huge global market Ex: Coca Cola, Citigroup Credit Cards, Blue jeans, Sony Play station, McDonald, Nokia phones, Microsoft Windows

IMPLICATIONS OF GLOBALIZATION Industry boundaries do not stop at national borders Shift from national markets to Global markets intensified the competitive rivalry Rate of Innovation has increased along with Competitive intensity Through the threat of entry and the intensity of rivalry has increased, it has created enormous opportunities

NATIONAL COMPETITIVE ADVANTAGE* Attributes: Factor Endowments Demand Conditions Relating and Supporting Industries Firm Strategy, Structure and Rivalry

NATIONAL COMPETITIVE ADVANTAGE* NATIONAL COMPETITIVE ADVANTAGE FACTOR CONDITIONS INTENSITY OF RIVALRY LOCAL DEMAND CONDITIONS COMPETITI- VENESS OF SUP. INDUS

1. Factor Endowments : BASIC FACTORS: Land, Labor, capital and 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 needs of the closest customers Creates pressure for innovation and quality High standards of product quality due to sophisticated 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 production by the related & supporting industries 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 be grouped into clusters of related industries Ex: German textile & apparel sector –High quality cotton, wool, synthetic fiber, sewing machine needles and other textile machinery

4. INTENSITY OF RIVALRY: German & Japan predominantly top management team consists of engineers emphasis on improving processes and product design In US the top management contain mainly finance background— short term financial returns– loss of US competitiveness in many engineering based industries Rivalry induces companies to improve efficiency Creates pressure to innovate, improve quality, reduce costs & upgrade advanced factors

INTERNAL ANALYSIS We should understand ----- How the value is created and profit generated? What is the role of Resources, Capabilities and Distinctive competencies in this process? The importance of superior efficiency, innovation, quality and response to customers To analyze the sources of competitive advantage to identify what is driving the profitability How the strengths of the enterprise boost its profitability and the weaknesses lead to lower profitability?

CRITICAL ISSUES IN INTERNAL ANALYSIS What factors influence the durability of competitive advantage? Why do successful companies lose their competitive advantage? How can companies avoid failure and sustain the competitive advantage over a period of time?

GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE* EFFICIENCY QUALITY AND RELIABILITY INNOVATION RESPONSIVENESS TO CUSTOMERS ---Differentiate its product offering & creates greater customer perceived value ---Lower its cost structure

GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE Superior Quality Comp. Adv *Low Cost . *Differentiation Superior Efficiency Superior Customer Responsive- -ness Superior Innovation

1.EFFICIENCY: EFFICIENCY HELPS A COMPANY ATTAIN A COMPETITIVE ADVANTAGE THROUGH LOWER COST STRUCTURE EMPLOYEE PRODUCTIVITY CAPITAL PRODUCTIVITY PRODUCTIVITY OF R&D SPENDING SALES FORCE PRODUCTIVITY HIGH PRODUCTIVITY LEADS TO GREATER EFFICIENCY AND LOWER COSTS

2. QUALITY & RELIABILITY : IF CUSTOMERS PERCEIVE GREATER VALUE IN THE ATTRIBUTES OF A SPECIFIC PRODUCT AS COMPARED TO COMPETITORS HIGH QUALITY PRODUCTS INCREASES THE VALUE OF THE PRODUCT IN THE EYES OF THE CUSTOMER &THE COMPANY CAN CHARGE HIGH PRICE RELIABLE PRODUCTS GIVE RISE TO GREATER EFFICIENCY AND LOWER UNIT COST ie LESS EMPLOYEE TIME IS WASTED MAKING DEFECTIVE PRODUCTS OR PROVIDING SUBSTANDARD SERVICES IN MANY INDUSTRIES QUALITY & RELIABILITY HAS BECOME AN ABSOLUTE IMPERATIVE FOR SURVIVAL

3. INNOVATION : PRODUCT INNOVATION –Development of products that are new or have superior attributes to existing products. Ex: Intel microprocessors, Cisco’s Routers, Palm’s Hand held computer—increases company’s pricing options PROCESS INNOVATION —Development of new process for producing products& delivering to customers Ex: Toyota: Lean production system, Just in time inventory, self managing teams, reduced setup times Innovation makes a company UNIQUE as compared to its rivals and it can differentiate itself from its rivals. Innovation can reduce its unit costs far below those of competitors

4. RESPONSIVENESS TO CUSTOMERS : Identifying and satisfying customer needs better than the rivals Achieving superior quality and innovation leads to superior responsiveness Customize goods and services unique demands of the customers Fast response time Superior design, superior after sales service and support allows a company to differentiate --- helps to get brand loyalty, and company can charge a premium price for its products

DISTINCTIVE COMPETENCIES ARE FIRM SPECIFIC STRENGTHS THAT ALLOW A COMPANY TO DIFFERENCIATE ITS PRODUCTS AND ACHIEVE SUBSTANTIALLY LOWER COSTS THAN ITS RIVALS THUS GAIN COMPETITIVE ADVANTAGE Ex: TOYOTO’S LEAN PRODUCTION SYSTEM CONSISTING OF a) JUST IN TIME INVENTORY SYSTEM b) SELF MANAGING TEAMS c) REDUCED SETUP TIMES FOR COMPLEX EQUIPMENT A STRATEGY IS THE DRIVER OF COMPETITIVE ADVANTAGE AND PROFITABILITY DISTINCTIVE COMPETENCIES ARISE FROM ----RESOURCES ----CAPABILITIES

STRATEGY, RESOURCES, CAPABILITIES AND COMPETENCIES RESOURCES DISTINCTIVE COMPETEN- -CIES CAPABILITIES STRATEGIES COMPETITIVE ADVANTAGE SUPERIOR PROFITA- -BILITY

RESOURCES: CAPITAL OR FINANCIAL, PHYSICAL, SOCIAL OR HUMAN, TECHNOLOGICAL AND ORGANIZATIONAL FACTOR ENDOWMENTS ------ FIRM SPECIFIC AND DIFFICULT TO IMITATE ------VALUABLE LEAD TO DISTINCTIVE COMPETENCY AND CREATES STRONG DEMAND TANGIBLE RESOURCES : Land, buildings, plant, equipment, inventory and money INTANGIBLE RESOURCES : Brand names, reputation of the company, knowledge gained by employee through experience & intellectual property of the company including patents, copy rights and trade marks EX: Polaroid instant film processing – a valuable resource which vanished with the invention of DIGITAL PHOTOGRAPHY

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 DISTINCTIVE COMPETEN- -CIES CAPABILITIES SUPERIOR FACTORS VALUE CREATION SUPERIOR PROFITA- -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: ARE FACTORS THAT MAKE IT DIFFICULT FOR A COMPETITOR TO COPY A COMPANY’S DISTINCTIVE COMPETENCIES IMITATING RESOURCES: TANGIBLE RESOURCES LIKE FIRM SPECIFIC AND VALUABLE TANGIBLE RESOURCES –VISIBLE TO ALL COMPETITORS INTANGIBLE RESOURCES LIKE BRAND NAME, MARKETING AND TECHNOLOGICAL KNOW HOW , PATENTS. INVENTIONS AROUND PATENTS CAN BE DONE IMITATING CAPABILITIES: IMITATING THE CAPABILITIES IS DIFFICULT

CAPABILITY OF COMPETITORS : STRATEGIC COMMITMENT: IMITATION BECOMES DIFFICULT DUE TO STRATEGIC COMMITMENT OF THE COMPETITORS ABSORPTIVE CAPACITY: ABILITY OF THE ENTERPRISE TO IDENTIFY,VALUE, ASSIMILATE AND USE NEW KNOWLEDGE Ex: TOYOTA’S LEAN PRODUCTION SYSTEM COULD NOT BE IMITATED BY GENERAL MOTORS DUE TO INTERNAL INERTIA

INDUSTRY DYNAMISM: THE MOST DYNAMIC INDUSTRIES HAVING HIGH RATE OF PRODUCT INNOVATION RAPID RATE OF INNOVATION MEANS SHORTENING OF THE PRODUCT LIFE CYCLES AND THE COMPETITIVE ADVANTAGE IS FLEETING 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: Companies find it difficult to change their strategies and structures to adapt to the changing competitive conditions Capabilities are difficult to change like procedures and processes PRIOR STRATEGIC COMMITMENTS THE ICARUS PARADOX

Rising and Falling Companies CRAFTSMAN: Texas Instruments & Digital Equipment corporation Engineering Excellence & ignored the market realities BUILDERS: ITT & Gulf Western –enchanted by Diversification beyond the Profitable limit PIONEER: Wang Labs– Brilliant innovator ended up with novel and useless innovations SALESMAN: P&G , Chrysler Marketing ability to sell anything– Ignored product Development and manufacturing 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 -2 --To be submitted by 17 th Jan 2011 Taking the example of any company/ organization describe its Resources, Capabilities and by adopting the suitable strategies how it’s competitive advantage got affected ?

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