King Saud University Management Case Study

CONTEMPORARY STRATEGY ANALYSIS
tenth edition
Robert M. Grant
John Wiley & Sons Ltd., 2019
Chapter 7
The Nature and Sources of
Competitive Advantage
1
The Nature and Sources of
Competitive Advantage
OUTLINE
•
How is competitive advantage established?
•
How s competitive advantage sustained?
•
Cost analysis
•
Differentiation analysis
•
Combining cost and differentiation strategies
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
HOW IS COMPETITIVE ADVANTAGE ESTABLISHED?
The Emergence of Competitive Advantage
How does competitive
advantage emerge?
External sources of
change e.g.:
•Changing customer demand
•Changing prices
•Technological change
Resource heterogeneity
among firms means
differential impact
Some firms faster
and more effective
in exploiting change
© 2013 Robert M. Grant, www.contemporarystrategyanalysis.com
Internal sources
of change
Some firms
have greater creative
and innovative
capability
HOW IS COMPETITIVE ADVANTAGE ESTABLISHED?
Competitive Advantage from Internally-Generated
Change: Strategic Innovation
STRATEGIC INNOVATION: creating customer value from new products,
experiences, or modes of product delivery
Innovatory strategies may involve:
– Creating whole new markets/industries (e.g. Craig McCaw and wireless
telephony services; My Space and Facebook in social networking)
– Creating new customer segments (e.g. AirAsia in low-cost air travel in
SE Asia; Nintendo’s Wii games console;)
– New sources of competitive advantage
• Reconfiguring the value chain: Zara in fashion clothing; Southwest in
airlines; Cemex in cement; IKEA in furniture
• Reconceptualizing the product: Cirque du Soleil in circuses;
Starbucks in coffee shops; Apple in computers (iPad)
• New performance combinations : e.g. Low prices with quality (Virgin
Atlantic); low prices and style (H&M, Primark, Target)
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
HOW IS COMPETITIVE ADVANTAGE ESTABLISHED?
Historical Origins of Business Model Innovations
Business model innovation
Free content supported by paid
advertising
Platform business models
Origin
US commercial radio, early 1920s
The first platform businesses were auction
houses: Sotheby’s, 1744; Christies, 1766.
Shared-ownership models
Began with real estate timeshares during
1960s. Currently: Airbnb, Zipcar, Netjets
Franchising
Singer Sewing Machine Company created
global network of franchised dealers in 1880s
Consumer cooperatives
The Rochdale Society of Equitable Pioneers,
1844
Muhammad Yunus’s Grameen Bank, 1970s
Microfinance
Tied products (razor-and-blades)
model
Introduced by Gillette’s competitors in 1910
Mail order
Montgomery Ward, 1872
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
HOW IS COMPETITIVE ADVANTAGE ESTABLISHED?
Blue Ocean Strategy
Blue Oceans are uncontested market spaces such as: new customer segments
for or reconceptualizations of existing products, or novel recombinations of
product attributes.
The Strategy Canvas can help identify blue ocean strategies by exploring new
combinations of product attributes. E.g. Cirque du Soleil.
High
Cirque du Soleil
Traditional circus
Low
HOW IS COMPETITIVE ADVANTAGE SUSTAINED?
Sustaining Competitive Advantage
Against Imitation
Requirement for
Imitation
Identification
Incentives for
imitation
Diagnosis
Resource
acquisition
Isolating Mechanism
• Obscure superior performance
•
•
Deterrence: signal aggressive intentions to imitators
Pre-emption: exploit all available investments
opportunities
•
Rely upon multiple sources of competitive
advantages to create “causal ambiguity”
•
Base competitive advantage upon resources and
capabilities that are immobile and difficult to
replicate
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
HOW IS COMPETITIVE ADVANTAGE SUSTAINED?
Competitive Advantage in Different Industry Settings:
Trading Markets and Production Markets
Source of imperfection
of competition
TRADING
MARKETS
Opportunity for
competitive advantage
•
•
•
•
None (efficient markets)
Imperfect information
Transactions costs
Systematic behavioral
trends
None
Insider trading
Cost minimization
Superior diagnosis
(e.g. chart analysis)
•
Overshooting
Contrarianism
•
Barriers to imitation
Identify barriers to imitation
(e.g. deterrence, preemption,
causal ambiguity, resource
immobility, etc.) and base
strategy upon them.
•
Barriers to innovation
Difficult to influence or
exploit.
PRODUCTION
MARKETS
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
TYPES OF COMPETITIVE ADVANTAGE
Sources of Competitive Advantage
COST
ADVANTAGE
COMPETITIVE
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
TYPES OF COMPETITIVE ADVANTAGE
Porter’s Generic Strategies
SOURCE OF COMPETITIVE ADVANTAGE
Industry
-wide
COMPETITIVE
SCOPE
Low cost
Differentiation
COST
LEADERSHIP
DIFFERENTIATION
Single
segment
© 2016 Robert M. Grant, www.contemporarystrategyanalysis.com
FOCUS
COST ANALYSIS
Unit cost
(1958 $s)
Experience Curve for the Ford
Model T, 1909-1920
$4,000
1909
$3,500
$3,000
Note: The figure shows an 85%
experience curve, i.e. unit costs
declined by approximately 15%
with each doubling of
cumulative volume.
1910
$2,500
$2,000
1911
1912
1913
$1,500
1914
$1,000
1915
1918
1920
$500
$0
0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0
Cumulative units of production (millions)
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
COST ANALYSIS
Examples of Experience Curves
100K
200K
500K
1,000K
Accumulated unit production
(millions)
70% slope
50
75%
UK refrigerators, 1957-71
Price Index
200 300
100
1960 Yen
30K
15K
20K
Japanese clocks & watches, 1962-72
5
10
Accumulated units
(millions)
50
COST ANALYSIS
The Importance of Market Share
If all firms in an industry have the same experience curve, then:
Change in relative costs over time = f (relative market share)
ROS (%)
-2 0
5
10
PIMS data show that market share is positively related to profitability:
BUT:
0-10
10-20 20-30 30-40
Market Share (%)
over 40
– Association does not imply causation
– Costs of acquiring market share offset the returns to market
share
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
COST ANALYSIS
Drivers of Cost Advantage
ECONOMIES OF SCALE
• Indivisibilities
• Specialization and division of labor
ECONOMIES OF LEARNING
• Increased dexterity
• Improved organizational routines
PRODUCTION TECHNIQUES
• Process innovation
• Reengineering business processes
PRODUCT DESIGN
INPUT COSTS
• Standardizing designs & components
• Design for manufacture
• Location advantages
• Ownership of low-cost inputs
• Non-union labor
• Bargaining power
CAPACITY UTILIZATION
• Ratio of fixed to variable costs
• Speed of capacity adjustment
RESIDUAL EFFICIENCY
• Organizational slack; Motivation &
culture; Managerial efficiency
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
COST ANALYSIS
Economies of Scale:
The Long-Run Cost Curve for a Plant
Sources of scale economies:
Cost per
unit of
output
– technical input/output relationships
– indivisibilities
– specialization
Minimum
Efficient Plant
Size: the point
where most
scale economies
are exhausted
© 2016 Robert M. Grant, www.contemporarystrategyanalysis.com

Units of
output
per period
COST ANALYSIS
Some of the World’s Most Expensive New
Product Development Projects
Product
Lead company
Estimated
development cost
Launch date
F-35 Lightening II joint
strike fighter
Lockheed Martin
$240 billion
2012
B-2 Spirit “stealth
bomber”
Northrup Grumman
$23 billion
December 1993
A380 “super-jumbo”
Airbus Industrie
$19 billion
October 2007
787 Dreamliner
Boeing
$16–18 billion
3rd Quarter 2010
Windows Vista
Microsoft
$7 billion
January 2007
PlayStation 3
Sony
$7 billion
November 2006
$6 billion
July 1999
$6 billion
October 1992
Iridium satellite
Motorola/Iridium
communication system Satellite LLC
Ford Contour/Mondeo Ford Motor Company
© 2016 Robert M. Grant, www.contemporarystrategyanalysis.com
COST ANALYSIS
Scale Economies in Advertising: U.S. Soft Drinks
Advertising Expenditure ($ per case)
0.20
0.15
0.10
0.05
0.02
Despite the massive advertising budgets of brand leaders Coke and Pepsi, their
main brands incur lower advertising costs per unit of sales than their smaller rivals.
Schweppes
SF Dr. Pepper
Diet 7-Up
Tab
Diet Pepsi
Diet Rite
Fresca
Seven Up
Dr. Pepper
Sprite
Pepsi
10
20
50
100
200
500
Annual sales volume (millions of cases)
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
Coke
1,000
COST ANALYSIS
Using the Value Chain for Cost Analysis:
Automobile Manufacture
Purchasing
R&D,
Design
Engineer
-ing
Component
manufacture
Assembly
Testing,
Quality
control
Sales,
Marketing
Distrib
-ution,
Dealer
support,
Customer
service
Stages of the analysis:
1.
Identify the main value chain activities
2.
Allocate total costs between value chain activities
3.
Identify the cost drivers at each stage of the value chain
4.
Identify linkages between activities
5.
Identify opportunities for cost reduction
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
DIFFERENTIATION ANALYSIS
The Nature of Differentiation:
Differentiation and Segmentation
DIFFERENTIATION: concerns choices of how a firm distinguishes
its offerings from those of its competitors (i.e. How the firm competes)
SEGMENTATION: concerns choices of which customers, needs,
localities a firm targets (i.e. Where the firm competes)
DOES DIFFERENTIATION IMPLY SEGMENTATION?
—Not necessarily, depends upon the differentiation strategy:
BROAD SCOPE DIFFERENTIATION Appealing to what is common
between different customers
(McDonalds, Honda, Gillette)
FOCUSED DIFFERENTIATION
Appealing to what distinguishes
different customer groups (MTV,
Harley-Davidson, Armani)
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
DIFFERENTIATION ANALYSIS
Analyzing Differentiation: The Demand Side
THE PRODUCT
What needs
does it satisfy?
By what
criteria do
they choose?
THE
CUSTOMER
What are key
attributes?
How do patterns of
customer
preferences link to
product attributes
What price
premiums do
product attributes
command?
What
motivates
them?
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
What are
demographic,
sociological,
psychological
drivers of customer
behavior?
FORMULATE
DIFFERENTIATION
STRATEGY
• Select product
positioning in
relation to product
attributes
• Select target
customer group
• Ensure customer/
product
compatibility
• Evaluate costs
and benefits of
differentiation
DIFFERENTIATION ANALYSIS
Techniques for Analyzing Product
Attributes and Positioning
• Multidimensional Scaling: maps consumer perceptions
of competing products along key differentiating variables
• Conjoint Analysis: uses estimates of consumer
preferences for particular product attributes to forecast
demand for new products that comprise different bundles of
product attributes
• Hedonic Price Analysis: estimates the price that
consumers will pay for particular product attributes
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
DIFFERENTIATION ANALYSIS
Differentiation in Pain Relievers:
Multidimensional Scaling of Competing Products
High
Tylenol
Low
High
Bufferin
EFFECTIVENESS
Bayer
Private
label
aspirin
Anacin
Excedrin
Low
GENTLENESS
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
DIFFERENTIATION ANALYSIS
Analyzing Differentiation on
the Supply Side
Sources of uniqueness:
•
Product features and product performance
•
Complementary services (such as credit, delivery, repair)
•
Intensity of marketing activities (advertising; promotion)
•
Technology embodied in design and manufacture
•
Quality of purchased inputs
•
Procedures that impact the customer experience (e.g. the, rigor of
quality control, service procedures, frequency of sales visits)
•
Skill and experience of employees
•
Location (e.g. with retail stores)
•
Degree of vertical integration (allows control over inputs and
intermediate processes)
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
DIFFERENTIATION ANALYSIS
Product Integrity
Key to successful differentiation: consistency of all aspects of the
firm’s relationship with its customers.
Product Integrity: the total balance of product features
• Internal integrity:
consistency between
function and structure
• External integrity:
fit between the product and
customers’ objectives, values,
and lifestyle
Successful differentiation strategies achieve consistency of internal
and external integrity (e.g. Harley-Davidson, Apple, Starbucks)
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
DIFFERENTIATION ANALYSIS
Using Value Chains Linkages to Identify
Differentiation Opportunities: Can Manufacture
1
5
3
2
4
Distribution
Marketing
Canning
Processing
Inventory holding
Purchasing
Service &
technical support
Sales
Distribution
Inventory holding
Manufacturing
Design
Engineering
Inventory holding
Purchasing
Supplies of steel
& aluminum strip
CAN MAKER
CANNER
Linkages:
1. Distinctive can design can assist canners’ marketing activities.
2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.
3. Frequent, reliable delivery can permit canner to adopt JIT can supply.
4. Efficient order processing system can reduce customers’ ordering costs.
5. Competent technical support can increase canner’s efficiency of plant utilization.
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
COMBINING COST AND DIFFERENTIATION STRATEGIES
Features of Cost Leadership and
Differentiation Strategies
Generic
strategy
Key strategy elements
Resource and organizational
requirements
• Scale-efficient plants
• Access to capital
• Design for manufacture
• Process engineering skills
• Frequent reports
Cost
• Control of overheads
and R&D
leadership
• Process innovation
• Outsourcing/offshoring
• Specialization of jobs and
functions
• Avoiding marginal
customers
• Incentives linked to quantitative
targets accounts
• Emphasis on branding
advertising, design,
service, quality, and new
product development
• Marketing abilities
Differentiation
• Tight cost control
• Product engineering skills
• Cross-functional coordination
• Creativity
• Research capability
• Incentives linked to qualitative
performance targets
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com

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