Strategic Elements of Competitive Advantage. PPT 6 (First ppt slides after the mid-term) Assist. Prof. Dr. Ayşen Akyüz

Transcription

1 Strategic Elements of Competitive Advantage PPT 6 (First ppt slides after the mid-term) Assist. Prof. Dr. Ayşen Akyüz

2 Industry Analysis: Forces Influencing Competition Industry group of firms that produce products that are close substitutes for each other Michael E. Porter identifies five forces that influence industry competition: the threat of new entrants, the threat of substitute products or services, the bargaining power of buyers, the bargaining power of suppliers, and competitive rivalry.

3 Porter s Force 1: Threat of New Entrants New entrants to an industry bring new capacity, a desire to gain market share and position, and, quite often, new approaches to serving customer needs. The decision to become a new entrant in an industry is often accompanied by a major commitment of resources. New entrants mean reduced profitability Barriers to entry determines the extent of threat of new industry entrants

4 Threat of New Entrants: Barriers to Entry Industry is more attractive to new entrants when: Advantages of economies of scale are absent. Capital requirements to enter the industry are low Cost advantages are not related to company size Buyers are not loyal to existing brands Government does not restrict the entrance of new companies

5 Threat of New Entrants: Barriers to Entry Distribution channels Are there current distribution channels available with capacity? Government policy Are there regulations in place that restrict competitive entry? Cost advantages independent of scale economies Is there access to raw materials, large pool of low-cost labor, favorable locations, and government subsidies? Competitor response How will the market react in anticipation of increased competition within a given market?

6 Porter s Force 2: Threat of Substitute Products Availability of substitute products places limits on the prices market leaders can charge Industry is more attractive when: Quality substitutes are not readily available High prices induce buyers to switch to the substitute

7 Porter s Force 3: Bargaining Power of Buyers Buyers=manufacturers and retailers, not consumers Buyers seek to pay the lowest possible price Buyers influence is high when number of customers is small and cost of switching to a competitor s product is low. Buyers have leverage over suppliers when: They purchase in large quantities (enhances supplier dependence on buyer) Suppliers products are commodities Industry is more attractive when: Customers switching costs are high Number of buyers is large Customers want differentiated products Customers find it difficult to collect information for comparing suppliers

8 Porter s Force 4: Bargaining Power of Suppliers When suppliers have leverage, they can raise prices high enough to affect the profitability of their customers Leverage occurs when Suppliers are large and few in number Supplier s products are critical inputs, are highly differentiated, or carry switching costs Few substitutes exist Suppliers are willing and able to sell product themselves Industry is more attractive when: Many suppliers sell a commodity product Substitutes are available Switching costs are low

9 Porter s Force 5: Rivalry Among Competitors Refers to all actions taken by firms in the industry to improve their positions and gain advantage over each other Price competition Advertising battles Product positioning Differentiation

10 Competitive Advantage Achieved when there is a match between a firm s distinctive competencies and the factors critical for success within its industry Two ways to achieve competitive advantage Low-cost strategy Product differentiation

11 Generic Strategies for Creating Competitive Advantage Cost Leadership low price Product Differentiation premium price Focused Differentiation premium price

12 Cost Leadership Goal: to be the low-cost producer in the industry (or market segment). Low-cost leaders have advantages: Reaching buyers who buy on the basis of price The power to set the industry s price floor. Must construct the most efficient facilities Must obtain the largest market share so that its per unit cost is the lowest in the industry Only works if barriers exist that prevent competitors from achieving the same low costs

13 Product Differentiation When a product has perceived uniqueness, in a broad market, it is said to have achieved competitive advantage by differentiation. Extremely effective for defending market position Extremely effective for obtaining aboveaverage financial returns; unique products command a premium price

14 Focused Differentiation The product not only has actual uniqueness but it also has a very narrow target market Results from a better understanding of customer s wants and desires It might emphasize high quality, extraordinary service, innovative design, technological capability, or an unusually positive brand image Ex.: High-end audio equipment

15 Sustaining a Competitive Advantage Competitive advantage counts for little if it cannot be sustained over the long-term. Factors reducing competitive advantage Evolutionary changes in the industry Technological changes Customer preferences Imitation by competitors Defending competitive advantage Patents, copyrights, trademarks, regulations, and tariffs Competing on price Long-term contracts with suppliers (and customers)

16 Global Competition and National Competitive Advantage Global competition occurs when a firm takes a global view of competition and sets about maximizing profits worldwide The effect is beneficial to consumers because prices generally fall as a result of global competition While creating value for consumers, it can destroy the potential for jobs and profits

17 Global Competition and National Competitive Advantage

18 Factor Conditions Human Resources the quantity of workers available, skills possessed by those workers, wage levels, and work ethic Physical Resources the availability, quantity, quality, and cost of land, water, minerals, and other natural resources Knowledge Resources the availability within a nation of a significant population having scientific, technical, and market-related knowledge

19 Factor Conditions Capital Resources the availability, amount, cost, and types of capital available; also includes savings rate, interest rates, tax laws, and government deficit Infrastructure Resources this includes a nation s banking, healthcare, transportation, and communication systems

20 Related and Supporting Industries: The advantage that a nation gains by being home to internationally competitive industries in fields that are related to, or in direct support of, other industries Globally-competitive supplier industries provide inputs to downstream industries. They are globally competitive in terms of price and quality and gain competitive advantage. Downstream industries have easier access to inputs and technology, and to the managerial and organizational structures that made them competitive.

21 Demand Conditions are the factors that either train firms for world-class competition or that fail to adequately prepare them to compete in the global marketplace. Three characteristics of home demand are important to creation of competitive advantage: Composition of Home Demand. This demand element determines how firms perceive, interpret, and respond to buyer needs. Size and Pattern of Growth of Home Demand. These are important only if the composition of the home demand is sophisticated and anticipates foreign demand. If home demand reflects or anticipates foreign demand, large-scale facilities and programs will be an advantage in global competition. Rapid home market growth. This is an incentive to invest in and adopt new technologies faster, and to build large, efficient facilities. Early market saturation puts pressure on a company to expand into international markets and innovate.

22 Firm Strategy, Structure, and Rivalry Domestic rivalry in a single national market is a powerful influence on competitive advantage The absence of significant domestic rivalry can lead to complacency in the home firms and eventually cause them to become noncompetitive in the world markets It is not the number of domestic rivals that is important; rather, it is the intensity of the competition and the quality of the competitors that make the difference. Differences in management styles, organizational skills, and strategic perspectives create advantages and disadvantages. For example, German company structure is hierarchical while Italian firms run like small family businesses.

23 Current Issues in Competitive Advantage Today s business environment, market stability is undermined by: Short product life cycles Short product design cycles New technologies Globalization Result is an escalation and acceleration of competitive forces