Analysing Competitive Advantage
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Analysing Competitive AdvantageChristopher McKenna
Executive MBAMay 2013
WWW.SBS.OXFORD.EDUEDUCATING LEADERS FOR 800 YEARS
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What’s So Special About the iPhone?
Apple Software Samsung Applications Processor Samsung SDRAM Memory (10% of the total
cost to manufacture) Samsung NAND Flash (15% of total cost) Broadcom GPS Texas Instruments Touchscreen Controller ST Micro Gyroscope LG LCD Display Infineon Transceiver (Quad Band)
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1. Resource-Based View
2. Core Competence
3. Business Designs
4. Generic Competitive Strategies
Key Concepts from this Session
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American RailwaysWhat Business Is It In?
Rail
Transport
Goods Passengers
Distribution Tourism
Business Services Consumer Services
“The Customer-Defined Business”
Source: Ted Levitt, Marketing Myopia, HBR, July, 1960
Looking Outside
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Cameras Copiers Faxes Printers
Precis. Fine Micro- Mech. Optics Electron
Micro- Optronics
“Core Competence”
Source: Prahalad and Hamel, HBR, May, 1990
Core Competences at Canon
Looking Inside the Firm
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Core Competence: the firm’s central dynamo of strategic advantage over time (typically integrativeand specific)
Many firms have none.
Capabilities/Competences: the firm’s ability to put resourcesto profitable use (verbs) Most firms will have some.
Resources: e.g. the firm’s equipment, patents, people, brands, money (nouns)
All firms have these.
The key question from the RBV is: what are you best at?
The Resource-Based View
RBV = Superior performance stems from within the firm – its resources and capabilities
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Core Competence Statements
CitiCorp: Systematising and exploiting real-time financial information
Honda: Designing and manufacturing petrol-poweredengines, especially for mobile devices
Sony: Using miniaturisation to create and market innovative electronic products for consumer markets
Based on Prahalad and Hamel, The Core Competence of the Corporation, HBR, 1990
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Key question: Are there activities others can do better?
Profitability
Distance from Core
A Question of Focus
Core
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1. Map products and services
2. Identify underlying technologies, skills, processes and resources
3. Synthesise common technologies, skills, processes and resources
4. Check that common technologies, skills, processes and resources are extendable
5. Keep Testing!
Identifying Core Competence
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· is it valued by customers will they pay you more than it costs?
· is it superior you command a premium over competitors?
· is it imitable your competitors cannot copy?
· is it substitutable your competitors cannot out-trump you?
· is it durable are you managing and building it?
· is it core is it the base of (nearly) everything you do?
Testing Resources and Competences
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It is Probably NOT a “Core Competence” if ...
it’s based on a particular product or service (not “our core competence is coffee”)
it’s based on a person or small group of people (not “our core competence is our emerging markets team”)
it’s simply what you haven’t yet divested or outsourced (not “we have divested these businesses to focus on our core”)
it’s something many others could say (not “our core competence is service excellence”)
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Business Designs
Competition is no longer about ‘silver bullets’ but about competing ‘business designs’.
Business Design: a mutually reinforcing (complementary) configuration of business choices
on key value adding dimensions, underpinned by fundamentalassumptions about business drivers
Examples: Wal-Mart, EasyJet, Nucor, and Amazon
Fundamental Assumptions:What business are you in?
What are your customers going to want?What drives profits in the chain?
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Competing on Business Design
‘Big Steel’ Mini-Mills
Fundamental Quality at a Price Right quality, right priceAssumptions: Volume Key Low Volumes
Design Elements:
Customers Broad Regional Focus
Scope Vertical Integration Scrap
Operating System Basic Oxygen Electric Arc
Capital Intensity High Low
R&D In-house Suppliers
Organization Unionized Lean, Green
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Electric Arc
Low Volume
LowQuality
GreenWorkers
RegionalMarkets
Low R&D
KeyPlant
Suppliers
LowOverheads
HighIncentives
Low Prices
No Unions
Nucor’s Business Design (“activity system map”)
Low Capital
List Prices
LimitedProducts
Porter, 1996, Harvard Business Review
Key Business Drivers Shaded; Reinforcing Links Indicated
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1. Identify functional elements of overall strategy (e.g. HR, Ops etc)2. Identify complementary links, potential links – and conflicting ones3. Build complements, and minimise conflicts4. Which element most at risk of change?
Technology Strategy
Supplier Strategy
OperationsStrategy
FinancingStrategy
Human ResourceStrategy
MarketingStrategy
Mapping Complementarities in Business Design
The Activity System Map
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At the level of the business unit, there are just two ways of achieving superior performance, the ‘generic strategies’ of:
· cost leadership· differentiation
The scope of cost leadership and differentiation can be broad or narrow. But Porter warns that the two strategies can’t be mixed. His message is:
· identify your advantage - your ‘reason for being’· know your competence· don’t get ‘stuck-in-the-middle’
Porter’s Generic Competitive Strategies
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Costs Costs
Average PriceProfit Profit
Profit
Costs
Competence Competence
Advantage from Generic Strategies
Apply competences for either cost or differentiation advantages
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Profitability Profitability
Low Cost Differentiation
1. Does the business really know where it is?
2. Is the business in too many positions?3. Is the business in danger of compromising its position?
Generic Strategy Choices
Maintain ‘parity’ on each dimension – but don’t get stuck-in-the-middle
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Cost Leadership and Differentiation
Cost leader Differentiator
• Higher prices• More extras• Quality features• Service• Snob appeal
• Lower costs• Fewer extras• Efficiency• Scale economies• Budget appeal
“Stuck in the Middle”
• Unclear value proposition• High costs, low prices?
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Some Cautionary Warnings
Are Core Competences too Subjective?
Are Resources Inherently Tautological?
Are Generic Strategies too Dichotomous?
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Your Strategy Statement?
For a business with which you are familiar:
1. Explain the goals of the business
2. Define its scope
3. Explain how competitive advantage supports goals and scope
4. Is competitive advantage adequate, all across the business?
In 35 words or less ....
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1. Resource-Based View
2. Core Competences
3. Business Designs and Activity Systems
4. Generic Competitive Strategies
Key Concepts from this Session