Strategies for Competitive Advantage

S. Sredharran – M.C.A, M.B.A, M.Phil, M.Sc(Psychology)

Core Competence of Corporation

Difficult to Imitate by

competition

Wide Access to Markets

Add value to the customer

Core Competence

Basic Needs of a Customer

Friendliness is the most basic of all customers needs, usually associated with being greeted graciously and with warmth. We all want to be acknowledged and welcomed by someone who sincerely is glad to see us. A customer shouldn’t feel they are an intrusion on the service provider’s work day!Understanding and empathyCustomers need to feel that the service person understands and appreciates their circumstances and feelings without criticism or judgment. Customers have simple expectations that we who serve them can put ourselves in their shoes, understanding what it is they came to us for in the first place.

Basic Needs of a Customer

Fairness - We all need to feel we are being treated fairly. Customers get very annoyed and defensive when they feel they are subject to any class distinctions. No one wants to be treated as if they fall into a certain category, left wondering if “the grass is greener on the other side” and if they only received second best.

Control - Control represents the customers’ need to feel they have an impact on the way things turn out. Our ability to meet this need for them comes from our own willingness to say “yes” much more than we say “no.” Customers don’t care about policies and rules; they want to deal with us in all our reasonableness.

Basic needs of a Customer

Options and alternatives - Customers need to feel that other avenues are available to getting what they want accomplished. They realize that they may be charting virgin territory, and they depend on us to be “in the know” and provide them with the “inside scoop.” They get pretty upset when they feel they have spun their wheels getting something done, and we knew all along a better way, but never made the suggestion.

Information - “Tell me, show me – everything!” Customers need to be educated and informed about our products and services, and they don’t want us leaving anything out! They don’t want to waste precious time doing homework on their own – they look to us to be their walking, talking, information central

Organic Growth

Organic growth is the process of business expansion due to increasing overall customer base, increased output per customer or representative, new sales, or any combination of the above, as opposed to mergers and acquisitions, which are examples of inorganic growth.

Typically, the organic growth rate also excludes the impact of foreign exchange. Growth including foreign exchange, but excluding divestitures and acquisitions, is often referred to as core growth.

Organic growth is growth that comes from a company's existing businesses, as opposed to growth that comes from buying new businesses.

Organic Growth

Organic growth does include growth over a period that results from investment in businesses the company owned at the beginning of the period. What it excludes is the boost to growth from acquisitions, and the decline from sales and closures of whole businesses.

When a company does not disclose organic growth numbers, it is usually possible to estimate them by estimating the numbers for acquisitions made in the period being looked at and in the previous year. It is useful to break down organic sales growth into that coming from market growth and that coming from gains in market share: this makes it easier to see how sustainable growth is.

Relating to organic input in an organisation, it can also relate to the act of closing down cost centers through established organic methods instead of waiting for a Finance list.

Organic Growth – Advantages

Organization strategic goals can be achieved

Thru organic growth, the management team are able to guide and lead the business according and in-line with the strategic goals of the company.

No clashes in culture

There will be no culture clashies as the company employees are all either hired from the start of the business or being transferred to the newly setup business. the culture and norms of the business will be maintained.

Cheaper compared to acquisitions

very often when a company buys another business. they'll need to pay a premium, and that premium itself can sometimes wipe out the whole value of the acquisitions rather than increasing shareholder's value.

Organic Growth - Disadvantages

Longer time organic growth business needs longer time

to grow as they need to start from scratch including setting up the whole business, hiring and recruiting human capital, investing in machineries, and etc.

Riskier The business will be bearing the whole risk

by themselves.

Resources, Capabilities & Competitive Advantage (CA)

Every firm has resources & work processes Systems to do whatever it’s in business to do

But not every firm is able to Effectively exploit its resources & capabilities Obtain resources & capabilities it needs

Some firms are able to “pull it together” & develop distinctive capabilities, others don’t

Competitive advantage implies gaining the edge on others – using resources & capabilities

As firms strive for sustainable CA, stage for competition is set - intense, moderate, low

Basic Competitive Strategy

Become the low-cost supplier - By under-pricing the competition, you can achieve greater volume, which can drive your costs down even further by realizing economies of scale. Of course, it's important to still maintain a healthy profit margin so the key here is to lower costs, not just prices.

Achieve product or service quality differentiation - Think about the hundreds of companies that have achieved such differentiation for themselves. Take L'Oreal, for example. Why have they used the slogan "I'm worth it" for so many years? And are there really any other crackers on grocery store shelves that have the image of Ritz?

What's the real difference between Coke and Pepsi, or between Skippy and Jif peanut butter? Why do you keep returning to the same dealership to have your car serviced? Why do many of us follow our favorite hair stylist or radio personality if they move to another location or station? The answers lie in the perception of a difference in people's minds.

Basic Competitive Strategy

Achieve supply or distribution leverage - When Microsoft wrote the DOS operating system, it instantly gained an advantage in the computer industry that has remained virtually impossible to copy. Airlines with landing rights at airport gates, or companies like Kellogg's with lots of shelf clout, have sustainable advantages that provide serious barriers to competitors. A patent, copyright or exclusive contract provides legal protection.

Pursue a market niche - especially one that has been neglected by the dominant firm in your industry. As companies grow, decisions often have to be made to discontinue servicing a particular segment. But that doesn't mean that the segment no longer has needs; it just means that the larger company can no longer provide for them efficiently or profitably. That spells immediate opportunity for a smaller, leaner organization.

COMPETITIVE ADVANTAGE AND HOW IT IS OBTAINED

Competitive Advantage What sets an organization apart -- competitive

edge Controlling or having something others do not

have Doing something better than other organizations Doing something other organizations cannot do

Competitive strategies are designed to exploit an organization’s competitive advantage

Implies there are other competitors also trying to develop competitive advantage & attract customers

Competitive advantage can be eroded easily (& often quickly) by rival’s actions

Strategy FormulationStrategy Formulation

Managers analyze the current situation to develop strategies achieving the mission.

SWOT analysis: a planning to identify: Organizational Strengths and

Weaknesses. Strengths: manufacturing ability, marketing

skills. Weaknesses: high labor turnover, weak

financials. Environmental Opportunities and

Threats. Opportunities: new markets. Threats: economic recession, competitors

Planning & Strategy FormulationPlanning & Strategy Formulation

Corporate-level strategydevelop a plan of action

maximizing long-run value

Business-level strategya plan of action to take

advantage of opportunitiesand minimize threats

Functional-level strategya plan of action improving

department’s ability to create value

SWOT analysis identifies strengths & weaknesses inside the firm and opportunities

& threats in the environment.

Corporate Governance (Growth Strategy) Horizontal integration is the process of acquiring or

merging with industry competitors in an effort to achieve the competitive advantages that come with large scale and scope.

An acquisition occurs when one company uses its capital resources—such as stock, debt, or cash—to purchase the other, and a merger is an agreement between equals to pool their operations and create a new entity.

For example, in the automobile industry, Chrysler merged with Daimler Benz to create DaimlerChrysler, in the aerospace industry, Boeing merged with McDonald Douglass to create the world's largest aerospace company; in the pharmaceutical industry, Pfizer acquired Warner Lambert to become the largest pharmaceutical firm; in the financial services industry, Citicorp and Travelers merged to create Citigroup, the world's largest financial services company; and in the computer hardware industry, Compaq acquired Digital Equipment and then itself was acquired by Hewlett Packard.

Vertical Integration(Growth Strategy)

By vertical integration, a company expands its operations either backward into an industry that produces inputs for the company's products or forward into an industry that uses or distributes the company's products.

Traditionally, IBM has been a very vertically integrated corporation. It integrated backward into the disc drive industry to produce the disc drives that go into its computer hardware systems and forward into the computer consulting services industry.

Vertical IntegrationVertical Integration

When the firm is doing well, managers can add more value by producing its own inputs or distributing its products. Backward vertical integration: the firm

produces its own inputs. McDonalds grows its own potatoes. Can lower the cost of supplies.

Backward vertical integration: the firm distributes its outputs or products. McDonalds owns the final restaurant. Firm can lower costs and ensure final

quality.

Vertical Value ChainVertical Value Chain

Intermediate Manufacturing

Intermediate Manufacturing

Raw Materials

Raw Materials

Assembly Assembly

Distribution Distribution Customer

Backward Forward

Mergers & Acquisitions(Market Entry Strategies)

A domestic company selects a foreign company and merger itself with foreign company in order to enter international business.

Alternatively the domestic company may purchase the foreign company and acquires itownership and control.

It provides immediate access to internationalmanufacturing facilities and marketing network.

is the process of acquiring or merging with industry competitors in an effort to achieve the competitive advantages that come with large scale and scope.

An acquisition occurs when one company uses its capital resources—such as stock, debt, or cash—to purchase the other, and a merger is an agreement between equals to pool their operations and create a new entity.

Mergers & Acquisitions - Advantages

1. The company immediately gets the ownership and control over the acquired firm’s factories, employee, technology, brand name and distribution networks.

2. The company can formulate international strategy and generate more revenues.

3. If the industry already reached the stage of optimum capacity level or overcapacity level in the host country. This strategy helps the host country.

Mergers & Acquisitions – Disadv

1. Acquiring a firm in a foreign country is a complex task involving bankers, lawyers regulation, mergers and acquisition specialists from the two countries.

2. This strategy adds no capacity to the industry.

3. Sometimes host countries imposed restrictions on acquisition of local companies by the foreign companies.

4. Labour problem of the host country’s companies are also transferred to the acquired company.

Diversification

Diversification means "not putting all your eggs in one basket." Diversifying is like protecting your money. Investors diversify by spreading their investments across a variety of investment types and industry types. So if one company or industry falters, investors do not lose all of their money. 

Diversification Types - There are two major types of diversification: related diversification and unrelated diversification.

Related diversification refers to diversification into a new activity that is linked to a company's existing activity by a commonality between one or more components of each activity's value chain.

Unrelated diversification refers to diversification into a new activity that has no obvious commonalities with any of the company's existing activities.

Licensing

Licensing is where your own organization charges a fee and/or royalty for the use of its technology, brand and/or expertise.

Licensing is the process of leasing a legally protected (that is, trademarked or copyrighted) entity – a name, likeness, logo, trademark, graphic design, slogan, signature, character, or a combination of several of these elements.

The entity, known as the property or intellectual property, is then used in conjunction with a product. Many major companies and the media consider licensing a significant marketing tool.

Licensing – Advantages

1. Low investment on the part of licensor.2. Low financial risk to the licensor.3. Licensor can investigate the foreign

market without much efforts on his part.4. Licensee gets the benefits with less

investment on research and development.5. Licensee escapes himself from the risk of

a given product failure in that market.

Licensing - Disadvantages

1. It reduces market opportunities for both.2. Both parties have to maintain the product quality and promote the product . Therefore one party can affect the other through their improper acts.3. Chance for misunderstanding between the parties.4. Chance for leakages of the trade secrets of the licensor.5. Licensee may develop his reputation6. Licensee may sell the product outside the agreed territory and after the expiry of the contract.

Franchising

Under franchising an independent organization called the franchisee operates the business under the name of another company called the franchisor under this agreement the franchisee pays a fee to the franchisor.

Franchising involves the organization (franchiser) providing branding, concepts, expertise, and infact most facets that are needed to operate in an overseas market, to the franchisee.

Management tends to be controlled by the franchiser. Examples include Dominos Pizza, KFC, Subway, Burger King, McDonald's Restaurants.

Franchising

The franchisor provides the following services to the franchisee.1. Trade marks2. Operating System3. Product reputation4. Continuous support system like advertising , employee training , reservation services, quality assurances program etc.

Franchising - AdvantagesLow investment and low risk.Franchisor can get the information regarding the market culture, customs and environment of the host country.Franchisor learns more from the experience of the franchisees.Franchisee get the benefits of R& D with low cost.Franchisee escapes from the risk of product failure.

Franchising - Disadvantages

It may be more complicating than domestic franchising.It is difficult to control the international franchisee.It reduce the market opportunities for both.Both the parties have the responsibilities to maintain product quality and product promotion.There is a problem of leakage of trade secrets

Restructuring

A restructuring strategy is based on the presumption that an efficiently managed company can create value by acquiring inefficient and poorly managed enterprises and improving the efficiency of those enterprises. Such improvements can come from a number of sources.

Restructuring is often a response to Excessive diversification, Failed acquisitions, and Innovations in management process that have

reduced the advantages of vertical integration and diversification.

 

Joint Ventures

There are situations when a company prefers internal venturing to acquisitions as an entry strategy, yet hesitates to commit itself f to an internal venture because of the risks and costs involved. In such circumstances, the company may prefer to enter into a joint venture with another company and then use the joint venture as a vehicle for entering the new business area.

The advantage of such an arrangement is that it enables the company to share the substantial risks and costs involved in a new venture project.

In addition, a joint venture makes sense when a company has some, but not all, of the skills and assets necessary to establish a successful new venture. When it teams up with a company that has the skills and /or assets that it lacks, the probability of sources may be increased.

Joint Venture

Joint Ventures tend to be equity-based i.e. a new company is set up with parties owning a proportion of the new business.

There are many reasons why companies set up Joint Ventures to assist them to enter a new international market:

Access to technology, core competences or management skills. For example, Honda's relationship with Rover in the 1980's.

To gain entry to a foreign market. For example, any business wishing to enter China needs to source local Chinese partners.

Access to distribution channels, manufacturing and R&D are most common forms of Joint Venture.

Joint Venture

One very good reason why many joint ventures only involve two parties is the difficulty in integrating different corporate cultures.

With two domestic companies from the same country, it would still be very difficult. However, with two companies from different cultures, it is almost impossible at times.

This is probably why pure joint ventures have a fairly high failure rate only five years after inception.

Strategic Outsourcing

Strategic outsourcing involves separating out some of a company's value creation activities within a business and letting them be performed by an independent entity or spinning off the part of the company that performs that activity as an independent entity.

Strategic outsourcing is concerned with reducing the boundaries of the company and focusing on fewer value creation functions. The activity to be outsourced may encompass an entire function, such as the manufacturing function, or it may entail an activity embedded within a function. For example, many companies outsource management of their pension system while keeping other Human resource function activities within the company.

Strategic Alliances

Strategic alliances are essentially agreements between two or more companies to share the costs, risks, and benefits associated with developing new business opportunities. Many strategic alliances are constituted as formal joint ventures in which each party has an equity stake.

Other alliances take the form of a long-term contract between companies in which they agree to undertake some joint activity that benefits both. Agreements to work together on joint R&D projects often take this form.

Strategic alliances seem to be a particularly viable option when a company wishes to create value from transferring competencies or sharing resources between diversified businesses.

Reciprocal Distribution Agreements This type of strategic alliance is more

trade-based, but in a very real sense it does in fact represent a type of direct investment.

Basically, two companies, usually within the same or affiliated industries, agree to act as a national distributor for each other’s products.

The classical example is to be found in the furniture industry. A U.S.-based manufacturer of tables signs a reciprocal distribution agreement with a Spanish-based manufacturer of chairs.

RDA Both companies gain direct access to the

other’s distribution network without having to pay distributor support payments and other related expenses found within the distribution channel and neither company can hurt the other’s market for its products.

Without such an agreement in place, the Spanish manufacturer might very well have to invest in a national sales office to coordinate its distributor network, manage warehousing, inventory and shipping as well as to handle administrative tasks such as accounting, public relations and advertising.

Exit Strategies

Exit strategies. Companies use three main strategies to exit from business areas: divestment, harvest, (or) liquidation.

Divestment - Divestment is usually the favored one. It represents the best way for a company to recoup as much of its initial investment in a business unit as possible. The idea is to sell the business unit to the highest bidder. Three types of buyers are possible: independent investors,(Spin off), other companies, and the management of the unit to be divested(MBO – Management Buy Out).

Harvest (or) Liquidation

A harvest or liquidation strategy is generally considered inferior to a divestment strategy since the company can probably best recoup its investment in a business unit by divestment.

A harvest strategy involves halting investment in a unit in order to maximize short-to medium-term cash flow from that unit, before liquidating it. Although this strategy sounds nice in theory, it is often a poor one to pursue in practice since the morale of the unit's employees, as well as the confidence of the unit's customers and suppliers in its continuing operation can all decline rapidly once it becomes apparent that the unit is pursuing a harvest strategy.

Portfolio Analysis – BCG Matrix

BCG Matrix - Interpretation

Stars- Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBU’s located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures.

Cash Cows- Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBU’s are the corporation’s key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued.

BCG Matrix

Question Marks- Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective.

There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars.

Dogs- Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitor’s/rival firms.

These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization.

Ansoff’s Growth Matrix

Industry Attractiveness Business Strength Matrix

Porter’s Five Forces Model

© Porter M. E, 1980

The Five ForcesThe Five Forces

1. Level of Rivalry in an industry: how intense is the current competition with competitors?Increased competition results in lower profits.

2. Potential for entry: how easy is it for new firms to enter the industry?Easy entry leads to lower prices and profits.

3. Power of Suppliers: If there are only a few suppliers of important items, supply costs rise.

4. Power of Buyers: If there are only a few, large buyers, they can bargain down prices.

5. Substitutes: More available substitutes tend to drive down prices and profits.

Market Position

Will involve/determine some or all of the following: Market Penetration New Product

Development Branding Diversification SWOT Analysis Product Portfolio –

Product Life Cycle, Boston Matrix

How can football clubs market themselves in new markets like China?

Market Objectives

Which Segment?

Mass Markets – high volume, low margin goods – confectionary, cars, clothing, food stuffs

Multiple Segments – appealing to wider range of groups – e.g. 4x4 vehicles – town, country, gender, lifestyle, social class?

Single Segment – often a specialised product, e.g. machinery, exclusive goods

Market Positioning

In marketing, positioning is the process by which marketers try to create an image or identity in the minds of their target market for its product, brand, or organization.

Re-positioning involves changing the identity of a product, relative to the identity of competing products.

De-positioning involves attempting to change the identity of competing products, relative to the identity of your own product.