michael porters competitive advantage 6110
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Competitive Advantage
Author: Michael Porter
Instructor: Wesley Shu
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How a firm can actually create and sustain a competitive advantage in its industry
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Two Basic Types
• Cost leadership
• Differentiation
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Value Chain
• Identify which activities contributing to cost leadership and differentiation
• Analyze the source of competitive advantage
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Value Chain
Inbo
und
Logi
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Ser
vice
Mar
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gan
d S
ales
Out
boun
dLo
gist
ics
Mar
gin
Ope
ratio
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Procurement
Firm Infrastructure
Human Resource Management
Technology Development
PrimaryActivities
SupportingActivities
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Primary Activities
• Inbound LogisticsReceiving, storing, and disseminating inputs. E.g., warehousing, inventory control
• OperationsTransforming inputs into the final product form
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Primary Activities• Outbound Logistics
Collecting, storing and distributing the product to buyers
• Marketing and SalesProviding a means and incentive which allow buyers to purchase the product
• ServiceProviding service to enhance or maintain the value of the product
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Primary Activity Focus by Industry
Industry Inbound Logistics
Operations Outbound Logistics
Marketing & Sales
Service
Distributor X X
Restaurant X NA
Corporate Lending
X
Xerox X
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Support Activities
• ProcurementFunction of purchasing inputs used in the value chain
• Technology Development
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Support Activities
• Human Resource Management
• Firm Infrastructure
planning, finance, accounting, legal, etc.
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Competitive Scope
• Segment ScopeDifferences required to serve different product or buyer segment
• Vertical ScopeDivision of activities between a firm and its suppliers, channels, and buyers
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Competitive Scope
• Geographic ScopeDifferent geographic areas
• Industry ScopeInterrelationships among business units
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“Generic” Competitive Advantage
• Cost Leadership
• Differentiation
• Focus
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Competitive Strategies
Competitive Advantage
Lower Cost Differentiation
Com
petitive S
cope
Broad
Target
Cost Leadership
Differentiation
Narrow
Target
Cost Focus Differentiation Focus
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Cost Leadership Strategy
• Make cost assignment
• Identify cost drivers
• Understand cost dynamics
• Control cost drivers
• Reconfigure the value chain
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Operating Cost Assignment
Firm Infrastructure (9%)
Operations (67%)
Inbo
und
Log
isti
cs (
3%)
(27%)
(40%)
Procurement (1%)
Human Resources Management (2%)
Technology Development(9%)
Mar
keti
ng &
Sal
es (
6%)
OutboundLogistics (1%)
Mar
gin
(5%
)S
ervi
ce (
1%)
Purchased Operating Inputs
Human Resource Costs
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Asset AssignmentFirm Infrastructure (16%)
Operations (67%)Inbound Logistics
(38%)
(8%)
Procurement (2%)
Human ResourcesManagement (1%)
Technology Development(2%)
Marketing & Sales (1%)
OutboundLogistics (1%)
Ser
vice
(2%
)
(15%)Liquid Assets
Fixed Assets
(5%)
(6%)
(2%)
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Cost Leadership – Cost Drivers
• Economies or diseconomies of scale
• Learning and spillover
• Pattern of capacity utilization
• Linkages How other activities are performed– Linkages within the Value Chain– Vertical Linkages
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Cost Leadership – Cost Drivers
• InterrelationshipsWith other business units within a firm
• IntegrationVertical integration in a value activity
• Timing
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Cost Leadership – Cost Drivers
• Discretionary policiesPolicies that reflect a firm’s strategy
• Location
• Institutional factorse.g., government regulations, financial incentives, unionization, etc.
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Identify Cost Drivers
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Cost Dynamics
• What cause the change of cost drivers
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Cost Dynamics
• Industry real growth
• Differential scale sensitivity
• Different learning rates
• Differential technological change
• Relative inflation of costs
• Aging
• Market adjustment
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How to Achieve Cost Advantage
Cost Position
composition of afirm’s valuechain versuscompetitors’
Cost Advantage
a firm’s relativeposition vis-à-visthe cost driversof each activity
Reconfigure thevalue chain
Control costdrivers
achieve
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Analyze Cost Advantage
Your costAdvantage
Mar
gin
Ope
ratio
ns
Firm Infrastructure
Human Resource Management
Technology Development
Procurement
Inbo
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Logi
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s
Out
boun
dLo
gist
ics
Mar
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Control Cost Drivers
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Reconfigure the Value Chain
• Reconfiguration of the value chain presents the opportunity to fundamentally restructure a firm’s cost, compared to settling for incremental improvements.
• By altering the basis of competition in a way that favors a firm’s strengths, it may change the important cost drivers in a way that favors a firm.
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Steps in Strategic Cost Analysis1. Identify the appropriate value chain and
assign costs and assets to it.2. Diagnose the cost drivers of each value
activity and how they interact.3. Identify competitor value chains, and
determine the relative cost of competitors and the sources of cost differences.
4. Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain and/or downstream value.
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Cost Focus
A firm dedicates its efforts to a well-chosen segment of an industry can often lower its costs significantly.
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Differentiation
• Emphasize on a unique source of differentiation in the Value Chain, rather than on products or markets only
• Differentiation base on buyers’ value, not only difference that buyers do not value
• Should consider the cost of differentiation
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Uniqueness Buyers’ ValueDifferentiation
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Identify Sources of Differentiation
Mar
gin
Your strength which canlead to differentiation and
then improve buyers’ value
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Drivers of Uniqueness
• Policy Choices• Linkages
– Linkages within the value chain– Supplier linkages– Channel linkages
• TimingBe the first
• Location
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Drivers of Uniqueness
• InterrelationshipSharing a value activity with sister business units. E.g., sharing a sales force for both insurance and other financial products
• Proprietary learning• Integration – e.g., integrating online systems
to current ordering systems• Scale• Institutional factors – e.g., “Madame’s route”
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Why buyers purchase?
Purchasing Criteria
• User criteria – firms to meet them by lowering cost or raising buyer performance
• Signaling criteria
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Differentiation for creating Buyer Value by• Lowering buyer cost• Raising buyer performance• Signaling the value
• Linking the firm’s value chain to the buyer’s value chain
Through
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Steps in Differentiation
1. Determine who the real buyer is2. Identify the buyer’s value chain and
the firm’s impact on it3. Determine ranked buyer purchasing
criteria4. Assess the existing and potential
sources of uniqueness in a firm’s value chain
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Steps in Differentiation5. Identify the cost of existing and potential
sources of differentiation6. Choose the configuration of value activities
that creates the most valuable differentiation for the buyer relative to cost of differentiating
7. Test the chosen differentiation strategy for sustainability
8. Reduce cost in activities that do not affect the chosen forms of differentiation
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Discussion: Red Ocean to Blue Ocean
Porter’sStrategy
BOSBPR
Porter’sStrategy
BOS
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Other Discussion
• Creative Industries
• Supply Chain Management
• What is “Buyer’s Value Chain”?
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