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External and Internal Analysis and Competitive Advantage

In this lecture, we focus• Company’s present strategy • Internal strength and weakness and

external opportunity and threat• Five generic competitive strategy• Competitive advantage and strategy for

Diversification

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External and Internal Analysis and Competitive Advantage

Considerations for Present Strategy:

Cost (low cost?)

Quality (superior quality?)

Customer based (broad or narrow segment)

Product-distribution (logistic, inventory strategy)

Performance can be evaluated by• Growth of sales• Acquiring new and retaining

existing customers• Profit margin• Trends on return on investment

(ROI)• Efficiency in production cost,

defects rate, inventory, distribution, supply chain management

• Image and reputation

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External and Internal Analysis and Competitive Advantage

Basis of developing strategySWOT analysis is based on the principle that

• Strategy making efforts aim at producing a good fit between company’s resource capability (balance of resource strength and weakness) and its external situation (market opportunities and threats to profitability and market standing)

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Strategy 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

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External Analysis• Analyzing the dynamics of the industry in

which an organization competes to help identify:

– Opportunities: conditions in the environment that a company can take advantage to become more profitable

– Threats: conditions in the environment that endanger the integrity and profitability of the company’s business

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The Computer Sector: Industries and Segments

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Porter's Five Forces Model

Substitutes

BuyersCompetitive RivalrySuppliers

Potential Entrants

Bargaining Power

Bargaining Power

Threat of Entry

Threat of Entry

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Risk of Entry by Potential Competitors

Potential for entry: how easy is it for new firms to enter the industry?

• Easy entry leads to lower prices and profits.

• Barriers to entry– Brand loyalty– Absolute cost advantage

• Superior production operations and processes• Control of particular inputs required for production• Access to cheaper funds because existing companies

represent lower risks than new entrants

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Risk of Entry by Potential Competitors

• Barriers to entry – Economies of scale

– Cost reductions from mass production of standardized output– Discounts on bulk purchases of inputs– Advantages of spreading fixed costs over a large production

volume– Cost savings from marketing and advertising for a large

volume of output

• Customer switching costs• Government regulation

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Rivalry Among Established Companies

Level of Rivalry in an industry: how intense is current competition with competitors?• Increased competition results in lower

profits.

• Industry competitive structure– Fragmented vs. consolidated (oligopoly or

monopoly)• Industry growth• Fixed (or storage) cost

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The Bargaining Power of BuyersPower of Buyers: If there are only a few buyers, they can

bargain down prices.

• Buyers are most powerful when– The industry that is supplying a particular product or

service is composed of many small companies and the buyers are large in size and few in number (when Wal-Mart is a buyer)

– Buyers purchase in large quantities– The supply industry depends on the buyers for a large

percentage of its total orders– Switching costs are low– It is economically feasible for buyers to play one supplier

against another– Buyers can threat to produce the product themselves

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The Bargaining Power of SuppliersPower of Suppliers: If there are only a few suppliers of

important items, supply costs rise.• Suppliers are most powerful when

– There are few substitute for the supplier's products (raw materials)– Switching costs are high for companies/consumers

switching to a different supplier– Suppliers can threat to compete directly with buyers by

entering their industry– Supplier's contribution to quality or service of the industry

products is high– Total industry cost contributed by suppliers is high– Buyers cannot threat to enter the suppliers’ industry– Importance of the industry to supplier's profit

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Substitute Products• Substitutes: More available substitutes tend to drive

down prices and profits.• Many substitute products

– Are a threat and limit the price that companies in one industry can charge for their product, and thus industry profitability

• Few or weak close substitutes– Gives the industry the opportunity to raise prices and earn

additional profits• Substitute producer's profitability & aggressiveness • Substitute price-value

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Market Feasibility and Strategy Development

Sixth Force: Complementors• When complementors are important and their

number is increasing

– Demand and profits in the industry are boosted

• When complementors are weak

– Industry growth can slow and profits can be limited• Example: Hotel and Tourism

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External and Internal Analysis

• Internal analysis–Identify organizational strengths and

weaknesses

– Sources of competitive advantage: • superior efficiency• quality• innovation, and • responsiveness to customers

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Competitive Advantage

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Internal AnalysisIdentifying strength and weakness of company• Managers must understand

– The role of resources, capabilities, and distinctive competencies in the process by which companies create value and profit

– The importance of superior efficiency, innovation, quality, and responsiveness to customers

– The sources of their company’s competitive advantage (strengths and weaknesses)

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Distinctive Competences and Competitive Advantage

• Distinctive competencies

–Firm-specific strengths that allow a company to gain competitive advantage by differentiating its products and/or achieving lower costs than its rivals

–Arise from resources and capabilities

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The Role of Resources• Resources

– Capital or financial, physical, social or human, technological, and organizational factor

• A firm-specific and difficult to imitate resource is likely to lead to distinctive competency (for Grameen Optical Fiber Network from Railway)

• A valuable resource that creates strong demand for a firm’s products may lead to distinctive competency

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The Role of Capabilities

• Capabilities

– A company’s skills at coordinating and using its resources

• Capabilities are the product of organizational structure, processes, and control systems

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RESOURCE-BASED APPROACH TO STRATEGY ANALYSIS

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Value Creation per Unit

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Comparing Toyota and General Motors

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The Value Chain

• A company is a chain of activities for transforming inputs into outputs that customers value

• The transformation process is composed of primary and support activities that add value to the product

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The Value Chain: Primary and Support Activities

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KEY SUSSESS FACTOR MATRIX• External Factor Evaluation Matrix• Internal Factor Evaluation Matrix

• List Key Factors• Assign relative weight• Assign a rating for strength/weakness or

opportunity/threat• Multiply each factor’s weight by company’s

rating for that factor• Sum up the weighted scores

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KEY SUSSESS FACTOR MATRIX

                                                                                                                                 

               

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The Five Generic Competitive Strategies

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• Make achievement of meaningful lower coststhan rivals is the theme of firm’s strategy

• Include features and services in productoffering that buyers consider essential

• Find approaches to achieve a cost advantagein ways difficult for rivals to copy or match

• Pride Textile, Maruti Car

Low-cost leadership means lowoverall costs, not just low

manufacturing or production costs!

Keys to Success

Low-Cost Provider Strategies

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Strategy

Option 1: Use lower-cost edge to

– Underprice competitors and attract price-sensitive buyers in enough numbers to increase total profits

Option 2: Maintain present price, be content with present market share, and use lower-cost edge to

– Earn a higher profit margin on each unit sold, therebyincreasing total profits

Low-Cost Advantage

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Do a better job than rivals in performing value chain activities efficiently and cost effectively

Revamp value chain to bypass cost-producing activities that add little value from buyer’s perspective

Approach 1

Approach 2

Securing Cost Advantage

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Approach 1: Controlling the Cost Drivers

• Capture scale economies; avoid scale diseconomies

• Capture learning and experience curve effects• Manage costs of key resource inputs• Consider linkages with other activities in value chain• Find sharing opportunities with other business units• Compare vertical integration vs. outsourcing• Assess first-mover advantages vs. disadvantages• Control percentage of capacity utilization• Make prudent strategic choices related to

operations

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Approach 2: Revamping Value Chain

• Make greater use of Internet technology applications

• Use direct-to-end-user sales/marketing methods• Simplify product design• Offer basic, no-frills product/service• Shift to a simpler, less capital-intensive, or more

flexible technological process• Find ways to bypass use of high-cost raw materials• Relocate facilities closer to suppliers or customers• Drop “something for everyone” approach and focus

on a limited product/service

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Success in Achieving Low-Cost Leadership

• Scrutinize each cost-creating activity, identify cost drivers• Use knowledge about cost drivers to manage costs of each

activity down year after year• Find ways to restructure value chain to eliminate nonessential

work steps and low-value activities• Work diligently to create cost-conscious corporate cultures

– Feature broad employee participation in continuous cost-improvement efforts and limited perks for executives

– Strive to operate with exceptionally small corporate staffs • Aggressively pursue investments in resources and capabilities

that promise to drive costs out of the business

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When Low-Cost Strategy Work Best• Price competition is vigorous• Product is standardized or readily available

from many suppliers• There are few ways to achieve differentiation

that have value to buyers• Most buyers use product in same ways• Buyers incur low switching costs • Buyers are large and have significant

bargaining power• Industry newcomers use introductory low

prices to attract buyers and build customer base

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Pitfalls of Low-Cost Strategies• Being overly aggressive in cutting price

• Low cost methods are easily imitated by rivals

• Becoming too fixated on reducing costs and ignoring

– Buyer interest in additional features

– Declining buyer sensitivity to price

– Changes in how the product is used

• Technological breakthroughs open up cost reductions for rivals

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Low Cost and Differentiation

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Differentiation Strategies

• Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals (General Motors Automobiles in International market, Retail superstore like Nandan, Agora, Mina Bazar etc. in Bangladesh)

• Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals

• Not spending more to achieve differentiation than price premium that can be charged

Objective

Keys to Success

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Benefits of Successful Differentiation

A product / service with unique, appealing attributes allows a firm (consider different features of NSU and its premium price) to

Command a premium price and/or

Increase unit sales and/or

Build brand loyalty

= Competitive Advantage

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Types of Differentiation Themes• Unique taste -- Dr. Pepper• Multiple/Friendly features -- Microsoft

Windows and Office• Wide selection and one-stop shopping --

Home Depot and Amazon.com• Superior service -- FedEx, Ritz-Carlton• Service availability– Dutch-Bangla Bank by

ATM booth• Spare parts availability -- Caterpillar

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Types of Differentiation Themes• More for your money -- McDonald’s, Wal-

Mart, KFC in Bangladesh• Prestige – Rolex, Harrods departmental

store• Quality manufacture – General Motors,

Honda• Unique Fashion -- Aarong• Technological leadership -- 3M Corporation• Top-of-line image -- Ralph Lauren, Chanel,

Cross

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Differentiation: Keys to Competitive Advantage

• Most appealing approaches to differentiation– Those hardest for rivals to match or imitate– Those buyers will find most appealing

• Best choices to gain a longer-lasting, more profitable competitive edge – New product innovation– Technical superiority– Product quality and reliability– Comprehensive customer service– Unique competitive capabilities

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Differentiation Opportunities in Value ChainDifferentiation Opportunities in Value Chain• Purchasing and procurement activities (Starbucks

in buying coffee beans) • Product R&D and product design activities (Omega,

Swiss Army, Swiss Legend--Swiss Watch)• Production process / technology-related activities

(Samsung)• Manufacturing / production activities (Toyota)• Distribution-related activities (Dell)• Marketing, sales, and customer service activities

(Rahimafrooz)

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Achieve Differentiation-Based Advantage

Approach 1

Incorporate features/attributes that raise theperformance a buyer gets out of the product (Hybrid car: better

speed, Sony — picture tube)

Approach 2

Incorporate product features/attributes thatlower buyer’s overall costs of using product (Hybrid car: Fuel

consumption low, Energy savings bulb)

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Achieve Differentiation-Based Advantage

Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways (Hybrid car: status, CK

brand handbags for women)

Approach 3

Compete on the basis of superior capabilities to serve (CNN to cover breaking news, Unilever through

excellent distribution channel)

Approach 4

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Differentiation Strategy Work Best• There are many ways to differentiate a product

that have value and please customers

• Buyer needs and uses are diverse

• Few rivals are following a similar differentiation approach

• Technological change and product innovation are fast-paced

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Pitfalls of Differentiation Strategies• Buyers see little value in unique attributes of product• Appealing product features are easily copied by

rivals• Differentiating on a feature buyers do not perceive

as lowering their cost or enhancing their well-being• Over-differentiating such that product features

exceed buyers’ needs• Charging a price premium buyers perceive is too

high• Not striving to open up meaningful gaps in quality,

service, or performance features vis-à-vis rivals’ products

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Best-Cost Provider Strategies• Combine a strategic emphasis on low-cost with a

strategic emphasis on differentiation– Make an upscale product at a lower cost– Give customers more value for the money

• Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations (Toyota)

• Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to under price comparable brands

Objectives

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• A best-cost provider’s competitive advantage comes from matching close rivals on key product attributes and beating them on price

• Success depends on having skills and capabilities to provide attractive performance and features at a lower cost than rivals

• A best-cost producer can often out-compete botha low-cost provider and a differentiator when– Standardized features/attributes won’t meet

diverse needs of buyers – Many buyers are price and value sensitive

Competitive Strength of Best-Cost Strategy

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Focus / Niche Strategies• Involve concentrated attention on a narrow piece of

the total market

Serve niche buyers better than rivals

• Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs

• Develop unique capabilities to serve needs of target buyer segment

Objective

Keys to Success

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• Geographic uniqueness

• Specialized requirements in using product /service

• Special product attributes appealing only to niche buyers

Defining Market Niche

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Focus Strategies• eBay

– Online auctions• Porsche

– Sports cars• Jiffy Lube International

– Maintenance for motor vehicles• Pottery Barn Kids

– Children’s furniture and accessories

• KFC– Rich People

• Bangla Link– Young group

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• Achieve lower costs thanrivals in serving the segment --

A focused low-cost strategy (Bangla Link)

• Offer niche buyers somethingdifferent from rivals --

A focused differentiation strategy (Dom-Inno builders)

Approach 1

Approach 2 Which hat is unique?

Focus / Niche Strategies

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Attractive for Focusing• Big enough to be profitable and offers good growth

potential• Not crucial to success of industry leaders• Costly or difficult for multi-segment competitors to

meet specialized needs of niche members• Focuser has resources and capabilities to effectively

serve an attractive niche• Few other rivals are specializing in same niche• Focuser can defend against challengers via superior

ability to serve niche members

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Generic Strategy: Which One to Use• Each positions a company differently in its market

and competitive environment• Each establishes a central theme for how company

will endeavor to out-compete rivals• Each creates some boundaries for maneuvering as

market circumstances unfold• Each points to different ways of experimenting with

the basics of the strategy• Each entails differences in product line, production

emphasis, marketing emphasis, and means to sustain the strategy

The big risk – Selecting a “stuck in the middle” strategy! This rarely produces a sustainable competitive

advantage or a distinctive competitive position.

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Diversification• Diversification

– As long as company has strong foothold on its current industry, there is no urgency to pursue diversification

• It depends on– Partly on company’s growth opportunity in

current industry– Partly on the opportunities to utilize its

resources, expertise, and capabilities in other industries

– The question is “what kind and how much diversification?”

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Diversification• Diversification

– The process of adding new businesses to the company that are distinct from its established operations

• Vehicles for diversification– Internal new venturing

• Starting a new business from scratch– Acquisitions– Joint ventures

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Beyond a Single Industry• Advantages of staying in a single industry

– Focus resources and capabilities on competing successfully in one area

– Focus on what the company knows and does best

• Disadvantages of being in a single industry– Danger of the industry declining– Missing the opportunity to leverage resources

and capabilities to other activities– Resting on laurels and not continually learning

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Portfolio of Distinctive Competencies• Reconceptualize the company as a

portfolio of distinctive competencies rather than a portfolio of products (Sony from Music to Kids games; Akiz from tobacco to soft drinks)

• Consider how those competencies might be leveraged to create opportunities in new industries

• Existing product vs. self competencies• Existing industries in which a company

competes vs. new industries

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Establishing a Competency Agenda

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Single Business Strategy

• Concentrate in single business: McDonalds focuses in the fast food business.

– Can become very strong, but can be risky.

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Profitability Through Diversification• Transferring competencies

– Taking a distinctive competence developed in one industry and applying it to an existing business in another industry

– The competencies transferred must involve activities that are important for establishing competitive advantage

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Transfer of Competencies at Akiz GroupC

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Profitability Through Diversification• Leveraging competencies

– Taking a distinctive competence developed by a business in one industry and using it to create a new business in a different industry

• Sharing resources: economies of scope– Cost reductions associated with sharing

resources across businesses

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Sharing Resources at Proctor & Gamble

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Diversification Strategies• Diversification: Organization moves into

new businesses and services.Related diversification: firm diversifies in

similar areas to build upon existing divisions. Synergy: two divisions work together to obtain more

than the sum of each separately.

Unrelated diversification: buy business in new areas.

• Build a portfolio of unrelated firms to reduce risk or trouble in one industry. Very hard to manage.