The Nature and Sources of Competitive AdvantageWhat is competitive advantage?The Emergence of Competitive AdvantageCompetitive Advantage from Internally-Generated Change: Strategic InnovationSustaining Competitive Advantage Against ImitationCompetitive Advantage in Different Industry Settings: Trading Markets and Production MarketsSources of Competitive AdvantagePorter’s Generic StrategiesFeatures of Cost Leadership and Differentiation StrategiesCost AdvantageThe Experience CurveExamples of Experience CurvesThe Importance of Market ShareDrivers of Cost AdvantageEconomies of Scale: The Long-Run Cost Curve for a PlantThe Costs Developing New Car Models (including plant tooling)Scale Economies in Advertising: U.S. Soft DrinksCost Advantage in Short-Haul Passenger Air TransportApplying the Value Chain to Cost Analysis: The Case of Automobile ManufactureApplying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued)Slide 21Dynamic vs. Static Approaches to ManufacturingRecent Approaches to Cost ReductionHarley Davidson CaseThe Nature and Sources of Competitive AdvantageThe Nature and Sources of Competitive Advantage•The emergence of competitive advantage•Sustaining competitive advantage•Competitive advantage in different market settings•Types of competitive advantage: cost and differentiationOUTLINEWhat is competitive advantage?•The potential to earn a persistently high rate of profit•Not the same as profitability–Long term investments may not show up in short term profits•Investing in market share, technology, customer loyalty or even executive perksHow does competitive advantage emerge?External sources ofchange e.g.:•Changing customer demand•Changing prices•Technological changeInternal sources of changeResource heterogeneity among firms means differential impactSome firms faster and more effective in exploiting changeSome firmshave greater creativeand innovativecapabilityThe Emergence of Competitive AdvantageThe Emergence of Competitive Advantage(Time-based competition)Competitive Advantage from Internally-Generated Change: Strategic InnovationCompetitive Advantage from Internally-Generated Change: Strategic Innovation•Many argue innovation is the only remaining source of competitive advantage (e.g. Hamel)–Kao (2007) Innovation Nation: How America is Losing its Innovation Edge, Friedman (2005) The World is Flat•Talent is everywhere, capital is everywhere, Silicon valley is everywhereCharacteristics of innovation strategies:–Associated with new entrants to an industry (e.g. Nucor in steel, IKEA in furniture, Home Depot in DIY, Dell in PCs, American Apparel in casual clothing)–Reconcile conflicting performance goals (e.g. Toyota’s lean production system combines low cost, high quality, and flexibility. Retailers Primark and Target combine low cost with stylishness.)–Reconfiguring the value chain e.g.---•Nike’s system for manufacturing and distributing shoes totally different from traditional shoe manufacturer•Southwest Airlines simplification of the normal airline value chain•Zara’s system of design, manufacture, and distributionREQUIREMENT FOR IMITATIONIdentification - Obscure superior performance- Deterrence--signal aggressiveIncentives for imitation intentions to imitators- Pre-emption--exploit all available investment opportunities- Rely upon multiple sources of Diagnosis competitive advantage to create “causal ambiguity”- Base competitive advantage upon Resource acquisition resources and capabilities that are immobile and difficult to replicateISOLATING MECHANISMSustaining Competitive Advantage Against ImitationSustaining Competitive Advantage Against ImitationTRADING MARKETS • None (efficient markets)• Imperfect information• Transactions costs• Systematic behavioral trends• OvershootingNoneInsider tradingCost minimizationSuperior diagnosis(e.g. chart analysis)ContrarianismPRODUCTION MARKETS• Barriers to imitation• Barriers to innovationIdentify potential barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, etc.) & base strategy upon them.Difficult to influence or exploit.MARKET TYPESOURCE OF IMPERFECTCOMPETITIONOPPORTUNITY FOR COMPETITIVE ADVANTAGECompetitive Advantage in Different Industry Settings: Trading Markets and Production MarketsCompetitive Advantage in Different Industry Settings: Trading Markets and Production MarketsSources of Competitive AdvantageSources of Competitive AdvantageCOST ADVANTAGECOST ADVANTAGEDIFFERENTIATIONADVANTAGEDIFFERENTIATIONADVANTAGECOMPETITIVEADVANTAGECOMPETITIVEADVANTAGESimilar productat lower costPrice premiumfrom unique productConcept of “stuck in the middle”Porter’s Generic StrategiesPorter’s Generic Strategies SOURCE OF COMPETITIVE ADVANTAGE Low cost Differentiation Industry-wide COST DIFFERENTIATIONCOMPETITIVE LEADERSHIPSCOPE Single Segment F O C U SFeatures of Cost Leadership and Differentiation StrategiesFeatures of Cost Leadership and Differentiation StrategiesGeneric strategy Key strategy elements Resource & organizational requirementsCOST Scale-efficient plants. Access to capital. ProcessLEADERSHIP Design for manufacture. engineering skills. Frequent Control of overheads & reports. Tight cost control. R&D. Avoidance of Specialization of jobs and marginal customer functions. Incentives for accounts. quantitative targets.DIFFERENTIATION Emphasis on branding Marketing. Product and brand advertising, engineering. Creativity. design, service, and Product R&D quality. Qualitative measurement and incentives. Strong cross-functional coordination.Cost AdvantageCost Advantage•Economies of experience curve and the benefits of market share•Sources of cost advantage•Using the value chain to analyze costs•Current approaches to managing costsOUTLINEThe Experience CurveThe Experience CurveThe “Law of Experience”The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles.Cost per unit of output (in real $)Cumulative Output1992199419961998200020022004Examples of Experience CurvesExamples of Experience Curves100K 200K 500K 1,000K 5 10 50 Accumulated unit production