chapter 12 competitive factors. chapter outline competitive factors competitive advantage porter’s...
TRANSCRIPT
Chapter 12Competitive factors
Chapter Outline
COMPETITIVE FACTORS
COMPETITIVE ADVANTAGE
PORTER’S 5 FORCES
PROTER’S VALUE CHAIN
Environmental analysis
Part of a firm’s environmental analysis will involve assessing the degree and sources of competition within the industry
Key issue whether the firm has a sustainable competitive advantage Different ways in which a firm can achieve a
competitive advantage Main competitive forces in an industry How different activities and departments within the
firm contribute to its competitiveness
Competitive advantage Michael Porter stated that a firm wishing to obtain a
competitive advantage over its rivals is faced with two choices:
1. Cost leadership vs. differentiation
2. Degree of focus
3 generic strategies: Cost leadership, e.g. Nissan, Ford, Honda Differentiation, e.g. BMW, Jaguar, Mercedes Focus, e.g. Ferrari, Rolls Royce
Competitive advantage1. Cost leadership vs. differentiation
Is the company seeking to compete by achieving lower costs than its rivals for similar p/s?
If so, then it can either undercut competitors on price, or charge similar prices and enjoy superior margins.
OR
Is the company wishing to differentiate itself by offering a better product than competitors?
Here the customer is prepared to pay a premium price for added value which the customer perceives in the product.
The firm thus enjoys a greater margin than the undifferentiated product.
Competitive advantage2. Degree of focus
What is the scope of the area in which the company wishes to obtain competitive advantage?
Is it industry-wide or is it restricted to a specific niche?
Porter argues that trying to be both a cost leader and a differentiator usually results in the firm becoming ‘stuck in the middle’ with no clear competitive advantage – a recipe for disaster.
Competitive advantage
Cost leadership Differentiation
Cost focus Differentiation focus
Lower Cost Differentiation
BASIS OF COMPETITION
Broad target
Narrow target
COMPETITIVE SCOPE
Competitive strategies Cost leadership strategy
Seeking to attain the lowest total overall costs relative to other industry competitors.
Differentiation strategy Attempting to create a unique and
distinctive product or service for which customers will pay a premium.
Focus strategy Using a cost or differentiation
advantage to exploit a particular market segment rather a larger market.
WA
SALVAGE
Cost leadership Low-cost producer in an industry for a given level of
quality Products are sold either at average industry prices to
earn a profit higher than that of rivals, or below average industry prices to gain market share
In case of price war, firm can maintain some profitability while competitors suffer losses
Usually targets a broad market Ways to acquire cost advantages: improve process
efficiencies, unique access to a large source of lower cost materials, outsourcing, vertical integration
Differentiation Development of a p/s that offers unique attributes that
are valued by customers and that customers perceive to be better than or different from the product of the competition
Differentiation focus: business aims to differentiate within just one or a small number of target market segments (important – there must be a valid basis for differentiation)
May be successful if a company can Reduce the ongoing cost to the customer of using the product
(cheaper to run) Increase customer satisfaction with the product (better product) Modify the customer’s perception of value (brand names)
Focus Concentrates on a narrow segment (a particular buyer
group, market segment, geographical region, service need, product feature or section of the product range)
Within that segment is attempted to achieve either a cost advantage or differentiation
Premise is that needs of the group can be better serviced by focusing entirely on it
Firm with focus strategy often enjoy high customer loyalty
May be the only way into a market for a small company competing against larger companies
Porter’s five forces analysis
Porter’s five forces model
Porter’s value chain
Porter developed his value chain to determine whether and how a firm’s activities contribute towards its competitive advantage
Approach involves breaking the firm down into 5 ‘primary’ and 4 ‘support’ activities, and then looking at each to see if they give a cost advantage or quality advantage
‘Primary’ activities Activity Description Example
Inbound logistics
Receiving, storing and handling raw material inputs
A just-in-time stock system could give a cost advantage
Operations Transformation of the raw material into finished p/s
Using skilled craftsmen could give a quality advantage
Outbound logistics
Storing, distributing & delivering finished goods to customers
Outsourcing deliveries could give a cost advantage
Marketing and sales
Market research + 4Ps Sponsorship of a sports celebrity could enhance the image of the product
Service All activities that occur after the point of sale, such as installation, training, repair
Marks & Spencer’s friendly approach to returns gives it a perceived quality advantage
‘Support’ activities Activity Description Example
Firm infrastructure
How the firm is organised
Centralised buying could result in cost savings due to bulk discounts
Technology development
How the firm uses technology
The latest computer-controlled machinery gives a greater flexibility to tailor products to individual customer specifications.
HR development
How people contribute to competitive advantage
Employing expert buyers could enable a supermarket to purchase better wines than competitors
Procurement Purchasing, but not just limited to materials
Buying a building out of town could give a cost advantage over High Street competitors
Results of analysis
How different departments contribute to competitive adv Purchasing
Cost advantages – sourcing cheaper materials, bulk discounts, centralised buying
Quality adv – sourcing higher quality materials, employing expert buyers
Production Cost adv – mass production lines, standardisation,
employing workers just above the minimum wage, keeping stock levels low
Quality adv – using better quality materials, more quality control procedures, employing highly-skilled staff, flexible manufacturing systems, use of technology to ensure better consistency, ongoing training of staff
How different departments contribute to competitive adv Marketing
Cost adv – word-of-mouth promotion, sell direct to cut distribution costs
Quality adv – market research can help tailor product to meet customer needs, large promotional budgets, sponsorship, perceived quality pricing, brand development
Service Cost adv – outsourcing (?), not offering service
provision, low paid staff Quality adv – outsourcing (?), highly-skilled staff
Chapter Summary
Competitive factorsPart of external analysis
Complements PEST analysis
Competitive advantage- Cost leadership- Differentiation- Focus
Porter’s value chain- Primary activities(inbound logistics, operations, outbound logistics, marketing, service)
- Support activities (procurement, infrastructure, technology)
Porter’s 5 forces- Competitive rivalry- Threat of entry- Threat of substitutes- Power of suppliers- Power of buyers