Types of Competitive Advantage Cost vs. Differentiation

Chapter 4Group 3: Coleman Crook, Jessica Crumpton, Ashton Davis, Sarah Ellens, and Kevin levesqueObjectives Integrating competitive analysisLooking at dynamic relationships between competitive advantage and competitive process. Understand characteristics of a market and identify opportunities for challengesAshton

2Singapore Airlines

Singapore AirlinesPrides itself on being the most awarded airline and having a reputation for providing passengers with high-quality experience.Strategy is based on two main components- its planes and its people. People:Offers excellent training and experiencePlanes:More fuel efficient and require less repairs Encouraged to find ways to reducing waste and bonuss are used to incentivize cost cutting behavior. Acknowledged as worlds best airline by conde nast traveler 21 out of 22 times and 27th in Fortunes Worlds most admired companies in 2010Two main pillars-planes and peopleTrying to keep planes young. Averages ages of SIA fleet was 74 months as opposed to 160 monthsBy keeping it young more fuel efficient and require less repair. Repairs account for 4% of total cost when competitors were in the 5.9% range

People: Pay average wages but because they offer ^^ they attract first-class university grads$70 million on training and 110 hours retraining annually Own crew trains rather than outside traniers

Compete on factors other than prices like service and quality

Willing to experiment to achieve both differentitation and cost saving and improve customer service first to introduce fully reclining seats 4The Emergence of Competitive AdvantageWhen two or more firms compete within the same market, one firm posesses a competitive advantage over its rivals whin it earns (or has the potential to earn) a persistently higher rate of profitToyota- mass produced carsSAP- ERP SoftwareSouthwest- affordable flightsExternal Sources of changeCan create an advantage of a disadvantage depending on magnitude of change and extent of firms strategic differencesIndustry EnvironmentTobacco VS Toy industryCompetitive Advantage from responsiveness to changeThe competitive advantage that arises from external change also depends on firms ability to respond to changeOpportunities for change- EntrepreneurshipAbilitiesPredict changeReaction time ( time-based competition)Case 4.1 Singapore AirlinesGaining or losing competitive advantage as a consequence of external changeAirbus 380Competitive Strategies from innovation: new game strategiesChanges that create competitive advantage can be created internally through innovationStrategic Innovation: value for customers through new products, experiences of mode of product delivery*Key source of competitive advantage, including new business modelsExamplesNucor SteelSouthwestNikeAppleShaping innovation strategiesNew Industries- Kim and Mauborgne, creating new markets is the purest form of blue ocean strategy (uncontested market space)New customer segments- Apple, VCRs, WiiNew sources of competitive advantage- (Blue Ocean) Dells ordering system, Cirque du SoleiSustaining competitive advantageAbility of competitors to challengeImitationInnovation

BarriersIsolating mechanismsProcess of ImitationIdentificationIdentify that the firm possesses competitive advantageIncentiveBelieve that they may earn superior returnsDiagnosisDiagnose features of rivals strategyResource acquisitionMust have ability to acquire resources and capabilities necessary

Barrier: Obscure SuperiorityMask high performance

Private companyAvoid disclosing financial performanceDeterrence and Pre-Emption Persuade rivals that imitation will be unprofitablePre-emptionProliferation of product varietiesLarge investments in production capacity ahead of growthPatent proliferation- for technology based opportunities15Pre-Emption ContinuedTwo flaws must be presentSmall market relative to efficient scale of productionFirst-mover advantage preferential access to information and resourcesDiagnosing competitive advantageIdentification of basis of rivals successCausal ambiguityMultidimensional competitive advantage Uncertain imitabilityCaused by causal ambiguityAcquiring resources and capabilitiesTime it takes to acquire resources determines time able to sustain competitive advantage

Imitation may take place quickly if limited resources are requiredCost Advantage same product/lower priceCost leader

Differentiation Advantage customer pays a higher price for differentiation. Uniqueness Types of Competitive AdvantageCost vs. DifferentiationCost Leadership Strategy efficient plants, overhead control, outsourcing

Requirements access to capital, frequent reports, job specialization, incentives for quantitative performanceDifferentiationStrategy focus on advertising, design, service, quality

Requirements marketing abilities, cross-functional coordination, incentives linked to qualitative performanceCost Drivers:Economies of scale through specializationEconomies of Learning increase in skillsProduction Techniques innovationProduct Design standardizationInput Costs bargaining power, locationCapacity Utilization flexible adjustmentsResidual Efficiency overall management

Points out inefficiencies and which adjustments could be madeValue Chain Analyses:Breakdown the firmEstablish importance associated with costs major sourcesCompare costs by activity compared to competitorsIdentify costs driversIndentify LinkagesIdentify cost saving opportunitiesStages of value chain analysis for differentiation advantage Construct a value chain for the firm and the customer.- Consider firms further downstream in value chain.Identify the drivers of uniqueness in each activity.- Variables & Actions to achieve uniqueness.Stages of value chain analysis for differentiation advantage Select the most promising differentiation variables for the firm.- Greatest potential to differentiate- Linkages among activities - Sustainability of uniquenessLocate linkages between the value chain of the firm and that of the buyer.- Why is the customer buying your product?Rise and Fall of StarbucksHoward Shultz 1982-2000 Rejoined in 2008Keys to failure70% increase in coffee shopsMcDonalds PressureOver expansionKeys to successEmployee developmentFocus on in home productsCommunity feel