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What determines a firm’s competitiveness?– Business strategy

• How to compete – looks at how a firm competes within an industry or market. Also known as competitive strategy

– Corporate strategy• Where to compete – defines the scope of the firm in terms of

– The industry it is in– The customer groups it targets– The countries and localities in which it operates– The vertical range of activities it undertakes

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Business StrategySources of competitive advantage:• External

– Examples include: changing customer demand, changing prices, technological change

– How a firm takes advantage of changes in its external environment depends on its ability to anticipate the changes and the speed by which it can react to the changes

• Internal– Firms can create competitive advantage through innovation of

products and processes– Examples include: creating new industries, new customer segments

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Two ways firms create competitive advantage:– Cost leadership

• Broadly defined as supplying the same product or service at a lower cost

• Characteristics:– Existence of economies of scale and scope– Efficient production– Simpler product design– Lower input costs– Low-cost distribution– Little R&D or brand advertising– Tight cost control system

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Two ways firms create competitive advantage:– Differentiation

• Broadly defined as supplying a unique product or service at a cost lower than the price premium customers are willing to pay

• Characteristics:– Superior product quality– Superior product variety– Superior customer service– More flexible delivery– Investment in brand image– Investment in R&D and advertising

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Corporate Strategy– Product scope

• Many different products in many different industries – the tools of competitive strategy analysis above can be used to analyze how the firm can compete in each industry

– Geographical scope• The firm sells (or produces, or both) its products in many different

countries.

– Vertical scope• Backward – the firm produces its own components or other inputs• Forward – the firm takes over activities previously undertaken by

its customers

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• Sources:– Palepu and Healy, Business Analysis and Valuation Using Financial

Statements, 4th ed.– Grant, Contemporary Strategy Analysis, 7th ed.