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Management Seminar What is Competitive Advantage anyway ?anyway ?
6th June 2011
Gerald Ariff B Eng M Sc‐ Gerald Ariff B.Eng, M.Sc ‐
Gerald Ariff B.Eng,M.ScHead of Program, Graduate. School of Management
Email: [email protected]
Education :
►1993–97 Univ. of London. UK. B.Eng Electronics Engineering
►1997‐99 Univ. of Surrey. UK. M.Sc Management (focus: Corporate strategy)
►2007‐now Univ of Indonesia Ph D Strategic Management
Career :
►2007 now Univ. of Indonesia. Ph.D Strategic Management
►2008‐10 PT Ernst & Young Manager, Advisory Services. Strategy (Jakarta)
►2006‐08 PT Astra Honda Motor Industry Analyst, Corp. Strategic Planning (Jakarta)
►2003‐06 Dasar Tech. Sdn Bhd. Country Manager, Indonesia (Kuala Lumpur)
►2001‐03 Inquam (UK) Ltd Research Associate, Terminal Development (London, UK)
►1999‐00 Qualcomm (UK) Ltd Market Analyst, Russia & CIS countries (Farnborough, UK)
►1996 Sir William Halcrow Engineer Trainee Civil Engineering Dept (Swindon UK)►1996 Sir William Halcrow Engineer Trainee, Civil Engineering Dept. (Swindon, UK)
►1995 Univ. of Colorado at Denver Research Assistant, Electronic Eng. Dept. (Denver, USA)
Expected learning outcome
A i t d t t i f t t i• Awareness on introductory topics of strategic management in relation to the concept of Competitive Advantage (CA)Competitive Advantage (CA).
• Understanding definitions of CA. • Understanding conceptual strategy frameworks• Understanding conceptual strategy frameworks on how CA is created.
• Awareness of alternative framework that• Awareness of alternative framework that provides different perspective of CA.
• Understanding of tools for strategic thinking andUnderstanding of tools for strategic thinking and analysis with respect to Strategy development and Game Theoryy
Chapter Roadmap
d i S i &• Introduction to Strategic Management & Competitive Advantage
• Discussions:• Generic Strategy• Conceptual Strategy Frameworks• Conceptual Strategy Frameworks• Alternative Frameworks
ddi i l l f i hi ki d• Additional Tools for Strategic Thinking and Analysis
What is strategy?gy
• Strategy sets the direction where theStrategy sets the direction where the business/company is going by defining its vision, mission and objectives
• Crafting of a strategy represents a managerial commitment to pursue a g pparticular set of strategic decisions & actions in order to add value to the business.business.
• Strategic decisions are those that affect the long‐term well‐being of the
i ti i l jorganization, involve major resource commitments & are difficult to reverse.
Strategy and the Quest for Competitive Advantage
• The heart and soul of any strategy are actions a company makes tocompany makes to
– Improve its financial performance,
St th it titi iti d– Strengthen its competitive position, and
– Gain a competitive advantage over rivals
A ti di ti ti t t th t t• A creative, distinctive strategy that sets a company apart from rivals and yields a competitive advantage is a company’s most p g p yreliable ticket to above average profitability
– Operating with a competitive advantage is more fit bl th ti ith tprofitable than operating without one
– Operating with a competitive disadvantage nearly always results in below‐average profitabilityy g p y
A Powerful Strategy Leads to SustainableCompetitive Advantage
• A company achieves sustainable competitive d hadvantage when – An attractive number of buyers prefer its
products/services over those of rivals andproducts/services over those of rivals and– The basis for this preference is durable
• Its nice when a strategy produces – A temporary competitive edge but– A sustainable edge over rivals greatly enhances a– A sustainable edge over rivals greatly enhances a
company’s prospects for above‐average profitability
What separates a powerful strategy from an ordinarystrategy is management’s ability to forge a series ofmoves, both in the marketplace and internally, thatmoves, both in the marketplace and internally, that
produces sustainable competitive advantage!
Porter's Generic Strategies (Porter, 1985)
Strategic Approaches to Building Sustainable Competitive Advantage
• Be the industry’s low‐cost providerA hi t b d titi d t– Achieve a cost‐based competitive advantage
• Incorporate differentiating featuresS i d t/ i k d t hi h lit b tt– Superior product/service keyed to higher quality, better performance, wider selection, value‐added services, or some other attribute
• Focus on a narrow market niche– Win a competitive edge by doing a
b j b h i l f i hbetter job than rivals of serving the needs and preferences of buyers in the niche
• Develop expertise and resource strengthsDevelop expertise and resource strengthsnot easily imitated or matched by rivals
– Achieve a capabilities‐based competitive advantage
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Tests of a Winning Strategy
• GOODNESS OF FIT TEST
– How well does the strategy fitHow well does the strategy fitthe company’s external and internal situation?
• COMPETITIVE ADVANTAGE TEST
Is the strategy helping the company achieve a sustainable– Is the strategy helping the company achieve a sustainable competitive advantage?
PERFORMANCE TEST• PERFORMANCE TEST
– Is the strategy resulting in better company performance?
Translating Performance of Value Chain Activities into Competitive Advantage
A i i d
p g
• A company can create competitive advantageby out‐managing rivals in performing value chain activities in either/both of two wayschain activities in either/both of two ways
Option 1: Develop competencies and capabilitiesth t i l d ’t h ’t t h dthat rivals don’t have or can’t match and thereby create a resource or capability‐based competitive advantagep g
Option 2: Perform value chain activities at a lower overall cost than rivals and thereby createoverall cost than rivals and thereby create a cost‐based competitive advantage
Value Chain : CPO plantation industry
Value Chain : Mining – Activities & Cost Drivers
SalesShippingBargeProcess /
Load & HaulDrill & BlastDevelop‐
Exploration
Planning & Coordination
SalesShippingBargeWash
Load & HaulDrill & Blastment
Exploration
Management
Activities
► Obtaining IUP ► Construction ► Shothole ► Load ► Wash ► Deliver ► Load ► Negotiation of
Management
Support Processes, e.g. Procurement, HR, Finance, External Relations
► Obtaining IUP► Exploratory
surveys► Appraisal
► Construction► Pre-strip► Infrastructure
► Shothole drilling
► Blasting
► Load ► Haul
► Wash► Crush► Screen► Stockpile
► Deliver minerals to barge
► Load► Transport► Unload
► Negotiation of sales contract & volumes
Cost Drivers
► Drilling cost $ / m
► Area covered► Hole density
► Strip ratio► Capital
equipment► Labour
► Explosives► Drilling
consumables► Labour
► Fuel► Labour► Maintenance
► Energy► Labour► Maintenance
► Energy► Labour► Maintenance
► Fuel► Labour► Maintenance
► Labour
y► Lab costs► Labour
► Fuel
Source: Ernst and Young analysis
Value Chain : Cost & Margin Build‐up
Industry Value Chain Costs and MarginsINDICATIVEINDICATIVE
Industry Value Chain - Costs and Margins% of total
15 100
15
108
85
Margin is captured
10
15
15along the value chain by those activities that have a unique set of asset, resources and
10
ratio
n
pmen
t
ing
&st
ing
Hau
l
oces
s
Bar
ge
ppin
g
Sal
es
eads
Tota
l
capabilities
Exp
lor
Dev
elop
Dril
lB
la
Load
&
Pr o B
Shi
p S
Ove
h
Cost MarginSource: Ernst and Young analysis
Question : How to tell if a Company is Stronger or Weaker than Key Rivals?
• Whether a company is competitively stronger or p y p y gweaker than key rivals hinges on the answers to two questions
– How does the company rankl i i hrelative to competitors on each
important factor that determines market success?market success?
– Does the company have a net p ycompetitive advantage or disadvantagevis‐à‐vis major competitors?
Competitive advantage: Differentiation factors
Strategy and Competitive Advantage
• Competitive advantage exists when a firm’s strategy gives it an edge instrategy gives it an edge in
– Attracting customers and
– Defending against competitive forces
Key to Gaining a Competitive Advantage
• Convince customers firm’s product / service offers superior value
Key to Gaining a Competitive Advantage
superior value
– A good product at a low price
– A superior product worth paying more for
– A best‐value product– A best‐value product
Benefits of Successful Differentiation
/A product / service with unique, appealing attributes allows a firm to
Command a premium price and/orp p /
Increase unit sales and/orWhichhat is /
Build brand loyalty
unique?
y y
= Competitive Advantagep g
Competitive Strength of a Best‐Cost Provider Strategy
• Competitive advantage is based on the capability t i l d l tt ib t t l t thto include upscale attributes at a lower cost than rivals’ comparable products
h i i d• To achieve competitive advantage,a company must be able to– Incorporate attractive featuresat a lower cost than rivalsM f t d t ll t lit– Manufacture a good‐to‐excellent qualityproduct at a lower cost than rivals
– Develop a product that delivers good‐to‐excellentDevelop a product that delivers good‐to‐excellent performance at a lower cost than rivals
– Provide attractive customer service at a lower cost than rivals
Deciding Which Generic Competitive Strategy to Usegy
• Each positions a company differently in its market and competitive environmentenvironment
• Each establishes a central theme for how a company will endeavor to outcompete rivals
• Each creates some boundaries for maneuvering as market circumstances unfold
• Each points to different ways of experimenting with the basics of• 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 – Mixing and matching pieces of the generic strategies to create aThe big risk – Mixing and matching pieces of the generic strategies to create a mixed bag or “stuck in the middle”
strategy! This rarely produces a sustainable competitive advantage or a distinctive competitive position !
Porter’s 5 Forces
Conceptual strategy frameworks: Five forces model
Conceptual strategy frameworks: Five forces model
Purpose: a tool for assessing the attractiveness of an industry by considering the competitive situation and the external forces acting on the industry.p g yDescription : Used to conduct a micro‐economic analysis of an organisation’s industry structure when determining a company’s competitive strategy. Porter has identified five driving forces that shape every industry and market. These forces determine the intensity of competition and therefore the profitability of an industry. The results of the Five Forces analysis can be used to determine how to influence or exploit various characteristics of an industry.I. Industry CompetitorsThe intensity of competitor rivalry is influenced by the following industry factors:• Brand strength; • Degree of fixed costs; • Diversity of rivals; • Level of exit barriers.L l f d diff i i N b f i d i• Levels of product differentiation ; • Number of industry competitors.
• Rate of market growth; • Switching costs.
Conceptual strategy frameworks: Five forces model
II. Substitutes and ComplementsWith Porter’s model, this refers to the threat of substitute products from other pindustries eg, the Eurostar train substituting flights from London to Paris.
The bargaining power of customers is high when:• Customers purchase a significant portion of the company’s product.• There is a credible threat of backward integration.• There are a small number of customers
The bargaining power of customers is weak when:• Buyers are fragmented.C dibl h f f d i i• Credible threat of forward integration.
• High switching costs.• Large number of customers.
Conceptual strategy frameworks: Five forces model
IV. Suppliers The term ‘supplier’ encompasses all those who
V. New EntrantsThe threat of new entrants if pp p
provide raw materials required to produce the product.
influenced by industry barriers to entry which are influenced by:• Brand loyalty or strength of brand
The bargaining power of suppliers is high when:• Credible threat of forward integration.• Market is dominated by a few large suppliers.
name.• Government legislation.• High capital investment.
• High switching costs for the suppliers’ customers.• No substitutes for the supplier’s product.
• Intellectual property and patents.• Minimum efficient scale.• Restricted distribution channels.S i hi
The bargaining power of suppliers is weak when:• Credible threat of backward integration
• Switching costs.
• Credible threat of backward integration.• Low supplier switching costs.• Many suppliers of a standardised product.• Number of substitute products• Number of substitute products.
Core competence /Core competence / CapabilitiesCapabilities
Conceptual strategy frameworks: Distinctive Competence
• A distinctive competence is a
p
competitively valuable activity that a company performs better than its competitorscompetitors
• A distinctive competence is a competitively potent resource
# 1competitively potent resourcesource because it
– Gives a company a competitivelyGives a company a competitively valuablecapability unmatched by rivalsC nderpin d add real p nch– Can underpin and add real punchto a company’s strategy
– Is a basis for sustainable competitive padvantage
Conceptual strategy frameworks: Determining the Competitive Power of a Company Resourcep p y
lif i i l l bl b h• To qualify as competitively valuable or to be the basis for sustainable competitive advantage, a “ ” t 4 t t“resource”must pass 4 tests:
1 Is the resource really competitively superior?1. Is the resource really competitively superior?
2. Is the resource rare – is it something rivals lack?
3. Is the resource hard to copy?
4. Can the resource be trumped bythe different capabilities of rivals?
Alternative framework:Alternative framework: HypercompetitionHypercompetition
Hypercompetition: Definition
Government (traditional, static approach)
“Society best served by limited aggressive competition” => outdatedy y gg p
“Chivalry” => dead
Hypercompetition (dynamic approach)
• “an age of cunning, speed, surprise, shifting borders & nouveau riches”
• “active strategy of disrupting the status quo to create a series of• active strategy of disrupting the status quo to create a series of unsustainable advantages”
• “focus on controlling the dynamic evoluation of the industry using New 7‐S framework to move forward to the next level of competition”
• “can not be stopped or slowed by national regulations without adverse effects on the competitiveness of the nation’s best companies”effects on the competitiveness of the nation s best companies
Slide 33
Hypercompetition: Industry Competition level
HighHighProle
vel
ofits level
mpe
tition
L /
Com
Low/ None“Monopoly”
/ No “Oligopoly” / Competition
“Schumpeterian / Hyper”
“Perfect / Extreme“
Low/ None
/competition
pavoidance
ypcompetition competition
Source: Adapted from D’Aveni (1994) Hypercompetition p.28. Different levels of competition within an industry
Slide 34
competition within an industry
Hypercompetition: Negative side effects
Aggressive moves result in the companies to
b tt t● better serves customers,
● creates new advantages,
● allows survival in hypercompetitive markets,
but often deemed as “Anticompetitive behaviour”:but often deemed as Anticompetitive behaviour :
a. By the government. Microsoft use of its Windows platform to force PC vendors to install internet explorerplatform to force PC vendors to install internet explorer ‐> probe by Federal Trade Commission
b B th tit A i Ai li d tb. By the competitors. American Airlines predatory pricing ‐> sued by competitors, faced Senate hearing
ittSlide 35
committee
Competitive Advantages: Sustainable vsTemporary
Sustainable advantages: Temporary advantages:
Static model => Dynamic modely
Slow changes Rapid changes
Build sustainable advantages Disruption of competitors’ advantages
Principles: 6x Principles: 3x
● All actions are interactions● All actions are interactions
● All actions are relative
● Projections of long‐term trends & trajectories of competitive maneuvres
F t f i ti f t d tFactors forcing creation of temporary advantages:
● Rising product Quality + Falling prices ●Information availability
● Compressed product / design life cycles ●Globalized competitors
Slide 36
Compressed product / design life cycles Globalized competitors
● Increasing technological innovation
Competitive Advantages: Traditional advantages no longer valid
Traditional advantages Neutralising factorsg g
● Economies of scale●Advances in production processp
● Deep Pockets ●Rival alliances
C tti d R&D●Research consortia & ● Cutting edge R&D alliances
● Product differentiation ●Rapid design cyclesp g y● Government policies & Trade barriers
●Agreements & Trading zonesTrade barriers zones
Slide 37
Competitive Advantages: Eventual Erosion
1 Advantage
ofits level
Launch
Exploitation
1 2 3 41 Advantage
Pro Exploitation
Counterattack5 10
Time (years)Time (years)
Source: Adapted from D’Aveni (1994) Hypercompetition p.12. A series of short‐
Slide 38
lived actions add up to a sustained advantage
Strategy developoment
Hierarchy of Strategies
CEO & Senior Execs
Corporate Strategy:● Create value for firm
(Orchestrators)
A focus business firm: two levels
of strategy‐making hierarchy,
merge into one level – business
strategy
● Investment in potential industries● Parenting for business units
Business Strategy:General manager of each strategyBusiness Strategy:● Strengthen market position to build competitive advantage● Build competitive capabilities
General manager of each business (Orchestrators) + input from heads of functional activities
Two‐Way Influence
Functional Strategy(Within each Business):
● Detail to implement strategyM i ti t t ll b i
Heads of functional activities (Craftors), + collaboration of key people
Two Way Influence
FUNCTIONAL
Marketing Department
Brand managers, plant managers, distribution
●Main routines to support overall business
Operating Strategy:D t il ti & l t tcenters, geographic units,
advertising (Craftors)
● Detail routines & completeness to business & functional strategy,
● Activities for the lower levels.
Sales Unit
Source: Thompson et al.. Crafting & Executing Strategy (2008) p.39
Example: PLN Batubara
PT PLN (Persero)
: ParentCorporate Strategy:
● Divest, Merge, Acquire ?● Parent style: central/de‐centralised ?● Org structure: flat/ M‐Form/ other?
PT PLN Batubara
PT Indonesia Power
PT PLN Geothermal
: Business unit
Business Strategy:●Market entry/exit● Secure unique resources (funds, mines)● Develop strategic alliances
Finance Opera‐ Legal: Functional unitFunctional Strategy:
● Implement function’s blue print Finance ptions
Legal: Functional unit● Function’s infrastructure (IT, ERP)● DCP, BCP, KPI development
Trading Mining: Operational unit
Operating Strategy:● Develop SOP & BPM for operating units ●Monitoring & assessment.
Game Theory
Looking for the best burger ?
Review of Analytical Models and Frameworks: Analytical Tool selectiony
• The number of decision variables: few vs many.
S f th t t i bl N B d• Scope of the strategic problem: Narrow vs Broad
• Narrow scope > when one or few decision variables are involved: e g launch of a new product entry into a newinvolved: e.g. launch of a new product, entry into a new market, a capacity extension. Here, all other variables are assumed to be constantassumed to be constant.
• Broad scope > a firm focuses on a large array of decision variables in analyzing the decision situation.variables in analyzing the decision situation.
• As the situation becomes more complex and more decision• As the situation becomes more complex and more decision variables are involved, it becomes more difficult to model the competitive moves of the players.p p y
Review of Analytical Models and Frameworks: Analytical Tool selectiony
Environment : Predictable vs uncertain
• Predictable environment > Environmental variables are held constant or are evolving at a constant pace, suggesting an evolutionary, incrementally changing competitive situation and not a revolutionary one.
• Uncertain environments > characterized by Schumpeterian shocks involving process of creative destruction of existing t h l i l d t ditechnological understandings.
• E.g. emergence of a revolutionary new technology, or unexpected entry of a new competitor from a totallyunexpected entry of a new competitor from a totally unrelated industry are events that can completely change the competitive landscape as well as the rules of the gamethe competitive landscape as well as the rules of the game.
The Rivalry Matrix
Analytical Tool: Game theoretic Modeling
• Game theory: The analysis of rational behavior in situations i l i i t d d f t ( h ffinvolving interdependence of outcomes (when my payoff depends on what you do) (Camerer, 1991). Focus more on short‐term moves of playersshort term moves of players.
• Concerned with: Formal analysis of conflict and cooperation among intelligent and rational decision‐makersp g g
• Two types of games: 1. Rule‐based games > players interact according to specified ‘rules of
t’engagement’2. Freewheeling games > players interact without any external
constraint• Limits: environment is predictable, relatively few decision
variables, rationality of players, able to identify all possible f h l & fi i l fmoves of each player & financial consequences of moves
Game Theoretic Models : Pay‐Off Matrix for the Prisoner’s Dilemma
Decision Tree for Kodak’s Entry into the Instant Camera Market: 1976 ‐ 1986
Pay‐Off Matrix for Polaroid and Kodak: 1976 ‐ 1986
Polaroid’s unit price freefall:( l )USD80 (July1976) > USD59
(Feb1977) > USD39 (Apr1977)
Any questions ?
For further information please contact :
Dr. Pantri Heriyati SE, MCommHead of School, School of ManagementTel +62 21 720 2222 e t 3110Tel: +62 21 720 2222 ext. 3110Fax: +62 21 720 5555Email: [email protected]: [email protected]
Gerald Ariff B.Eng, M.ScGerald Ariff B.Eng, M.ScHead of Postgraduate ProgramSchool of ManagementTel: +62 21 720 2222 ext. 3153 Fax: +62 21 720 5555E il iff@bi dEmail: [email protected]