COMPETITIVE STRATEGY
CREATING COMPETITIVE
ADVANTAGE

What is Competitive advantage?
… a basis for the firm’s long
term success?
… a basis for value creation?
Do we really know where it resides?
Can it be sustainable?

What is Competitive advantage?
What is Competitive advantage?
“When two or more firms compete
within the same market, one firms
possesses a competitive advantage over its
rivals when it earns a persistently higher
rate of profit (or has the potential to earn a
persistently higher rate of profit)”
R. M. Grant, 2000

The main types of Competitive
The main types of Competitive
Advantage
Advantage
Cost
advantage
Cost
advantage
Differentiation
advantage
Differentiation
advantage
Competitive
advantage
Competitive
advantage
Similar
product
at lower cost
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Competitive strategies
Competitive strategies
by
by Porter
Porter
Types of competitive advantage
Types of competitive advantage
Low cost Differentiation
Cost leadershipDifferentiation
Industry-wide
Niche Focus with
low cost
Focus with
differentiation
Market
Market

Five Generic Strategies
Five Generic Strategies
Competitive Advantage
Competitive
Scope
Cost Uniqueness
Broad
target
Narrow
target
Cost
Leadership
Differentiation
Focused
Cost
Leadership
Focused
Differentiation
Integrated
Cost
Leadership/
Differentiation

Cost Leadership Strategy
Cost Leadership Strategy
An integrated set of actions designed to
produce or deliver goods or services at the
lowest cost, relative to
competitors with features that are acceptable
to customers
◦ relatively standardized products
◦ features acceptable to many customers
◦ lowest competitive price

Cost Leadership Strategy
Cost Leadership Strategy
Cost saving actions required by this strategy:
◦ building efficient scale facilities
◦ tightly controlling production costs and
overhead
◦ minimizing costs of sales, R&D and service
◦ building efficient manufacturing facilities
◦ monitoring costs of activities provided by
outsiders
◦ simplifying production processes

How to Obtain a Cost Advantage
How to Obtain a Cost Advantage
Cost Drivers
Cost Drivers
Value Chain
Value Chain
Determine and
Determine and
control
control
Reconfigure, if
Reconfigure, if
needed
needed
• Alter production process
• Change in automation
• New distribution channel
• Direct sales in place
of indirect sales
• New advertising media
• New raw material
• Backward integration
• Forward integration
• Change location
relative to suppliers
or buyers

Product features
Performance
Mix & variety of
products
Service levels
Small vs. large buyers
Process technology
Wage levels
Product features
Hiring, training,
motivation
Factors That Drive Costs
Factors That Drive Costs
Economies of scale
Asset utilization
Capacity utilization
pattern
• Seasonal, cyclical
Interrelationships
Order processing
and distribution
Value chain linkages
• Advertising & sales
• Logistics &
operations

Major Risks of Cost Leadership
Major Risks of Cost Leadership
Strategy
Strategy
Dramatic technological change could take
away your cost advantage
Competitors may learn how to imitate value
chain
Focus on efficiency could cause cost leader
to overlook changes in customer
preferences

Differentiation Strategy
Differentiation Strategy
An integrated set of actions designed by a
firm to produce or deliver goods or services
(at an acceptable cost) that customers
perceive as being different or unique in
ways that are important to them.
◦ price for product can exceed what the firm’s
target customers are willing to pay
◦ Non standardized products
◦ customers value differentiated features more
than they value low cost

Differentiation Strategy
Differentiation Strategy
A product differentiation strategy must meet the
VRIO criteria…
Is it Valuable?
Is it Rare?
Is it costly to Imitate?
Is the firm Organized to exploit it?
…if it is to create competitive advantage.

Factors That Drive Differentiation
Factors That Drive Differentiation
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional design skill
Prestige and exclusivity

Differentiation Strategy
Differentiation Strategy
Differentiation actions required by this
strategy:
◦ Analysis of the value chain identifies in what
parts of the chain and through which links
superior products can be created and
customer perception may be changed
◦ Shaping perceptions through advertising
◦ Focus on quality – customer loyalty.
◦ Capability in R&D.

Differentiation Strategy and Price
Differentiation Strategy and Price
Elasticity of Demand
Elasticity of Demand
•Differentiation strategy, properly used, can:
reduce price elasticity of demand for the
particular product.
•This leads to the ability to charge higher
prices than competitors, without reducing
sales volume.
•Leads to above average profits compared
to sales.

Major Risks of Differentiation
Major Risks of Differentiation
Strategy
Strategy
 Customers may decide that the price differential
between the differentiated product and the cost leader’s
product is too large
 The “me-too” danger. Product features and
characteristics can be easily copied. The company needs to
be one step ahead of the curve and invest in improving and
perfecting the product, otherwise it will quickly become
obsolete.
 The “demanding consumer” danger. Products have
shorter life cycles and consumers gravitate towards what’s
new. In order to remain competitive firms need to keep up
with the latest trends and technologies, or their target
audience will switch to competitive offerings.

Focused Business-Level Strategies
Focused Business-Level Strategies
A focus strategy must exploit a narrow
target’s differences from the balance
of the industry by:
◦ isolating a particular buyer group
◦ isolating a unique segment of a
product line
◦ concentrating on a particular
geographic market.

Factors That May Drive Focused
Factors That May Drive Focused
Strategies
Strategies
Large firms may overlook small
niches
Firm may lack resources to compete
in the broader market
May be able to serve a narrow market
segment more effectively than can
larger industry-wide competitors
Focus strategy may allow the firm to
direct resources to certain value chain
activities to build competitive
advantage.

Major Risks of Focused Strategies
Major Risks of Focused Strategies
Firm may be “outfocused” by
competitors
Large competitor may set its
sights on your niche market
Preferences of niche market may
change to match those of broad
market

Integrated or Hybrid Strategy
Integrated or Hybrid Strategy
A firm that successfully uses an integrated
cost leadership/differentiation strategy should
be in a better position to:
◦ adapt quickly to environmental changes
◦ learn new skills and technologies more
quickly
◦ effectively leverage its core competencies
while competing against its rivals by
providing differentiated products at low costs.

Benefits of Integrated Strategy
Benefits of Integrated Strategy
Successful firms using this strategy
have above-average returns
Firm offers two types of values to
customers
◦ some differentiated features (but
less than a true differentiated firm)
◦ relatively low cost (but not as low as
the cost leader’s price)

Major Risks of Integrated Strategy
Major Risks of Integrated Strategy
An integrated cost/differentiation
business level strategy often involves
compromises (neither the lowest cost
nor the most differentiated firm)
The firm may become “stuck in the
middle” lacking the strong
commitment and expertise that
accompanies firms following either a
cost leadership or a differentiated
strategy

Sustainable competitive
Sustainable competitive
advantage
advantage
What is meant by sustainable competitive
advantage?
◦ Durable
◦ Valuable to the firm
 Exploiting weaknesses and neutralizing threats
◦ Unique
◦ Difficult for competitors to imitate
◦ Not easily substitutable

Examples of SCA
Examples of SCA
For many years, Singapore Airlines were
riding on its SCA of having the best in-flight
service
As more airlines improved their service and
narrowed the gap, SIA sought other
competitive advantages among which are
◦ The most modern fleet
◦ Outstanding Service on the Ground
◦ A super entertainment system in its cabins
◦ Comfort in its First Class cabins at an unparallel
level

Warren Buffet's
Investment Criteria
Warren Buffet was once asked
what is the most important
thing he looks for when
evaluating a company to
invest in. Without hesitation,
he replied, "Sustainable
competitive advantage."

STRATEGIES FOR
◦Market Leaders
◦Challengers
◦Followers, and
◦Nichers

MARKET LEADER`S
MARKET LEADER`S
STRATEGY:
STRATEGY: Defense Strategy
Defense Strategy
A market leader should generally adopt a
defense strategy
5 commonly used defense strategies
◦ Position Defense
◦ Flanking Defense
◦ Contraction Defense
◦ Pre-emptive Defense
◦ Counter-Offensive Defense

Defense Strategy (cont’d)
Defense Strategy (cont’d)
Position Defense
Use ones existing good position as defence.
One of the most successful of the defense
strategies
e.g. High end car manufacturers like Mercedes,
Lamborghini, Ferrari use a position defense
strategy given their

Defense Strategy (cont’d)
Defense Strategy (cont’d)
Flanking Defense:
◦ Secondary markets (flanks) are the weaker
areas and prone to being attacked
◦ Pay attention to the flanks

Defense Strategy (cont’d)
Defense Strategy (cont’d)
Contraction Defense
Withdraw from the most vulnerable segments
and redirect resources to those that are more
defendable
By planned contraction or strategic withdrawal
e.g. India’s TATA Group sold its soaps and
detergents business units to Unilever in 1993

Defense Strategy (cont’d)
Defense Strategy (cont’d)
Pre-emptive Defense
Detect potential attacks and attack the
enemies first
Let it be known how it will retaliate
Product or brand proliferation is a form of
pre-emptive defense e.g. Seiko has over
2,000 models

Defense Strategy (cont’d)
Defense Strategy (cont’d)
Counter-Offensive Defense
Responding to competitors’ head-on attack
by identifying the attacker’s weakness and
then launch a counter attack
e.g. Toyota launched the Lexus to respond
to Mercedes attack

Market Challenger Strategies
Market Challenger Strategies
The market challengers’ strategic objective
is to gain market share and to become
the leader eventually
How?
By attacking the market leader
By attacking other firms of the same size
By attacking smaller firms

Market Challenger Strategies
Market Challenger Strategies
(cont’d)
(cont’d)
Types of Attack Strategies
Frontal attack
Flank attack
Encirclement attack
Bypass attack
Guerrilla attack

Frontal Attack
Frontal Attack
Seldom work unless
◦ The challenger has sufficient fire-power (a 3:1
advantage) and staying power, and
◦ The challenger has clear distinctive advantage(s)
e.g. Japanese and Korean car manufacturers
launched frontal attacks in various ASPAC
countries through quality, price and low cost

Flank attack
Flank attack
Attack the enemy at its weak points or
blind spots i.e. its flanks
Ideal for challenger who does not have
sufficient resources
e.g. In the 1990s, Yaohan attacked
Mitsukoshi and Seibu’s flanks by opening
numerous stores in overseas markets

Encirclement attack
Encirclement attack
Attack the enemy at many fronts at the
same time
Ideal for challenger having superior
resources
e.g. Seiko attacked on fashion, features,
user preferences and anything that
might interest the consumer

Bypass attack
Bypass attack
By diversifying into unrelated products
or markets neglected by the leader
Could overtake the leader by using new
technologies
e.g. Pepsi use a bypass attack strategy
against Coke in China by locating its
bottling plants in the interior provinces

Guerrilla attack
Guerrilla attack
By launching small, intermittent hit-and-run
attacks to harass and destabilize the leader
Usually use to precede a stronger attack
e.g. airlines use short promotions to attack
the national carriers especially when
passenger loads in certain routes are low

Market-Follower Strategies
Market-Follower Strategies
Theodore Levitt in his article, “Innovative
Imitation” argued that a product imitation
strategy might be just as profitable as a
product innovation strategy
e.g. Product innovation--Sony
Product-imitation--Panasonic

Market-Follower Strategies (cont’d)
Market-Follower Strategies (cont’d)
Each follower tries to bring distinctive advantages to
its target market--location, services, financing
Four broad follower strategies:
◦ Counterfeiter (which is illegal)
◦ Cloner e.g. the IBM PC clones
◦ Imitator e.g. car manufacturers imitate the style of one
another
◦ Adapter e.g. many Japanese firms are excellent adapters
initially before developing into challengers and eventually
leaders

Market-Nicher Strategies
Market-Nicher Strategies
Smaller firms can avoid larger firms by
targeting smaller markets or niches that
are of little or no interest to the larger
firms
e.g. Logitech--mouse
Microbrewers--special beers

Market-Nicher Strategies (cont’d)
Market-Nicher Strategies (cont’d)
Nichers must create niches, expand the niches
and protect them
◦ e.g. Nike constantly created new niches--cycling,
walking, hiking, cheerleading, etc
What is the major risk faced by nichers?
◦ Market niche may be attacked by larger firms once they
notice the niches are successful

Multiple Niching
Multiple Niching
“A firm should `stick to its niching’ but not
necessarily to its niche. That is why
multiple niching is preferable to single
niching. By developing strength in two or
more niches the company increases its
chances for survival.”
Philip Kotler

THANK YOU !!
THANK YOU !!