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Analysing Competitive Advantage

WWW.SBS.OXFORD.EDU EDUCATING LEADERS FOR 800 YEARS. Executive MBA May 2013. Analysing Competitive Advantage. Christopher McKenna. What’s So Special About the iPhone ?. Apple Software Samsung Applications Processor Samsung SDRAM Memory (10% of the total cost to manufacture )

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Analysing Competitive Advantage

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  1. WWW.SBS.OXFORD.EDU EDUCATING LEADERS FOR 800 YEARS Executive MBA May 2013 Analysing Competitive Advantage Christopher McKenna

  2. What’s So Special About the iPhone? • Apple Software • Samsung Applications Processor • Samsung SDRAM Memory (10% of the total cost to manufacture) • Samsung NAND Flash (15% of total cost) • Broadcom GPS • Texas Instruments Touchscreen Controller • ST Micro Gyroscope • LG LCD Display • Infineon Transceiver (Quad Band)

  3. Key Concepts from this Session • Resource-Based View • Core Competence • 3. Business Designs • 4. Generic Competitive Strategies

  4. Rail Transport Goods Passengers Distribution Tourism Business Services Consumer Services “The Customer-Defined Business” Source: Ted Levitt, Marketing Myopia, HBR, July, 1960 Looking Outside American RailwaysWhat Business Is It In?

  5. Cameras Copiers Faxes Printers Precis. Fine Micro- Mech. Optics Electron Micro- Optronics “Core Competence” Source: Prahalad and Hamel, HBR, May, 1990 Looking Inside the Firm Core Competences at Canon

  6. Core Competence: the firm’s central dynamo of strategic advantage over time (typically integrative and specific) Many firms have none. Capabilities/Competences: the firm’s ability to put resources to profitable use (verbs) Most firms will have some. Resources: e.g. the firm’s equipment, patents, people, brands, money (nouns) All firms have these. The key question from the RBV is: what are you best at? The Resource-Based View RBV = Superior performance stems from within the firm – its resources and capabilities

  7. Core Competence Statements CitiCorp:Systematising and exploiting real-time financial information Honda:Designing and manufacturing petrol-powered engines, especially for mobile devices Sony:Using miniaturisation to create and market innovative electronic products for consumer markets Based on Prahalad and Hamel, The Core Competence of the Corporation, HBR, 1990

  8. Profitability Distance from Core Key question: Are there activities others can do better? A Question of Focus Core

  9. 1. Map products and services 2. Identify underlying technologies, skills, processes and resources 3. Synthesise common technologies, skills, processes and resources 4. Check that common technologies, skills, processes and resources are extendable 5. Keep Testing! Identifying Core Competence

  10. Testing Resources and Competences • is it valued by customers will they pay you more than it costs? • is it superior you command a premium over competitors? • is it imitable your competitors cannot copy? • is it substitutable your competitors cannot out-trump you? • is it durable are you managing and building it? • is it core is it the base of (nearly) everything you do?

  11. It is Probably NOT a “Core Competence” if ... • it’s based on a particular product or service (not “our core competence is coffee”) • it’s based on a person or small group of people (not “our core competence is our emerging markets team”) • it’s simply what you haven’t yet divested or outsourced (not “we have divested these businesses to focus on our core”) • it’s something many others could say (not “our core competence is service excellence”)

  12. Business Designs Competition is no longer about ‘silver bullets’ but about competing ‘business designs’. Business Design: a mutually reinforcing (complementary) configuration of business choices on key value adding dimensions, underpinned by fundamental assumptions about business drivers Examples: Wal-Mart, EasyJet, Nucor, and Amazon Fundamental Assumptions: What business are you in? What are your customers going to want? What drives profits in the chain?

  13. Competing on Business Design ‘Big Steel’ Mini-Mills Fundamental Quality at a Price Right quality, right price Assumptions: Volume Key Low Volumes Design Elements: Customers Broad Regional Focus Scope Vertical Integration Scrap Operating System Basic Oxygen Electric Arc Capital Intensity High Low R&D In-house Suppliers Organization Unionized Lean, Green

  14. Nucor’s Business Design (“activity system map”) Key Business Drivers Shaded; Reinforcing Links Indicated Key Plant Suppliers Electric Arc Regional Markets Low R&D Low Capital Low Volume Limited Products Green Workers Low Prices Low Quality No Unions List Prices High Incentives Low Overheads Porter, 1996, Harvard Business Review

  15. Mapping Complementarities in Business Design 1. Identify functional elements of overall strategy (e.g. HR, Ops etc) 2. Identify complementary links, potential links – and conflicting ones 3. Build complements, and minimise conflicts 4. Which element most at risk of change? Technology Strategy Supplier Strategy Operations Strategy Financing Strategy Human Resource Strategy Marketing Strategy The Activity System Map

  16. Porter’s Generic Competitive Strategies • At the level of the business unit, there are just two ways of achieving superior performance, the ‘generic strategies’ of: • cost leadership • differentiation • The scope of cost leadership and differentiation can be broad or narrow. But Porter warns that the two strategies can’t be mixed. • His message is: • identify your advantage - your ‘reason for being’ • know your competence • don’t get ‘stuck-in-the-middle’

  17. Advantage from Generic Strategies Profit Average Price Profit Profit Costs Costs Costs Competence Competence Apply competences for either cost or differentiation advantages

  18. Generic Strategy Choices Profitability Profitability 1. Does the business really know where it is? 2. Is the business in too many positions? 3. Is the business in danger of compromising its position? Low Cost Differentiation Maintain ‘parity’ on each dimension – but don’t get stuck-in-the-middle

  19. Cost Leadership and Differentiation Cost leader Differentiator • Higher prices • More extras • Quality features • Service • Snob appeal • Lower costs • Fewer extras • Efficiency • Scale economies • Budget appeal “Stuck in the Middle” • Unclear value proposition • High costs, low prices?

  20. Some Cautionary Warnings • Are Core Competences too Subjective? • Are Resources Inherently Tautological? • Are Generic Strategies too Dichotomous?

  21. Your Strategy Statement? • For a business with which you are familiar: • Explain the goals of the business • Define its scope • 3. Explain how competitive advantage supports goals and scope • 4. Is competitive advantage adequate, all across the business? • In 35 words or less ....

  22. Key Concepts from this Session • Resource-Based View • Core Competences • 3. Business Designs and Activity Systems • 4. Generic Competitive Strategies

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