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Lecture #10: The Nature and Sources of Competitive Advantage

Lecture #10: The Nature and Sources of Competitive Advantage. Sources of competitive advantage Cost leadership Differentiation. Sources of Competitive Advantage. COST ADVANTAGE. Similar product. at lower cost. COMPETITIVE ADVANTAGE. Price premium. from unique product. DIFFERENTIATION

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Lecture #10: The Nature and Sources of Competitive Advantage

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  1. Lecture #10:The Nature and Sources of Competitive Advantage • Sources of competitive advantage • Cost leadership • Differentiation MGTO321 (L1 & L2) -- Dr. JT Li

  2. Sources of Competitive Advantage COST ADVANTAGE Similar product at lower cost COMPETITIVE ADVANTAGE Price premium from unique product DIFFERENTIATION ADVANTAGE MGTO321 (L1 & L2) -- Dr. JT Li

  3. Porter’s Generic Strategies SOURCE OF COMPETITIVE ADVANTAGE Low cost Differentiation Industry-wideCOST DIFFERENTIATION COMPETITIVE LEADERSHIP SCOPE Single Segment FOCUS MGTO321 (L1 & L2) -- Dr. JT Li

  4. Cost & Differentiation MGTO321 (L1 & L2) -- Dr. JT Li

  5. Drivers of Cost Advantage • Minimum efficiency scale • Specilaization ECONOMIES OF SCALE • Increased dexterity • Improved coordination ECONOMIES OF LEARNING • Automization • Effiecient utilization of materials • Few defects PRODUCTION TECHNIQUES • Design to facilitate automation • Economize on costs and materials PRODUCT DESIGN • Location advantages • Ownership of low-cost inputs • Bargaining power • Supplier cooperation INPUT COSTS • Ratio of fixed to variable costs • Costs of installing and closing capacity CAPACITY UTILIZATION MANAGERIAL/ ORGANIZATIONAL EFFICIENCY • Organizational slack MGTO321 (L1 & L2) -- Dr. JT Li

  6. Economies of Scale: The Long-Run Cost Curve for a Plant Cost per unit of output Units of output per period Minimum Efficient Plant Size Sources of scale economies: - technical input/output relationships - specialization MGTO321 (L1 & L2) -- Dr. JT Li

  7. Scale Economies in Advertising: U.S. Soft Drinks Despite the massive advertising by brand leaders Coca Cola and Pepsi Cola, it is the smaller brands which incur the highest advertising costs per unit of sales: Schweppes SF Dr. Pepper Tab Diet 7-Up Diet Pepsi Diet Rite Advertising Expenditure ($ per case) 0.02 0.05 0.10 0.15 0.20 Fresca Seven up Dr. Pepper Sprite Pepsi Coke 10 20 50 100 200 500 1,000 Annual sales volume (millions of cases) MGTO321 (L1 & L2) -- Dr. JT Li

  8. Static Drivers of Differentiation • Product features and performance • Complementary services • Intensity of marketing • Technology • Quality of inputs • Organizational procedures • Location • Vertical integration MGTO321 (L1 & L2) -- Dr. JT Li

  9. Dynamic Cost and Differentiation • Total Quality movement (TQM) • Business Process Reengineering • Restructuring MGTO321 (L1 & L2) -- Dr. JT Li

  10. Recent Approaches to Cost Reduction Key elements: • Plant closures • Outsourcing • Delayering and cuts in administrative staff Fundamental rethinking and redesign of business processes to achieve improvements in performance. e.g.:- • Several jobs combined into one • Steps of a process combined in natural order • Minimizing steps, controls, and reconciliation • Hybrid centralization/ decentralization CORPORATE RESTRUCTURING BUSINESS PROCESS REENGINEERING MGTO321 (L1 & L2) -- Dr. JT Li

  11. Summary • Generic strategies • Managing cost and differentiation strategies • Static and dynamic drivers of cost and differentiation • Value chain MGTO321 (L1 & L2) -- Dr. JT Li

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