LESSON 4: COMPETITIVE ADVANTAGE AND

SUPERIOR PERFORMANCE

COMPETITIVE ADVANTAGE • Alter production process

- A basis for the firm’s long term success • Change in automation
- A basis for value creation • New distribution channel
- R.M. Grant, 2000. When two or more firms compete • New advertising media
within the same market, one firms possesses a • Direct sales in place of indirect sales
competitive advantage over its rivals when it earns a • New Raw materials
persistently higher rate of profit (or has the potential • Forward integration
to earn a persistently higher rate of profit) • Backward integration
• Change location relative to suppliers or
FIVE GENERIC STRATEGIES
buyers

FACTORS THAT DRIVE COSTS

• Economies of scale
• Asset utilization
• Capacity utilization pattern
• Seasonal, cyclical Interrelationships order
processing and distribution Value chain linkages
• Advertising and Sales
• Logistics and Operations
• Product features performance
• Mix & variety of products
• Service levels
• Small vs. large buyers
• Process technology
• Wage levels
COST LEADERSHIP STRATEGY • Product features
An integrated set of actions designed to produce or deliver • Hiring. Training, motivation
goods or services at the lowest cost, relative to competitors MAJOR RISKS OF COST LEADERSHIP STRATEGY
with features that are acceptable to customers. • Dramatic technological change could take away your
• Relatively standardized products cost advantage
• Features acceptable to many customers. • Competitors may learn how to imitate value chain
• Lowest competitive price • Focus on efficiency could cause cost leader to
overlook changes in customer preferences.
Cost saving actions required by this strategy:

• Building efficient scale facilities DIFFERENTIATION STRATEGY

• Tightly controlling production costs and overhead An integrated set of actions designed by a firm to produce or
• Minimizing costs of sales, R&D and service deliver goods or services (at an acceptable cost) that customers
• building efficient manufacturing facilities perceive as being different or unique in ways that are
• Monitoring costs of activities provided by outsiders important to them.
• Simplifying production processes
• Price for product can exceed what the firm’s target
customer are willing to pay
• Non standardized products
• Customers value differentiated features more than
they value low cost

A product differentiation strategy must meet the VRIO

criteria…

Is it Valuable?
HOW TO OBTAIN A COST ADVANTAGE
Is it Rare?

Is it costly to Imitate?

Is the firm Organized to exploit it?

…if it is to create competitive advantage 6. Make a decision.

FACTORS THAT DRIVE DIFFERENTIATION LESSON 5: SHAREHOLDER’S DECISION TO INVEST

IN A COMPANY
• Unique product features
• Unique product performance
• Exceptional services SHAREHOLDER
• New technologies
- A person, company, or institution that owns at least
• Quality of inputs
one share of a company’s stock.
• Exceptional design skill
- A shareholder is any person, company, or institution
• Prestige and exclusivity
that owns shares in a company’s stock.
INTEGRATED OR HYBRID STRATEGY - A company shareholder can hold as little as one
share.
A firm that successfully uses an integrated cost - Shareholders are subject to capital gains (or losses)
leadership/differentiation strategy should be in a better and/or dividend payments as residual claimants on a
position to: firm’s profits.
- Shareholders also enjoy certain rights such as voting
• Adapt quickly to environmental changes
at shareholder meetings to approve the members of
• Learn new skills and technologies more quickly
the board of directors, dividend distributions, or
• Effectively leverage its core competencies while
mergers.
competing against its rivals by providing
- In the case of bankruptcy, shareholders can lose up to
differentiated products at low costs.
their entire investment.
FOCUSED COST LEADERSHIP STRATEGY
TYPES OF SHAREHOLDERS
• A focused cost leadership strategy required
MAJORITY SHAREHOLDERS
competing based on price to target a narrow market.
• A firm that follows this strategy does not necessarily - Owns and controls more than 50% of a company’s
change the lowest priced in the industry. Instead, it outstanding shares. This type of shareholder is often
charges low prices relative to other firms that company founders or their descendants.
compete with the target market.
MINORITY SHAREHOLDERS
FOCUSED DIFFERENTIATION
- Hold less than 50% of a company’s stock, even as
It requires offering unique features that fulfill the demands of little as one share.
a narrow market. As with a focused low-cost strategy, narrow
markets are defined in different ways in different settings. MUTUAL FUND
Some firms using a focused differentiation strategy
- a managed fund that pools money from shareholders
concentrate their efforts on a particular sales channel, such as
to invest in securities.
selling over the Internet only.

SUPERIOR PERFORMANCE
STOCK
It means the performance of work at a level recognized above
and beyond the expected standard established for the position - also known as equity, is a security that represents the
in terms of quality and/or quantity; results in demonstrated ownership of a fraction of the issuing corporation.
benefits to the department or work unit's purpose and
objectives; and/or achieves significant benefits to the public. TYPES OF STOCK

6 BEST PRACTICES TO SUSTAIN SUPERIOR COMMON STOCK

PERFORMANCE
- is more prevalent than preferred stock, and is what
1. Focus on fundamentals. ordinary investors typically buy in the stock market.
Common stockholders enjoy voting rights.
2. Find an accountability partner.
PREFERRED STOCKHOLDERS
3. Add 1%.
- have a priority claim to dividends. Furthermore, the
4. Adapt faster. dividends paid to preferred stockholders are generally
more significant than those paid to common
5. Get a guru.
 stockholders. Preferred stockholders do not enjoy - This force assesses how fiercely the market is
voting rights.  competitive. It takes into account the amount of
current rivals and what each one is capable of.
- Rivalry is said to be high when there are few
SHAREHOLDER RIGHTS companies selling a good or service, when the market
is expanding, and when customers may quickly and
affordably switch to a competitor's product. And
when there is fierce rivalry, advertising and pricing
wars break out, which can be detrimental to a
company's bottom line.

2. THE BARGAINING POWER OF SUPPLIERS

- This force examines the degree of influence and
control a supplier may have on the possibility of price
increases, which would lower a company's
profitability. It also evaluates the quantity of raw
material suppliers and other resources that are
offered.
- The fewer suppliers there are, the more power they
have.
- When there are many suppliers, businesses are in a
better position.

3. THE BARGAINING POWER OF CUSTOMERS

ADVANTAGES - This force studies consumer power and how it affects
prices and product quality. When there are fewer of
• They can benefit from the appreciation of capital them, consumers have more influence; nevertheless,
• They may receive dividends when there are many sellers, consumers can easily
switch.
• They may have voting rights on certain matters - Conversely, when consumers make lesser purchases
of goods and the seller's product differs significantly
• Shareholders also have limited liability
from that of its rivals, their purchasing power is
limited.

DISADVANTAGES
4. THE THREAT OF NEW ENTRANTS
• They can face losses
- This force takes into account how simple or
• Not all companies pay out dividends challenging it is for competitors to enter the market.
- The risk of a market share loss for an established
• They may receive nothing if the company faces business increases when new competitors find it
bankruptcy simpler to enter the market. Barriers to entry include
absolute cost advantages, access to inputs, economies
• They have limited rights
of scale, and strong brand identity.

5. THE THREAT OF SUBSTITUTE PRODUCTS OR

LESSON 7: ANALYZING COMPETITION IN THE SERVICES
INDUSTRY ENVIRONMENT USING FIVE FORCES - This force studies how simple it is for customers to
MODEL
move from a company's product or service to one
offered by another company. In order to assess
Porter proposed that formulating effective, strategic decisions whether they can cut their expenses even further, it
and creating a compelling competitive strategy for the future analyzes the number of competitors, how their prices
require a grasp of both the competing forces at work and the and quality compare to the business under
overall industry structure. consideration, and how much profit those competitors
are making.
In Porter’s model, the five forces that shape industry - Both the short- and long-term switching costs, as well
competition are: as the inclination of consumers to switch, are factors
that influence the threat of substitutes. To keep one
1. COMPETITIVE RIVALRY
 step ahead of rival companies in the market, learn
how to do a competitive study.
- Make sure you have the ability to accurately calculate
the cost of goods sold (COGS) in order to benefit the
most from this technique.

HOW TO APPLY PORTER’S FIVE FORCES

ANALYSIS

Using Porter's 5 Forces, you should start to understand the

forces that shape your industry. The next step is to identify
how your company is going to compete and formulate a
competitive strategy.

Ideally, you want to sit in a position where you can balance

the 5 Forces and maximize your profit. The key question to
answer here is how you are going to achieve a competitive
advantage that will put your organization in a winning
position.

Porter developed three generic strategies that can be used to

create a defendable position and outperform competitors.
These strategies are cost leadership, differentiation, and focus
on a particular niche.

1. COST LEADERSHIP STRATEGY

- Cost leadership is a strategy that focuses on reducing
the costs involved in providing a product or service.
By running a lean operation and reducing costs across
different departments, you’ll maintain healthy
margins and profits.

2. DIFFERENTIATION STRATEGY
- A differentiation strategy focuses on providing a
product or service that is perceived as being unique
and hard to replicate. Buyers won’t find anything like
your product or service in the market allowing you to
charge higher prices.

3. FOCUS STRATEGY
- A focus strategy looks at serving a specific target
market better than anyone else in this industry. By
acquiring a deep understanding of your specific
customer, you’ll be able to serve your customers
more effectively and efficiently than the competitors
who are working across the entire industry.