Advanced Competitive Strategy

Course Learning
Satyasiba Das MBA (Hult IBS, London, Boston)
Associate Professor, IIM Raipur M.Phil.; D.Phils. (NTNU, Norway); Marie Curie Postdoc (NUIG, Ireland)
What is strategy? Why do strategic decisions important for growth?

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Strategy Fundamentals

Where do we compete?
Attractive market opportunity - what makes a market opportunity
attractive?
How do we compete?
Resources and capabilities that allow us to serve the market
opportunity better than our competitor.
How do we execute?
Incentives and control systems, motivation and leadership

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How strategy is different from other subjects?

What determines the total corporate

performance of an entire business
enterprise?

What, if anything, can a manager do about it?

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Strategy as Integration

Chester Barnard, The Function of Executives, Cambridge, HBP, 1938.

Alfred D. Chandler, Strategy and Scope: Chapters in the History of the Industrial Enterprise,
Cambridge: MIT Press, 1962.
Paul Lawrence and Jay Lorsch, Organisation and Environment: Managing Differentiation and
Integration, Cambridge, HBP, 1967.

…the rise of large business enterprises due to their

superior ability to seamlessly integrate the production,
marketing, and distribution of a massive volume of
goods. Chandler, 1962

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 Strategy Fundamentals

– Why firms succeed or fail is the crux of strategy.

– The key activity of strategists is to search, deliberate or not, for the
combination of decisions that together yield high performance.

– Transition from Core to Advanced…

– To build an ability to examine the parts of the firm’s strategy in a
consistent manner and maps out the connections among the parts.

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What makes something a strategy?

“the smallest set of choices to optimally guide (or force) other

choices” (toward sustained superior performance)
– The tell-tale sign of a ‘lack of strategy’ is a lack of consistency.

Why can’t every employee simply take the best decision from her perspective?
Three essential reasons: 1) Choices interact; 2) fixing core choices strategy
reduces the amount of time and expertise needed in making decisions; 3)
having a clear strategy also gives management more control over the
organisation’s direction.
How can a leader or management team check whether they really have a strategy?
A three-fold strategy test: Guidance (Does it guide appropriately?), Specificity (Is it
non-generic?), Conciseness (Is it really the smallest set of choices?).

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What makes something a strategy?

Understanding the company’s strategy allows managers and employees to

anticipate what others will do and align their actions.
The six elements of the strategy framework are a good starting point for
developing a strategy. The six elements are divided into two groups:
– The first group: Level of Competitive Advantage (consisting of four
business system elements): Assets, Configuration of PPOF Choices
{Product, Process, organisation, and finance choice}, Scale and Scope
– The second group: consists of two positioning elements: Value Proposition
and Cost Structure
– What makes a decision strategic: a central and high-level choice; ex-ante
ambiguous or uncertain, but with (ex-post) clear implication; reliable and
persistent.

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Level of Aggregation of Strategic Decisions

– A corporate strategy sets the strategic goals for the

company as a whole.

– A business strategy sets the strategic goals for the

business unit. If a company is small, corporate and
business strategies are the same.

– A functional (area) strategy sets the strategic goals to

deliver on the business or corporate goals AND
continues to strengthen, improve, or enhance the
functional area.

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Level of Aggregation of Strategic Decisions

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What a strategy is?

The objective of this module is to build the ability to

examine the parts of the firm’s strategy in a consistent
manner.
– When strategy comes together for the first time?
– when it is challenged by the external environment?
– when managers attempt to change the strategy?

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Competitive Strategy

ACS: conceives of the firm’s Strategy as a set of Decision

‣ the advantage it aims to deliver
‣ the markets the firm targets
‣ array of function-level actions by which it intends to deliver the
desired advantage to the target market.
A key activity of a strategist is to search, deliberate or not, for
a combination of decisions that yield high performance.

Three types of choices define a firm’s strategy.

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Learning Objectives of Module 1

– to identify the relevant part of the firm’s strategy

– to analyze how much each part contributes to the
firm’s competitive advantage (or disadvantage)
– to spot the interactions that link parts to each other

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Performance and Value Analysis

Performance and value analysis (PVA) is a framework to analyse a

firm’s performance to determine its sustainability and to evaluate
options to improve it.
The PVA framework decomposes a firm’s overall performance into
three parts that are each driven by different forces.
– Common Performance
– Bargaining Advantage
– Value Creation Advantage

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Performance and Value Analysis

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Competition and Competitive Advantage

What is competitive advantage?

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© Satyasiba Das, 2013
Competition and Competitive Advantage

What is competitive advantage?

– A firm has a competitive advantage when it creates more
economic value (EV) than its rivals; and EV is the
difference between the perceived customer benefits
associate with buying a firm’s products or services and the
cost of producing and selling these products or services
– The purpose of business is, first, to create value for
customers and, second, to extract some of that customer
value in the form of profit, thereby creating value for the
firm.

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© Satyasiba Das, 2013
Competitive Advantage as a consistent lens

A firm achieves a competitive advantage with

respect to a set of customers and products when
it manages to drive a wider wedge than rivals do
between the costs it incurs to serve those
customers and the willingness to pay it
commands among them.

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A Price-Quality Indifference Curve

There is usually some rate

at which customers are
willing to trade off price
and quality

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A Cost-based Competitive Advantage

A firm can have a cost-

based advantage if it can
lower costs by more than it
must lower price.

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General Cost Drivers

– Cost drivers related to firm size or scope

(economies of scale, economies of scope, capacity utilisation,
specialisation)
– Cost drivers related to the cumulative experience
(learning curve)
– Cost drivers related to the organisation of transactions
(vertical integration, long-term contracts, management and
control)
– Other cost drivers
(input prices, location, economies of density)

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A Differentiation-Based C o m p e t i t i v e A d v a n t a g e

A firm can have a

differentiation-based
advantage if it can raise
price by more than it must
increase costs.

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General Value Drivers

– Physical characteristics of the product

(performance, durability, quality, features, aesthetics, ease of use)
– Quality of complementary goods
(post-sale service, spare parts, warranties, maintenance and repair
services)
– Characteristics associated with sale or delivery
(timeliness, convenience, credit, location, quality of sales staff)
– Characteristics that shape consumers' perceptions or
expectations
(reputation, installed base, network externalities)
– Subjective image (prestige, status)

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Heterogeneous Price-Quality Preferences

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Heterogeneous Price-Quality Preferences

Which strategy a firm should pursue depends on the options that are
available given its cost structure, customers, etc.

• COST-BASED WHEN... • BENEFIT-BASED WHEN...

• Economies of scale are potentially • Some customers are willing to
significant but unexploited pay a premium for quality
• There are few opportunities to • Customers are heterogeneous
enhance benefits in their preferences
• Customers are price sensitive, or • Learning or economies of scale
unwilling to pay a premium for quality are exploited already
• A firm is likely to differ from
competitors in cost

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Analysing Relative Cost

Relative cost analysis aims to estimate how a company’s costs

compare to a rival’s.
≥ To anticipate how a rival is likely to react to price change.
≥ To predict how a price war may evolve
≥ To test the reality of cost advantage
≥ To decide how low the company must bid
≥ To identify the opportunity for internal cost reduction
≥ During acquisition

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The Scope

Dimension of discrete market:

Geography, Value Chain, and Product/Customer
Each discrete market along those dimensions can be thought of
as a new business for a firm to enter.

While horizontal dimensions of scope are primarily concern with the

economic determinants of value creation, the vertical dimension is
concerned with the institutional arrangements - the market or the
hierarchy - that are the best governance structure for a set of
transaction.

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Determinant of Scope

What do determines scope of the firm?

Two costs of performing an activity:
– The Production Cost

– Governance Cost

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Determinant of Scope

The Production Cost

Economic Scope of the firm:
– Is there value created by competing in the market?
Governance Cost
Organisational Scope of the firm:
– Why should this activity be performed inside the firm, rather than through
some form of contractual arrangement?
– Both must be answered affirmatively before the firm should expand its scope
into new business.

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Economies of Scale

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Economies of Scale (Trade-off among alternate technology)

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Economies of Scale (Trade-off among alternate technology)

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Organisation and Learning (learning Curve)

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Determinant of Scope: Diversification

Why do firms diversify?

Efficiency-based reasons for Diversification

▪ Scope Economies
Dominant general management logic (the way in which managers conceptualize the
business and make critical resource allocations be it in technology, product
development, distribution, advertising, or in human resource management)
▪ Internal Capital Markets
▪ Diversifying shareholders’ portfolios
▪ Identifying undervalued firms

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Vertical Scope of the Firm

Two approaches determine optimal organisational arrangements:

Vertical boundaries (The vertical boundaries of a firm define the
activities that the firm itself performs as opposed to purchases
from independent firms in the market.)
1. Information Processing:
which arrangement makes the best use of information to optimise decision-
making.
2. Incentives:
given that all individuals act in their own self-interest, which arrangement
produces the best outcome for shareholders.

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Vertical Scope of the Firm

Vertical Foreclosure

Integration to tie up channels is known as vertical foreclosure. We can envision

four ways for a firm to foreclose its rivals.

1. A downstream monopolist acquires an upstream firm and refuses to purchase

from other upstream suppliers.
2. An upstream monopolist acquires a downstream competitor and refuses to
supply other downstream firms.
3. A competitive downstream firm acquires an upstream monopolist and refuses
to supply its downstream competitors.
4. A competitive upstream firm acquires a downstream monopolist and refuses
to purchase from its upstream competitors.

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Case 1: Apple Inc. in 2015

– The evolution of industry structure over time and its

implications for strategic positioning.
– The nature of sustainable competitive advantage
– The timing of strategic moves
– The challenge of reinvigorating competitive advantage
through innovation
– Product advantage vs. competitive advantage
– Role of deep industry knowledge
Competitive Life Cycle Analysis

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Case 2: Husky - Learning Objectives

– To exemplify a highly focused competitor

– To illustrate how tailoring of and extensive interactions among a firm’s
activities both strengthen its position and influence its assessment of
options;
– To show how one can analyse buyer WTP quantitatively to calculate the
premium that a firm can command;
– To demonstrate the intimate connection of a firm’s strategy to its values,
culture, organisation, and leadership; and
– To discuss the challenges of altering an intricate strategy in the face of
environmental change
– a company’s ability relative to competitors to generate WTP
– The costs that the company incurs in generating the WTP, relative to
competitors

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Willingness to Pay

– Distinct from price

– Crucial to understanding customer’s economics
– Easier for industrial product than customer product
– Valid to apply in industrial product
– Typically done for a representative or typical customer
– Concrete unit of analysis

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Case 3: Curled Metal Inc.

– Quantitative Analysis of Willingness-to-Pay;

– Understand the interaction between Price, Business Strategy and
relevant marketing/sales programs;
– Pricing decision, Assessment of Customer economics, value
communication, competitive dynamics;
– Price as Strategic Outcome
– Value addition as a key factor of CA and Strategy Formulation;
– Integrated Strategic Options.

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Curled Metal Inc.

– Value calculation relevant to WTP;

– Possible pricing options: value and volume maximising
price
– High vs Low price approaches and role of intermediates in
the value chain;
– Integrated strategic options linking company objectives,
value chain choices, and wedge economics.

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Curled Metal Inc.

Tool for Understanding Total value

Acquisition Costs Possession Costs Usage Costs

1. Price 7. Interest Cost 13. Field defects

2. Paperwork Cost 8. Storage Cost 14. Training Cost

3. Shopping Time 9. Quality Control 15. User labor cost

4. Expediting Cost 10. Taxes and Insurance 16. Product longevity

5. Cost of Mistakes in 11. Shrinkage and

17. Replacement Costs
order Obsolescence

6. Pre-purchase product 12. General internal

18. Disposal costs
evaluation costs handling costs

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Case 4: Microsoft’s Search

– It is important to realize (MS) faces a moving target.

– Competitive Dynamics as the evolution of relative Cost-WTP gap.
– An important skill for a strategist is to foresee how the gap will evolve.
– Monopolization violates fair competition, which allows for criminal penalties
& prison time.
– Objectives should guide action
– Companies often have a mix of offensive and defensive motivation.
– Generic Threats to Competitive Advantage (Imitation, Substitution, Holdup)
– A core job of the business strategist is to secure and sustain a competitive
advantage.
– To do so, the strategist must understand the root of CA at the point of time as
well as how it evolved over time.

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Case 4: Microsoft’s Search

– Antitrust agencies worldwide examine whether merging firms will monopolize

a market and whether existing monopolists are abusing their power. A
necessary first step in identifying monopolists is the market definition, also
known as competitor identification.

– According to the DOJ, a market is well-defined, and all of its competitors are
identified if a merger among them would lead to a small but significant non-
transitory increase in price. This is known as the SSNIP criterion. “Small” is
usually defined to be “more than 5 percent,” and “non-transitory” is usually
defined to be “at least one year.”
– The SSNIP criterion is based on the economic concept of substitutes. In general,
two products X and Y are substitutes if, when the price of X increases and the
price of Y stays the same, purchases of X go down and purchases of Y go up.

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