S T R AT E G Y

B A S E D O N C H 1 0 - S T R A T E G Y
T H E Q U E S T T O K E E P P R O F I T F R O M E R O D I N G
B Y F R O E B , E T. A L . , 5 T H E D . B Y C E N G A G E

B Y: D R . S H I R L E Y C AT L E Y- R I N O Z A
I N S T I T U T E O F AC C O U N T S, B U S I N E S S & F I N A N C E
FA R E A S T E R N U N I V E R S I T Y
M A N I L A
LEARNING OBJECTIVES
• Understand how businesses achieve competitive advantage
• Differentiate between the two perspectives on achieving competitive advantage
• Comprehend Michael Porter’s Fiver Forces Model
• Specify a business firm on how it achieves competitive advantage through pricing
and/or costing
• Specify a business firm on how it achieves competitive advantage using the IO or
the RBV framework
TOPIC OUTLINE
• The firms’ objective
• Strategy and competitiveness
• Sources of competitive advantage
• Lowering the cost, superior quality
• How to increase profit
• Increasing price, reducing cost
• Two Perspectives on the key to competitive advantage and positive economic profit
• The Five Forces Model of Michael Porter (for IO Model)
• Generic Strategies
INTRODUCTION
•Why engage in business?
•Business firms are in a quest for profit and
competitiveness
5

S T R AT E G Y
• Strategy = trying to slow erosion
• Firms have a competitive advantage when they can:
a) Deliver the same product or service benefits as competitors at
a lower cost OR…
b) …they can deliver superior product or service benefits at a
similar cost
• Strategy is about raising price or reducing cost
• Really successful firms manage to do both
• Extremely successful firms (like Starbucks) do it over a long
period of time, creating sustainable competitive advantage
6

S T R AT E G Y (CONT.)
• Strategy is all about how
to increase the size of the
profit box
S T R AT E G Y
• a plan of action or policy designed to achieve a major or overall
aim.(google.com)
• a carefully developed plan or method for achieving a goal or the skill in
developing and undertaking such a plan or method (Merriam & Webster.com)
• Long-range plans for the effective management of environmental opportunities
and threats, in light of corporate strengths and weaknesses.
(Hunger & Wheelen,1996)

• the ‘Hows’ of doing business

L E V E L S O F S T R AT E G Y
• Corporate strategy – describes a company’s overall direction in terms of its general
attitude toward growth and the management of its businesses and product lines to
achieve a balanced portfolio of its products and services. (ex. growth/expansion,
stability, retrenchment, concentration, integration)
• Business strategy (Competitive strategy) – usually is developed at the divisional level
and emphasizes improvement of the competitive position of a corporation’s products or
services in the specific industry or market segment served by that division. (ex. cost-
leadership, differentiation)
• Functional strategy – concerned primarily with maximizing resource productivity. (ex. :
market development, technological followership, technological leadership) at the
departmental level.
S T R AT E G Y
• Strategy is the art of matching the resources and capabilities of a firm to the
opportunities and risks in its external environment for the purpose of developing a
sustainable competitive advantage (Froeb, et.al.)
• What is the key to competitive advantage and positive economic profit ?
• 2 Perspectives or Schools of thought:
1) Industrial organization (IO) economics
• Locates the source of advantage at the industry level

2) Resource-based view (RBV) – build the right firm

• Locates the source of advantage at the individual firm level
10

I N D U S T RY ( I O ) V I E W O F S T R AT E G Y
• Industry is the key issue
• Focus on the external environment
• Industry structure determines the conduct of firms, which in turn
determines their performance
• Typical structural characteristics that are of interest to IO
researchers include:
• 1. barriers to entry
• 2. product differentiation among firms
• 3. the number and size distribution of firms
11

I O V I E W O F S T R AT E G Y (CONT.)
• The key to generating economic profit for a business is its selection of industry
• According to the Five Forces model of Michael Porter, the best industries are
characterized by:
• High barriers to entry
• Low buyer power
• Low supplier power
• Low threat from substitutes
• Low levels of rivalry between existing firms
• (Cooperation from complementary products)
• So, the advice is to pick a good industry and work to make it even more
attractive
12

U S I N G F I V E F O RCE S
• Definition: An industry is comprised of a group of firms producing
products that are close substitutes to each other to serve each
other
• Note: For a multi-product company, industry analysis may
need to be done on a product-by-product basis
• To use the Five Forces model, one must consider “value capture”
• Just because you are in an industry that creates value doesn’t
mean that you are going to capture it
• Value is created in each industry and distributed across
suppliers, industry rivals, and buyers
• The Five Forces model helps you think about how much of the
industry value your firm is likely to capture
13

F I V E F O RC E S ( C O N T. ) : B U Y E R S
AND SUPPLIERS
• Suppliers
• are the providers of any input to the product or service
• power tends to be higher when the inputs provided are
critical inputs or highly differentiated
• Concentration among suppliers gives suppliers power because
a firm will have fewer bargaining options
• Even if many suppliers exist, power may still be high if there are
significant costs to switching between suppliers
• Buyers
• If buyers are concentrated or if it is easy for buyers to switch
from firm to firm, buyer power will tend to be higher.
• More power means these buyers will find it easier to capture
value, taking it away from your firm.
14

F I V E F O RC E S (CONT.) : ENTRANTS
• Economic profits tend to draw new entrants
• Entrants erode the profit of an industry, so barriers are made to
prevent, or slow, their entry
• Some barriers are,
• government protection (e.g., patents or licensing requirements)
• proprietary products
• strong brands
• high capital requirements for entry
• lower costs driven by economies of scale
• Substitute products can still erode a firm’s ability to capture value
even if barriers to entry are high
15

F I V E F O RC E S (CONT.) : R I VA L RY

• Rivalry is the force most directly related to our typical view of “competition”
• If a large number of firms compete in an industry with high fixed costs and slow
industry growth, rivalry is likely to be quite high
• Rivalry also tends to be higher when products are not very well differentiated and
buyers find it easy to switch back and forth
16

T H E RE S O U RCE -BAS E D V I E W (CONT.)

• So from the resource based view perspective, resources and
capabilities that are valuable, relatively rare, and difficult to
successfully imitate/substitute are at the core of sustained,
excellent firm performance
• These resources and capabilities may include:
• technology
• physical capital
• intellectual assets
• human capital
• financial resources
• organizational excellence
17

SOME ADVICE YOU CAN FOLLOW

• Be wary of any advice that claims to identify critical resources or
capabilities that successful companies have to develop in order to gain
a competitive advantage
• explanations such as these often mistakenly conclude a causal
relationship when only a correlation exists
• Publicly available knowledge is not going to help you create a
competitive advantage
• ex/ You read that having a CMEO (Chief Managerial Economics Ofcer)
in your company leads to a competitive advantage. You decide to hire a
CMEO for your business and no competitive advantage follows. What
happened?
• Your competitor heard about the CMEO “secret” as well and hired one
too. Now that everyone knows about it, no advantage is possible.
Competitive advantage ows from having something that competitors cant
easily duplicate
18

G E N E R I C S T R AT E G I E S
• There are three basic strategies a firm can follow to generate
better economic performance and keep ahead of competitors
1) Reduce costs
2) Reduce intensity of competition
3) Differentiate product
• Example: Perdue Chicken – successful differentiation
• Frank Perdue took an essentially homogenous product – chicken – and
turned it into a branded product by exercising quality control over the
entire supply chain. Consumers perceive his branded chickens to be of
higher quality.
• Example: Prelude Lobster – fruitless attempt at differentiation
• Tried to adopt Perdue’s strategy, but consumers correctly perceived that
the supply chain for lobsters is largely uncontrollable.
19

A BUSINESS CASE
• In 1964, an MIT professor founded a technology company
• One year later, the company launched it’s first product –
a loudspeaker with excellent technological performance
• Regardless, the loudspeaker was a complete failure in the market.
No one liked the design of it and turned to complimentary products.
• Four years later the company produced another loudspeaker.
The company was forced to rely on door-to-door sales to
convince consumer’s of the quality of the product.
• Baring the rocky start, the company stuck with it and continued to
produce innovative products. Now annual revenues have grown to $2
billion and the company employs over 9,000 people.
20

BUSINESS CASE, C O N T I N U E D

• In 2006, a survey of American households found that consumers

voted this company the most trusted technology brand.
• How did they achieve this success?
• According to the company’s former president:
“Our challenge is to prod people into being innovative and
using their creativity to do something that's better. In the long
run, this is the source of sustainable advantage over our
competition.”
• The continuous stream of product innovations coupled with
aggressive marketing and innovative control of its supply
chain created a competitive advantage that rivals found
difficult to match
REFERENCES
• Froeb, et. al. 5th ed. Managerial Economics by Cengage.
• Hunger, D & Wheelen, T. 5th ed. Strategic Management. Addison-Wesley
Publishing Co., Inc. c. 1996.
• Google.com/search
• Merriam & Wesbster.com