SM UNIT II.pptx Strategic Management Anna Univ

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1. UNIT -II COMPETITIVE ADVATAGE

2. Competitive Advantage A company has a competitive advantage over its rivals when its profitability is greater than the average profitability of all companies in its industry. It has a sustained competitive advantage when it is able to maintain above-average profitability over a number of years Distinctive Competencies Competitive advantage is based on distinctive competencies. Distinctive competencies are firm-specific strengths that allow a company to differentiate its products from those offered by rivals and/or achieve substantially lower costs than its rivals

3. Distinctive Competencies

4. Resources refer to the assets of a company. A company’s resources can be divided into two types: tangible and intangible resources . Tangible resources are physical entities, such as land, buildings, plant, equipment, inventory, and money. Intangible resources are nonphysical entities that are created by managers and other employees , such as brand names, the reputation of the company, the knowledge that employees have gained through experience, and the intellectual property of the company , including that protected through patents, copyrights, and trademarks.

5. Capabilities refer to a company’s skills at coordinating its resources and putting them to productive use. These skills reside in an organization’s rules, routines , and procedures, that is, the style or manner through which it makes decisions and manages its internal processes to achieve organizational objectives

6. External analysis stages Macro-environment – these are broad trends shaping the national and international environment in terms of political, economic, social and technological trends (i.e. PESTEL factors, key drivers ). Micro-environment – this is the operating environment or industry sector in which the firm competes. It addresses a range of issues such as suppliers, customers, competitive intensity, threat of new entry and of substitute products arising (i.e. the ‘five-forces’ analysis). Analysing the external environment involves breaking a complex inter-related reality into sets of issues to make the analysis manageable. The main sets of issues are usually :

7. Competitor analysis – seeks to understand the rival offers from other firms seeking to serve the same customers and to out manoeuvre their managers with our innovation and competitive moves. Market analysis seeks to evaluate the current needs of today’s customers and the emerging needs of tomorrow’s customers so new products can be anticipated. These will be different in different market segments.

8. The Macro-Environment Difficult for the firm to influence Changes can be far-reaching The media: rich source of both information and speculation Tools for analysing the macro-environment The PESTE analysis Key drivers Scenarios

9. What is PEST Analysis? This analysis is essential for an organization before beginning its marketing process Consists of internal environment and external environment P olitical Factors E conomic Factors S ocio Cultural Factors T echnological Factors

10. Political Factors This is the most important influence on the regulation of any business. How stable is the political environment? Influence the Government Policy / Law on your business Government’s position on Marketing Ethics Government’s policy on the economy Government’s view on culture under religion

11. Political System is responsible for Law Making. Immediate laws which affect any business in general are Central Excise, Sales Tax/ VAT, Corporate Income Tax, Personal Income Tax & Service Tax Environmental Protection Law Controls if any on Marketing Strategies Like Marketing / Advertising of Cigarettes, Tobacco, Alcohol etc.

12. Control on Pricing like sugar, drugs etc. Government Policies on the Economy Role of Public Sector Role of Private Sector Role of Joint Sector

13. Economic Factors Government outlook towards Bank Financing Interest Rates Exchange Rate Mechanism Incentives for Exports Restrictions for Imports Inflation Labour Policies

14. Economic Factors - Contd. Level of Government Spending Avenues for Capital Creation Size of the Capital Market Role of the Regulator Type of the Instruments Nature of the Investors

15. Socio-Cultural Factors Demographics Distribution of Income Social Mobility Life Style Changes Consumerism Educational Levels

16. Socio-Cultural Factors - Contd. Demographics & Distribution of Income Division of population - Male / Female Age Group of the Population Disposable Family Income Disposable Income in the hands of the different Age Groups Education Level of the Age Groups

17. Technological Factors Advantage of Technology In terms of Economies of Scale New Discoveries & Innovations Speed & Cost of Technology Transfer Rate of Obsolescence

18. Other Factors Judicial System Insurance System Banking System Regulatory System Infra Structure Communication Transportation

19. Role of PEST Helps Assess the market including Competitors from the stand point of a Particular Business. PEST is relevant for any type of Business large, small & medium.

20. MICRO ENVIRONMENTAL FACTORS Shareholders Suppliers Distributors Customers Media Competitors

21. PORTER’s FIVE FORCE MODEL The Five Forces model of Porter is an outside-in business unit strategy tool that is used to make an analysis of the attractiveness (value...) of an industry structure. Attractiveness in this context refers to the overall industry profitability and also reflects upon the profitability of the firm under analysis It captures the key elements of industry competition.

22. Buyers Suppliers Substitute products Potential entrants Industry competitors Rivalry among existing firms Threat of new entrants Bargaining power of suppliers Bargaining power of buyers Threat of substitutes PORTER’s FIVE FORCES MODEL

23. Threat of New Entrants The competition in an industry will be the higher, the easier it is for other companies to enter this industry. In such a situation, new entrants could change major determinants of the market environment The threat of new entries will depend on the extent to which there are barriers to entry. These are typically Economies of scale High initial investments and fixed costs Brand loyalty of customers Protected intellectual property like patents, licenses etc , Scarcity of important resources, e.g. qualified expert staff Access to raw materials is controlled by existing players, · Distribution channels are controlled by existing players High switching costs for customers Legislation and government action

24. Threat of Substitutes A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. The treat of substitutes is determined by factors like Brand loyalty of customers Close customer relationships Switching costs for customers The relative price for performance of substitutes Current trends.

25. Bargaining Power of Suppliers Supplier bargaining power is likely to be high when: The market is dominated by a few large suppliers rather than a fragmented source of supply There are no substitutes for the particular input The suppliers customers are fragmented, so their bargaining power is low The switching costs from one supplier to another are high There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins

26. Bargaining Power of Customers Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes. Customers bargaining power is likely to be high when They buy large volumes; there is a concentration of buyers The supplying industry comprises a large number of small operators The supplying industry operates with high fixed costs The product is undifferentiated and can be replaces by substitutes Switching to an alternative product is relatively simple and is not related to high costs

27. Competitive Rivalry between Existing Players High competitive pressure results in pressure on prices, margins, and hence, on profitability for every single company in the industry. Competition between existing players is likely to be high when There are many players of about the same size Players have similar strategies There is not much differentiation between players and their products, hence, there is much price competition

28. STRATEGIC GROUPS Strategic Groups Strategic Groups are organizations within an industry with similar strategic characteristics, following similar strategies or competing on similar bases include pricing practices , level of technology investment and leadership, product scope and scale capabilities, and product quality . Strategic Groups Strategic Groups are organizations within an industry with similar strategic characteristics, following similar strategies or competing on similar bases.  Strategic group maps present the various competitive positions that similar firms occupy within an industry

29. Identify Key Competitive Attributes Create Map Based Upon Two Key Attribute Variables Identify Strategic Groups Strategic group creation and analysis provides an effective way to develop a clearer understanding of how firms within an industry compete. Since each strategic group depicts firms with similar—if not identical—competitive attributes within the industry, the map helps managers identify important differences among competitive positions.

30. COMPETITIVE CHANGES DURING INDUSTRY EVOLUTION Industry lifecycle comprises four stages including fragmentation, growth, maturity and decline. An understanding of the industry lifecycle can help competing companies survive during periods of transition. Several variations of the lifecycle model have been developed to address the development and transition of products, market and industry.

31. Industry lifecycle

32. Competing over emerging industries The game rules in industry competition can be undetermined and the resources may be constrained. Thus, it is vital for firms to identify market segments that will allow them to secure and sustain a strong position within the industry. The product in the industry may not be standardised so it is necessary for companies to obtain resources needed to support new product development and rapid company expansion. The entry barriers may be low and the potential competition may be high, thus companies must adapt to shift the mobility barriers.

33. Competing during the transition to industry maturity When competition in the industry increases, firms can have a sustainable competitive advantage that will provide a basis for competing against other companies. The new products and applications are harder to come by, while buyers become more sophisticated and difficult to understand in the maturity stage of the industry lifecycle Slower industry growth constrains capacity growth and often leads to reduced industry profitability and some consolidation.

34. Competing in declining industries The characteristics of declining industries include the following: Declining demand for products Falling research and development advertisement expenditure Declining number of rivals as many are forced to leave the industry For companies to survive the dynamic environment, it is necessary for them to: Measure the intensity of competition Assess the causes of decline Single out a viable strategy for decline such as leadership, liquidation and harvest.

35. INDUSTRY STRUCTURE Industry is a collection of firms offering goods or services that are close substitutes of each other. An Industry consists of firms that directly compete with each other. Industry structure refers to the number and size distribution of firms in an industry. The level of competition in an industry rises with the number of firms in the industry. i) Fragmented Industry -If all firms in an industry are small in size when compared with the size of the whole industry, then it is known as fragmented industry . In a fragmented industry, no -Firms have large market. Each firm serves only a small piece of total market in competition with others. ii ) Consolidated Industry -If small number of firms controls a large share of the industry's output or sales, it is known as a consolidated industry.

36. CHARACTERISTICS OF INDUSTRY STRUCTURE Four characteristics of industry structure are particularly important to the performance of new firms in the industry: Capital Intensity Advertising Intensity Concentration Average firm size USES OF INDUSTRY STRUCTURE Business Policy and Strategy Public Policy Oligopoly

37. GLOBALIZATION Globalisation is the term to describe the way countries are becoming more interconnected both economically and culturally. This process is a combination of economic, technological, socio-cultural and political forces . ADVANTAGES Increased free trade between nations Increased liquidity of capital Corporations have greater flexibility to operate across borders Global mass media ties the world together. Greater ease and speed of transportation for goods and people. Reduction of cultural barriers increased the global village effect

38. DISADVANTAGES Increased flow of skilled and non-skilled jobs from developed to developing nations as corporations seek out the cheapest labor. Spread of a materialistic lifestyle and attitude that sees consumption as the path to prosperity International bodies like the world trade organization infringe on national and individual Greater risk of diseased being transported unintentionally between nations.

39. Impact of globalization on industry structure The structure of an industry is affected by globalization. Globalization gave rise to the following types of industries. Multidomestic Industries Global Industries Multidomestic Industries are specific to each country or group of countries. This type of international industry is a collection of essentially domestic industries like retailing, insurance and banking Global Industries operate world wide, with MNCs making only small adjustments for country- specific circumstances. A global industry is one in which a MNCs activities in one country are significantly affected by its activities in other countries

40. NATIONAL CONTEXT AND COMPETITIVE ADVANTAGE Despite the globalization of production & markets, many of the most successful companies in certain industries are still clustered in a small number of countries. Biotechnology & computer companies – U.S. Electronics Company – Japan. Chemical & Engineering company – Germany. This suggests that the nation – state within which a company is based may have an important bearing on the competitive position of that company in the global market place.

41. Companies need to understand how national factors can affect competitive advantage, for then they will able to identify . Where their most significant competitors are likely to come from. Where they might want to locate certain productive activities . Attributes to identify National Environment Factor Endowments Demand Conditions Relating & Supporting Industries Firm Strategy, Structure & Rivalry

42. National competitive Advantage

43. COMPETITIVE ADVANTAGE: Competitive advantage leads to superior profitability. At the most basic level, how profitable a company becomes depends on three factors: The amount of value customers place on the company’s product. The price that a company charges for its products. The cost of creating that value

44. RESOURCES: Resources are the capital or financial, physical, social or human, technological and organizational factor endowments that allow a company to create value for its customers Types: Tangible resources - land, buildings, plant, equipment, inventory and money Intangible resources - brand names,reputation , knowledge that employees have gained, patents, copyrights & trademarks CAPABILITIES: - Refers to a company’s skills at coordinating its resources & putting them to productive use. These skills reside in an organization’s rules, routines and producers.

45. Core Competencies

46. Core Competencies –Low Cost A company pursuing a cost-leadership business model chooses strategies that do everything possible to lower its cost structure so it can make and sell goods or services at a lower cost than its competitors . It requires close cooperation between all the functional areas of a business.  To be the lowest-cost producer, a firm is likely to achieve or use several of the following: High levels of productivity &capacity utilization Use of bargaining power to negotiate the lowest prices for production inputs Lean production methods (e.g. JIT) Effective use of technology in the production process Access to the most effective distribution channels

47. Differentiation

48. GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE

49. EFFICIENCY Efficiency of operations enables a company to lower the cost of inputs to produce given output and to attain competitive advantage. Employee productivity is measured in terms of output per employee . QUALITY Quality of goods and services indicates the reliability of doing the job, which the product is intended for. High quality products create a reputation and brand name, which in turn permits the company to charge higher price for the products . CUSTOMER RESPONSIVENESS – Companies are expected to provide customers what they are exactly in need of by understanding customer needs and desires. Customer Responsiveness is determined by customization of products, quick delivery time, quality, design and prompt after sales service.

50. DISTINCTIVE COMPETENCIES It is a unique strength that allows a company to achieve superior efficiency, quality, innovation and customer responsiveness. It allows the firm to charge premium price and achieve low costs compared to rivals, which results in a profit rate above the industry average. Ex : Toyota with world class manufacturing process . In order to call anything a distinctive competency it should satisfy 3 conditions, namely: Value – disproportionate contribution to customer perceived value Unique – unique compared to competitors; Extendibility – capable of developing new products.

51. Distinctive Competencies are built around all functional areas, namely : Technology related Manufacturing related Distribution related Marketing related Skills related Organizational capability Distinctive Competencies arise from two sources namely, Resources Capabilities

52. DURABILITY OF COMPETITIVE ADVANTAGE Durability of competitive advantage refers to the rate at which the firm’s capabilities and resources depreciate or become obsolete. It depends on three factors Barriers to Imitation Capability of Competitors Strategic commitment Absorptive capacity Dynamism of industry

53. AVOIDING FAILURE AND SUSTAINING COMPETITIVE ADVANTAGE