Scarica Competitive Advantage Strategies: Cost Leadership and Differentiation e più Appunti in PDF di Economia solo su Docsity!
INTERNAL ANALYSIS
Strategic decisional process: the logic flow Internal analysis within business strategy is crucial for understanding how companies compete in the market. There is a high-level strategic decisions, like those made by CEOs or CFOs, come later in one's career, but learning about business strategy is essential because it involves market competition, something relevant from the start. There are two levels of analysis. The first is the grand strategy , which involves deciding which markets to compete in and how to compete. There are two main types of generic strategies : cost leadership (offering the cheapest product on the market) and differentiation (offering the most unique and expensive product). These decisions are long-term and can't be changed frequently. Once a company chooses a direction, it must build upon it. The second level involves analyzing the company’s strengths and weaknesses internally to enhance its competitive position, either by improving its cost advantage or differentiation advantage. It’s hard to combine both strategies, but the goal is to create a sustainable competitive advantage over time. Analyzing the Internal Environment Understanding the sources of competitive advantage: why a company makes more/less profit than competitors
- the sources of competitive advantage
- the role of activities, resources and competences What is competitive advantage When two or more companies compete within the same market, one firm possesses a competitive advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit. The competitive advantage is measured by profits , which are a key indicator of a company’s success. While profits aren't the only goal, they are vital for the company's survival and for rewarding shareholders. Sometimes, competitive advantages arise from external factors like changes in customer demand, prices, or technological advancements that favor one company over others. External factors can influence a company either positively or negatively due to unexpected events or changes in the environment. One example is Zoom , which struggled to compete with Microsoft Teams and Webex in 2019. When the COVID- 19 pandemic hit, the demand for video conferencing increased dramatically, and Zoom was in the right position to take advantage of it, leading to a significant rise in its stock value in 2020-2021. However, this growth was not sustainable in the long term.
Another example involves gas producers outside of Russia. When the Russia-Ukraine war began, the price of Russian gas increased due to political sanctions. Companies in the Mediterranean, which could transport gas to Europe by ship, gained a competitive advantage by being in the right place at the right time. Beyond luck, some companies are quicker to adapt to changes. During the pandemic, the Politecnico di Milano saw an unexpected increase in enrollment because students could attend classes online, reducing the costs associated with relocation. By quickly investing in technology, the university managed to provide online courses without disruption, gaining a temporary advantage over other universities, such as those in the UK, which struggled more to adapt. Competition is a continuous process where companies must constantly adapt and seize emerging opportunities. Some companies are able to reinvent themselves and anticipate external changes. These companies manage to balance different types of products, like stars, cash cows, and question marks (potential future successes). Examples include Microsoft, IBM, and Amazon, which have always been at the forefront of market innovation, launching new products and creating new markets, even when they were already successful. This is unusual because companies typically innovate when they see a threat, but these companies use their excess resources and profits to drive change and prepare for the future. An example of this is Apple, which is currently testing virtual reality devices to anticipate what might happen in 3, 5, or 10 years. These companies are willing to fail because they know that every few failures can lead to a big win. This gives them an internal source of competitive advantage, as they don’t just react to changes—they anticipate them. A key concept related to this is ambidexterity , which refers to a company's ability to balance the exploitation of existing strengths with the exploration of new ideas. A famous example is 3M , which allows employees to spend 20% of their time developing innovative ideas. This approach has enabled 3M to expand into numerous sectors, evolving from a simple glue manufacturer to a company that operates in many different markets. External sources of change: Zara case This type of innovation is also reflected in structural ambidexterity , where innovation is embedded into the organization. A prime example is Zara , which excels in carefully monitoring customer preferences and reacting quickly. Zara minimizes the time needed to bring new products to market, often taking just a few weeks. The brand also offers a shopping experience that feels almost luxurious while maintaining affordable prices, constantly attracting customers with new products every time they visit the store. This makes shopping at Zara a continuous and engaging experience. Speed is crucial in this business because clothing is perishable, similar to meat or fish, which need to be sold and rotated quickly. This approach is one reason many consumers prefer Zara over its competitors. Important is the ability of some companies to continually adapt and innovate, such as Google (or Alphabet), which operates like a venture capital fund by acquiring startups and innovative technologies to anticipate future changes. Google buys anything it deems interesting for the future, including technologies and ideas. A similar example is given with 3M , which encourages its employees to dedicate part of their time to developing innovative ideas, thus contributing to the company's continuous growth. These companies do not wait for external threats to change; instead, they utilize their resources to drive change and prepare for the future. Types of competitive advantage
- Cost advantage
- Differentiation advantage
Economies of Scale, Minimum Efficient Scale, and Diseconomies of Scale Scale economies are not only sources of cost advantages but also of differentiation advantages:
- Economies of scale in R&D allow to undertake more complex and costly projects leading to a unique know- how and innovation.
- Economies of scale in ads allow to undertake widespread campaigns.
- Economies of scale allow to have a sales network more pervasive than competitors.
- Economies of scale allow to offer a wider and more widespread service and technical assistance. A Snapshot of the learning economies; we can see decreasing cost with time, with the with experience. Economies of learning
- The learning curve can be defined as follows: “Costs decline approximately 20 to 30 percent in real terms each time production doubles”.
- Such cost declines do not occur automatically. They require management. Economies of scale and of learning
- Learning effects occur over time as output accumulates.
- Economies of scale are captured at one point in time when output is increased.
- Learning declines at some point but there are no diseconomies to learning whereas there are diseconomies of scale.
- There are industries where economies of scale are not relevant and industries where economies of learning are weak. So, there are spillovers and crossovers between the economies of scale and the economies of learning. In particular, the more you grow, the more you learn (so the two can be reinforcing each other). Cost Advantage: Identification of opportunities for cost reduction Walmart is an excellent example of a cost leader who continuously tries to improve its cost advantage. This is the real cost leader in the supermarket industry because it has inspired entirely the low cost supermarket industry. Wal-Mart case study Wal-Mart, the biggest department store chains in US, has been able to achieve significant cost advantages through a deep change of its procurement processes, reducing inventory levels and their related costs. Wal-Mart ensures that certain quality levels are guaranteed. It operates by providing exhibition spaces to suppliers. The cash desk, where the customers pay for the purchase, are connected with the information systems of suppliers
and transfer information to the suppliers on the number of products sold. Suppliers are responsible for replenishing the shelves and managing the products from their own trucks to the shelves. There are no purchase orders and specific billings , but simply a framework agreement about supply and price. The suppliers have the advantage to schedule the production on the basis of the products sold and to be closer to the end customer; their staff can supervise the exhibition area in order to stimulate sales. Wal-Mart has no inventory costs, order costs, billing costs. A cost leader: is a company that tries to keep its costs as low as possible while still meeting basic legal standards. For example, in Europe, a product needs to have CE certification to be sold, but anything beyond that is extra. This helps the company sell products or services at the lowest price. ▪ Take Ryanair , for instance. When you fly with Ryanair, you're really only paying for a seat—everything else costs extra. They also push some of their costs onto the customer. For example, with priority boarding, you might have to wait longer in the tunnel before getting on the plane. Ryanair does this to save money, making the passengers handle the cost of waiting instead of the company. Online check-in is another example—it’s not just for convenience. It saves Ryanair money because they don’t need as many staff at the check-in desk. ▪ This strategy of shifting costs to others is common. Walmart does something similar by pushing the risk of unsold products onto its suppliers. Instead of Walmart handling the unsold stock, the suppliers have to take care of restocking. Walmart can do this because it’s very powerful and has a lot of control over its suppliers. By doing this, Walmart avoids costs related to holding stock, making purchase orders, and even billing, which helps them keep costs down. The main goal of a cost leader is to attract customers who care most about price. When people are choosing between two similar products, they usually pick the cheaper one. For example, if two pens are almost the same but one is a cent cheaper, most people will choose the cheaper one. That’s why being the second-cheapest isn't enough—you have to be the absolute lowest price to win customers. Walmart is very good at keeping costs low and measures its success through things like lower IT costs, fewer stolen goods, less spending on ads, and cheaper logistics compared to its competitors. Walmart is usually about 1% cheaper than its closest competitors, especially within the same local area. This is important because people tend to shop at grocery stores that are close to home. Supermarkets like Walmart compete locally. It doesn’t matter if Walmart is the cheapest in the whole world—it just needs to be the cheapest in the area where people do their shopping. Since most people shop near where they live, Walmart focuses on being the lowest-cost option in that specific area. Cost Advantage: Economic Value The levers being used here are cost and volume. By reducing costs, profits can increase , even if sales remain the same. Alternatively, you can keep costs constant and focus on increasing the number of units sold , which will also improve profits due to higher volumes. It’s all about finding the right balance between economies of scale (producing more at a lower cost) and the capacity of your production and sales systems. The bigger your production facility and sales reach, the more you can benefit from this balance.
o The concept of better products is influenced by customer’s criteria of purchase o Innovation is about creating new forms of value for customers Example: BMW vs Volvo No brand claims to have the best product
- BMW has always emphasized the joy of driving and holds an “exciting positioning”
- VOLVO is known for being a family car, emphasizing safety and comfort, although it may not have the most striking visual design They do not have to demonstrate their product is superior to the other, they simply appeal to very different customers because of their emphasis on different criteria of purchase.. This represents two completely different value propositions. Positioning Positioning is the firm’s decision about how it wants to be perceived by the market. The act of “ drawing” the firm’s offer and image in a way to be set in a precise position in the target consumers’ mind (Kotler ). It is about the combination of product attributes and customer preferences. (So, when you seek to develop a different strategic approach, positioning becomes crucial. Differentiation focuses on your place within the industry and the market. Positioning lies at the intersection of strategy and marketing, where these two disciplines often fail to communicate effectively. However, it's essential for strategists and marketers to collaborate, as this collaboration allows for a deep understanding of customer behavior). Steps :
- Identify the attributes the customer considers important for purchase. 2. Map the product/service of the firm and of its competitors on the basis of the attributes identified Chocolate Positioning In the chocolate market, brands are positioned based on quality and price. For instance:
- M&M's represent low quality and low price , appealing to those looking for affordable sweets.
- Lindt , on the other hand, is positioned as high quality and high price , suitable for gifting or special occasions. When shopping for chocolate, consumers typically don’t compare M&M's to Lindt; instead, they choose based on their specific needs—if seeking a quality gift, Lindt would be preferred over M&M's. Athletic Footwear Positioning In the athletic footwear sector, brands are mapped according to performance and price. For example: - Nike and ASICS are known for their high performance , designed for sports. - Converse , originally basketball shoes, are positioned more towards fashion than performance.
This positioning helps consumers understand what each brand offers, catering to various preferences—whether for performance in sports or style in everyday wear. Overall, these perceptual maps illustrate how brands differentiate themselves in the market based on consumer preferences and purchasing motivations. Combining product attributes and customer preferences Differentiation in the Soap Industry : The soap industry showcases significant differentiation despite its functional nature. Supermarkets often stock 50 to 60 different brands of soap, each targeting specific consumer needs.
- Targeted Products : Some soaps are designed for women, featuring appealing scents and colors.
- Family-Friendly Options : Others cater to the entire family, emphasizing basic cleaning properties.
- Specialized Features : Some soaps offer medical benefits for improved skin health.
- Cosmetic Soaps : Others focus on cosmetic attributes, promoting softness and pleasant fragrances. This variety highlights how brands satisfy to diverse consumer preferences Key variables, specific for each product/market, may be technical, functional, economic, image-driven The value curve , also known as a value canvas , is a visual representation of the product features that matter to customers and how each company is positioned in the market. It allows you to compare different companies and see how they provide various levels of value based on specific criteria. Critical success factors for positioning 1. Address to a specific target (segmentation); better you define your customer, the better you can differentiate your product 2. Focus on the key variables relevant for that segment
Illycaffè followed a strategy based on attractiveness differentials obtained through excellent quality of the product and a strong brand focused on quality and culture values.” So, companies like Illycaffè stand out in the coffee industry by offering high-quality products, such as blends made from 100% Arabica coffee. Illycaffè chooses the best raw materials and works with farmers to make sure their coffee is high quality and sourced ethically. Marketing is essential, with companies investing heavily in advertising to create a strong brand image. For example, Lavazza uses distinctive colors on their packaging to attract consumers' attention. Tesco case study Tesco is another example of differentiation in grocery stores. “Tesco is one of the biggest distributors (retailers) in the world, the first in the UK. The company's strategy is based on finding differential of attractiveness , leveraging customer loyalty. The mission is expressed in two fundamental values: No-one tries harder for customer and Treat people as we like to be treated. In 1993 Tesco started a loyalty program by establishing the "Clubcard", which offers to customer the possibility to accumulate points that can be translated into discounts or premiums, in addition to promotions and special offers for purchasing products. Today, these tools are widely used in the distribution, but 15 years ago Tesco was a pioneer in that experimentation. Tesco sends every quarter of the year a personalized newsletter to customers. This expedition is made in 4 million of different versions, defined on the basis of micro segmentation made from data collected through the Clubcard. It is something very different from sending a standard newsletter with generic offers.” Commerce Bank case study
- The Commerce Bank adopted a very different strategy from that of principal competitors. Instead of becoming bigger, the company decided to maintain a smaller size and to offer a personalized service with a very high quality. In view of that, it required a premium price , in terms of interests and fixed costs. Some examples of services:
- times of opening and closing of branches are respectively 7:30 AM and 8:30 PM, but in the overcrowded places the closing time may be extended until midnight. The 10 - minute rule also plans to anticipate the opening 10 minutes and postpone the closing of the same period of time.
- Commerce Bank launched the project "Retailtainment" offering coffees and newspapers to people waiting for with the presence in each branch of live music. In the banking sector, not all banks are the same. So, we can have differentiation also in the banking industry. Not all banks offer the same services. Some banks provide advanced services, closer and more personal relationships with clients, and better advice. This highlights that differentiation can be achieved in various sectors, including banking, by offering unique services and approaches to customer relationships. Differentiation Competitive Advantage: Economic Value It’s important to invest in making products different from others. This means creating extra value for customers. You can do this by raising the price while keeping the same amount of product or keeping the price the same but increasing the value (like saving costs). This helps you earn more profit. When we talk about cost leadership , we focus on lowering costs to make more money. In differentiation , we try to raise the price. In both cases, we want to increase the gap between the price and the cost of the product. There’s a balance to maintain. You can’t invest in making everything better, or the costs
might be too high to manage. Also, you can’t cut costs forever because there are minimum standards for quality, safety, and legal rules that must be followed. So, it’s important to find a good balance between these factors. Analyzing the Internal Environment Understanding the sources of competitive advantage: why I make more/less profit than my competitors
- the sources of competitive advantage
- the role of activities, resources and competences Companies can combine cost leadership and differentiation strategies. It is possible to use both approaches at the same time. For example, IKEA is a company that effectively combines these strategies. It offers affordable products (cost leadership) while also providing unique designs and a positive shopping experience (differentiation). IKEA keeps costs low by having customers do some of the work, like transporting and assembling their own furniture. This helps reduce the company's costs. Additionally, IKEA is known for its unique design and constant innovation, which sets it apart from competitors. A simple yet effective differentiator is the food experience they provide, particularly their famous meatballs, which make shopping there more enjoyable for families. However, there are risks when trying to combine cost leadership and differentiation. A company may end up "stuck in the middle," where it fails to offer enough differentiation to justify a higher price or incurs too many costs to maintain its position as a cost leader. Resource-Based View (RBV) theory: this theory highlights how a company’s unique resources and capabilities can help create a competitive advantage. Barney's work emphasizes that a company's success largely depends on its internal resources. So, companies need to recognize the value of their unique resources and how they can be used to stand out from competitors. Competitive advantage and a firm’s activity : a company's resources are key to its success, and knowing the activities that add value is essential
- Cost and differentiation advantages are linked to the activities of the company that stand behind.
- An effective way of representing this linkages is the Porter’s Value Chain Porter’s Value Chain Michael Porter’s value chain model helps understand which activities create value for the company. The Value Chain: Primary & Support Activities
- Primary Activities are the activities involved in the physical creation of the product and its sale and transfer to the buyer, as well as aftersale assistance. So, Primary activities are those that are directly connected to the final product. These include inbound logistics (managing and receiving raw materials), manufacturing operations (turning raw materials into finished products), outbound logistics (distributing finished products to customers), services (providing help after the sale). All these activities directly affect the final product.
- Support Activities support the primary activities and each other by providing purchased inputs, technology, human resources and various company- wide functions. These activities have an indirect effect on the value perceived by the customer. For example, research and development on how to design a bottle to use less plastic is a support activity. Even though it is not visible to the customer, this activity can differentiate a product, such as an "eco- friendly bottle”. Value is also created through indirect activities, like human resource management, technology development, and procurement. These processes are not immediately obvious but still influence the company’s market value.
Imagine a company with 10 activities. If you do a Pareto analysis (which means ranking the activities from the one that costs the most to the one that costs the least), you’ll see that it’s more effective to focus on the activities that absorb the most costs. Reducing even just 1% of the cost of the most expensive activity (activity #1) would have a bigger impact than reducing 50% of the cost of the least expensive activity (activity #10). The same idea applies when negotiating with suppliers: suppliers that contribute significantly to the cost of the product will have more power. Companies often start by trying to cut costs from the least expensive activities (#10), but those activities aren’t very interesting from a cost reduction point of view. So, if you want to use value chain analysis for a cost leadership strategy, you should rank the activities based on how much cost they absorb and focus on reducing costs in the most important activities. Cost drivers: the case of an automotive company To reduce costs, you need to understand the production process in detail. So, you have to understand what creates or affects the cost of each activity, and this will depend on the type of activity. For example, if you're thinking about the assembly of different components into a final product, you need to consider how many components are involved, how many steps are needed, the size and efficiency of the machines, how well they are used, how many people work there, and how skilled they are. If you're looking at marketing activities, you would think about how much you spend on advertising, which channels you use (TV, newspapers, social media), and then try to find ways to reduce costs by understanding what drives those costs. An example is an automotive company with many different ways to lower costs, usually by negotiating with suppliers. You might decide to use one supplier instead of ten to buy in larger quantities and reduce costs, but that also increases the risk if something goes wrong. So, you need to carefully look at every cost and find the key factors that can help you reduce them. Value Chain and Differentiation Advantage The analysis of differentiation advantage is made up of three phases :
- Identification of the key performance for the customer (what customers wants).
- Identification of the activities which impact on the key performance and how.
- Identification of opportunities for differentiation. So, when you use the value chain with a differentiation strategy, the approach is different than with a cost-reduction strategy. You always start with the customer. You ask yourself, what are the elements or values that the customer is willing to pay more for? What makes your company special? Then, you look at the activities that increase the value of the product in the eyes of the customer. This is the opposite of a cost-focused strategy: instead of starting with costs, you think about what the customer really likes. For example, in the case of Ferrari, customers love the sound of the
engine. So, you focus on the activities that make that sound special, like the research and development for the engine. In this case, you might decide to increase costs and invest more in areas that create value for customers. On the other hand, you should cut costs in areas that don’t provide value to the customer. Essentially, it’s about figuring out what the drivers of value are for the customer. Example: the case of a metal containers producer When you talk about costs, you focus on cost drivers. When you talk about differentiation, you focus on value drivers. Even something like shipping containers can be differentiated. For example, the quality of the material for ship containers is important because they are exposed to erosion from water. A strong metal container is more durable and safer for the goods inside. Customers also care about how to use space effectively. When you ship, containers go full on one trip and return empty, so it's important to maximize space. You can increase value by investing in research and development. For example, some companies have created foldable containers that can be collapsed when empty. This means you can fit more containers on a ship. These are value drivers for customers. Every product has its own value drivers, and there are no standard rules for all industries; it all depends on the type of product. Types of resources Porter's value chain is important as a key tool for understanding business strategy. J. Barney focuses on resources rather than activities. Barney’s approach looks at different types of resources. To conduct its activities a firm exploits resources of different types. Tangible Assets include physical and financial means. They are the easiest to find as they are often found on a firm’s balance sheet. So, are physical things that you can touch, like raw materials, physical assets, and financial resources. Intangible Assets include the resources you can not touch and see. They include: brand equity, reputation, culture, intellectual property (trademarks, technical knowledge, patents, trade secrets). These factors are harder to measure but can significantly impact on a company's success. Human resources include skills, know-how, experience, capacity for communication and collaboration, motivation and are also crucial sources of competitive advantage. The capabilities go beyond just having resources; they also include how a company uses and adapts those resources effectively. Capabilities involve the ability to reconfigure resources to meet changing needs. This topic will be explored in more detail later. Overall is important to understand both the value chain and resource-based strategies in developing a competitive advantage. Strategic Resources The foundations of the long-term (defendable) competitive advantage of a company are represented by its capabilities and resources. The profits earned from resources and capabilities depend not just on their ability to establish a competitive advantage but also on how long that advantage can be sustained
Google is an example of a company with a strong competitive advantage, but the exact reasons for its success are unclear. It could be due to its data access, user base, or algorithms, or a combination of all these factors
- Economic deterrence (the market size is not able to support two players). Because the specific causes of competitive advantage can be hidden or complex, it’s hard for competitors to imitate successful companies. Organizational capabilities are viewed similarly to resources by many researchers. Jay Barney stated that it doesn't really matter whether it is a tangible resource, an intangible resource, or a capability. What matters is that they are valuable, rare, not immutable, not substitutable. It is important to keep in mind that organizational capabilities are particularly tough to imitate or substitute. This means that companies that can develop these capabilities have a competitive advantage that is difficult for competitors to replicate. Organizational capabilities consist of various elements: Structures : The organizational framework and internal processes of the company. Resources : The physical and intangible resources available. People : The human capital, including the skills and knowledge of the workforce. Strategic resources and profitability Who gains returns from superior resources? Who gets the profit created by a resource? This brings to the concept of appropriability , the extent to which a company is able to «capture» the profits from its resources. It means how well a company can keep the profits made from its resources. Appraising resources and capabilities An example
Analyzing the Internal Environment The internal analysis is useful to identify:
