Foundations of Strategy: Ch. 4
Ashleigh Wright, Blair Barnhill, Danielle Zamora, Lucas Raney,
Marshall Lester, Michael Greene
Competitive Advantage
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Two+ firms compete within the same market, one firm possesses a competitive
advantage over its rivals when it earns a persistently higher rate of profit
May not always be revealed in higher profitability
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A firm may forego profit in favor of an:
■ Investment in market share
■ Technology
■ Customer loyalty
■ Executive perks
External and internal changes can create short-term opportunities for creating an
advantage
External Sources of Change
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To create competitive advantage:
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must have differential effects on
companies because of different
resources, capabilities, or strategic
positioning.
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Depends on the magnitude of the
change and the the extent of the
firm's positioning.
Chart Industries: GTLS
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Global brand for the design and manufacture of highly engineered cryogenic
equipment used from the beginning to the end in the liquid gas supply chain
Organized in three operating segments
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Products are critical components of nitrogen, oxygen, and noble gases from air
and in the processing and liquefaction of natural gas
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Energy and chemicals
Hydrocarbon and industrial gases
Biomedical
Equipment plays critical role in making liquefied natural gas available around the world as safe,
clean, and less costly fuel
Lightweight portable oxygen concentrators help respiratory patients breathe easier and live better
World's leading single-source supplier of equipment and solutions for LNG
Industrial Gas Industry
What does Chart and their competitors make possible?
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Cryosaunas
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TTU Museum
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Cryo video
Tissue Preservation
LIN Ice Cream
Competitive Advantage From Responsiveness to Change
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External changes create more opportunities for profit
Two Capabilities involved in responsiveness
1. The ability to anticipate changes in the external environment
2. Speed Ex. Ford’s assembly line
Competitive Advantage from Innovation
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Innovation helps create competitive advantage
Innovation is more than new technology and products
Innovation can be strategic - new approaches to doing business
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New industries - New products can create new market space
New Customer Segments - Ex. Ford’s Model T
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New sources of competitive advantage - Ex. Cirque du Soleil new approach to creating customer
value
Sustaining Competitive Advantage
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“Imitation is the most direct form of competition; thus, for competitive advantage
to be sustained over time, barriers to imitation must exist.”
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Isolating mechanisms - Rumelt’s term to describe barriers that protect a firm’s profits from being
driven down from competition.
4 Conditions to successfully imitate another firm
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Identification
Incentive
Diagnosis
Resource acquisition
Sustaining Competitive Advantage
● Deterrence
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A firm may avoid a competition by undermining the incentives for competition.
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If a firm can persuade rivals that imitation would be unprofitable, they may be able to avoid
competitive challenges.
● Pre-emption
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Proliferation of product varieties
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Large investments in production capacity
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Patent proliferation
Sustaining Competitive Advantage
● Causal Ambiguity
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The more multidimensional a firm's competitive advantage, and the more it
is based on complex bundles of organisational capabilities, the more difficult
it is to imitate.
● Uncertain Imitability
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Where there is ambiguity associated with the causes of a competitor's
success, any attempt to imitate that strategy is subject to uncertain success.
Which management practices are generic and which are complementary to
other management practices.
Sustaining Competitive Advantage
● Acquiring Resources and Capabilities
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Buy Them
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Build Them
First Mover Advantage- Initial occupant of a strategic position gains access to
resources and capabilities that a follower cannot match.
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Amazon online book store
Types of Competitive Advantage
Competitive
Advantage
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Cost
Advantage
Fro
Differentiation
Advantage
Competitive advantage for Chart Industries
● Cost Leadership
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Liquified Natural Gas for
vehicle fueling
● Differentiation
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Qdrive Cryogenic Coolers
Strategy & Cost Advantage
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Consists of 7 determinants known as Cost Drivers
Utilizing Cost Drivers gives us the ability to examine a firm’s costs to competitors
in order to find inefficiency and recommend changes
Coincides with breaking down a company’s value chain to find:
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importance of each activity with respect to cost
cost drivers within each activity
how cost drivers influence one another
what to outsource within a company and what to keep in-company
Cost Drivers
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Economies of Scale:
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Technical input-output relationships, specialization, and indivisibilities (production methods which
incur high cost for first unit made, essentially making it possible only to be made by larger, more
capable firms)
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Economies of Learning:
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Production Techniques:
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Increased individual skills and improved organizational routines
Process innovation and reengineering of business processes
Product Design:
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Standardization of designs and components as well as design for manufacture
Cost Drivers
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Input Costs:
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Capacity Utilization:
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Location advantages, Ownership of low-cost inputs, non-union labor, and bargaining power.
Ratio of fixed to variable costs as well as fast and flexible capacity adjustment
Residual Efficiency:
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organizational slack and X-inefficiency (the ability of a firm to get the maximum output from its
inputs)
The 6 Stages of Value Chain Analysis, 1-3
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Break down the firm into separate activities:
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Establish the importance of each activity relative to cost:
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Requires understanding of the process chain, utilizing the divisional or departmental structure is
generally a good rule of thumb.
Assign specific costs to each process, a lengthy process but nets good results.
Without specific assignment, critical activities can still generally be identified.
Compare costs by activity:
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Benchmark your company’s costs against competitors
Utilized as a measure of efficiency; those which cost more than competitors may not be as efficient
The 6 Stages of Value Chain Analysis, 4-6
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Identify cost drivers:
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Identify linkages:
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Determine what your business does particularly well, or what causes its efficiency to suffer utilizing
the cost drivers listed above.
Activity costs can be effected by the way other activities in the chain are performed, thus affecting
their cost.
Identify opportunities for reducing cost:
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Utilize comparative efficiencies and determine how the areas you experience inefficiency can be
altered to reduce cost.
Starbucks Coffee Value Chain
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Inbound Logistics:
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Operations:
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Starbucks excels in quality due to its refusal to outsource its
bean procurement process.
Starbucks maintains a huge network of stores, many of which
are company run, thus not franchised.
Outbound Logistics:
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Due to a minute amount of intermediaries, their outbound
logistic chain is small. Most of their product is sold in-store,
with very little going to other sales locations.
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Marketing:
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Starbucks focuses on high quality and good customer service
over aggressive marketing, allowing for good relationships
Starbucks Coffee Value Chain
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Service:
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Infrastructure:
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Starbucks utilizes sizeable incentives to workers, and as such, has a low turnover rate. Also has a high-quality
training program.
Technology Development:
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The store’s level of cohesiveness from store to store is highly consistent, allowing for customer to feel familiar in
each store.
Human Resource Management:
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A major emphasis for Starbucks, aims to create customer loyalty via customer service and high-quality coffee.
Not only utilizes high-end equipment to insure consistent flavor and quality in their coffee products, but also is
active on many forms of social media to keep in contact with its customers.
Procurement:
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Done in house, Starbucks sources only high-quality coffee and direct contact is maintained between the suppliers
and the company.
Strategy and Differentiation Advantage
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Differentiation Advantage - Occurs when a firm is able to obtain from its
differentiation a price premium in the market that exceeds the cost of providing
the differentiation.
This is not just offering a new product, but enhancing or changing current
interactions.
Analysing differentiation requires looking at both the firm(supply side) and the
customers(the demand side).
Stages of Value Chain Analysis for Differentiation
Advantage
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Construct a value chain for the firm and the customer
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Identify the drivers of uniqueness in each activity
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Examining each activity in the firm’s value chain
Identifying the variables and actions can achieve uniqueness compared to competition
Select the most promising differentiation variables for the firm
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Firms are not limited to one customer
Find where the firm has greatest potential to differentiate at a lower cost than rivals
Understand how the differentiation variables may change other activities
Locate linkages between the value chain of the firm and that of the buyer
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Make sure that the differentiation will add actual value for customers
Porter’s Generic Strategies
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Cost Leadership Strategy - Firm winning over customers due to low cost.
Differentiation Strategy - When a firm has unique resources and capabilities used
to target a niche market where cost is not an issue.
Cost leaders are usually not market leaders.
Do not want to be stuck in the middle.
Summary
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Find your competitive advantage and keep it up
To keep a competitive advantage make barriers
Understand what a competitive advantage
Cost advantage v.s. differentiation advantage
Get out of being “stuck in the middle”
Works Cited
What is X-efficiency?. Retrieved from http://www.investorwords.com/17826/x_efficiency.html
What are indivisibilities?. Retrieved from http://www.businessdictionary.com/definition/indivisibilities.html
Bajpai, Prableen. (2016, February 19). Starbucks As An Example Of The Value Chain Model. Retrieved from
http://www.investopedia.com/articles/investing/103114/starbucks-example-value-chain-model.asp
http://www.chartindustries.com/
FIRST-MOVER ADVANTAGE. (n.d.). Retrieved March 09, 2016, from http://www.referenceforbusiness.
com/management/Ex-Gov/First-Mover-Advantage.html#ixzz42LAxE6nV