Foundations of Strategy
Chapter 4.The nature and
sources of competitive
advantage
Yetunde Oyinwola, Eric Carstens, Alex Kollaritsch, Laura Padilla, Taylor Mullings
Objectives
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Understand the term “Competitive Advantage”
Predict potential for competition to wear away competitive advantage
Recognize how resource conditions create imperfections in the competitive
process that offer opportunities for competitive advantage
Distinguish the two primary types: cost advantage and differentiation
advantage
Use value chain framework to analyse potential sources of cost and
differentiation advantage to recommend strategies for enhancing
competitiveness
Appreciate the pitfalls of being ‘stuck in the middle’ and the challenge of
achieving effective differentiation and low cost
Opening Case: Singapore Airlines
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‘World’s Best Airline’ by Conde Nast Traveler
Ranked 27th in Fortune Magazine’s ‘World’s Most Admired Companies’ 2010
Based on two main strategies: its planes and its people
Planes
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‘Young’ fleets
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First airline to launch Airbus A380
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Cost Advantage
People
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Attracts first class university graduates
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110 hours of retraining for every employee annually
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Focus on customer service
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Differentiation Advantage
Emergence of Competitive Advantage
How does competitive
advantage emerge?
External sources of
change
● Changing customer
demand
● Changing Prices
● Technological
change
Resource
heterogeneity among
firms means differential
impact
Some firms faster
and more effective
in exploiting change
Internal sources of
change
Some firms have
greater creative and
innovative capability
C.A From Responsiveness to Change
Involves one of two key capabilities:
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The ability to anticipate changes in the external environment
Speed
Markets have become turbulent and unpredictable, so speed of response
through greater flexibility has become increasingly important
Two requirements for quick response:
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Information
Short cycle times
Competitive Advantage from Innovation
Innovation generates changes that create competitive
advantage.
➢
Overturns other firms competitive advantages
Strategic innovation: a new approach to doing business
including new business models
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Novel products
Experiences
Modes of product delivery
Novel Organisational Designs
Southwest Airlines
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Point-to-point
No frills airlines service
Single type plane
Flexible non-union
employees.
Apple
➢ Reinvention of record music
➢ iTunes
➢ New product launch
Pioneering Dimensions of Strategy
➢ New industries
○ Xerox: plain-paper copier industry
➢ New customer segments
○ VCRs and video cassette
○ Xbox
➢ New sources of competitive advantage
○ Cirque du soleil
○ Dell
Sustaining Competitive Advantage
Imitation is the most direct form of competition; for long
term sustainability barriers to imitation must exist.
Sources of isolating mechanisms
➢
Identification
➢ Incentive
➢ Diagnosis
➢ Resource acquisition
Identification: Obscuring Superior Performance
According to George Stalk of BCG, “one way to throw
competitors off balance is to mask high performance so
rivals fail to see your success until its too late”.
➢ Dominate a niche market
➢ Remain private: avoid disclosing financial performance
PepsiCo “Power of One”
➢ Introduced in September, 2011
➢ Full coordination across the food and beverage
operating systems.
○ Unlock opportunities and create value across the business.
➢ Long-term strategy to strengthen and extend global
leadership position in snacks and leverage the power of
PepsiCo combined food and beverage businesses.
○ Help extend competitive advantage around the world
Deterrence and Pre-emption
If a firm can persuade rivals that imitation will be
unprofitable, it may be able to avoid competitive
challenges.
• Proliferation of product varieties by a market leader
• Large investments in production capacity ahead of growth of
demand
• Patent proliferation
Diagnosing Competitive Advantage
If a firm is to imitate the competitive advantage of another,
it must understand the basis of its rival’s success.
• Causal Ambiguity: The more multidimensional a firm’s competitive
advantage, the more difficult it is to diagnose the determinants for
success
• Uncertain Imitability: Where there is ambiguity, imitation leads to
uncertain success
Acquiring Resources and Capabilities
•The imitator can mount a competitive challenge only if they
can assemble the required resources
•Imitation is fast when the competitive advantage does not
require complex, firm-specific resources
•First-mover advantage: Where the initial occupant of a
strategic position gains access to resources and capabilities
that a follower cannot match
Ex: Urban Outfitters
•Self description: “Targeting well-educated, urban-minded, young adults aged
18-30 through its unique merchandise mix and compelling store
environment.”
•Each store has a unique design
•Store layouts are changed every two weeks to provide a new shopping
experience for returning customers
•Emphasizes community with its customers through blogs and word-of-mouth
transmissions for advertising
•Attempts to imitate would likely fail because of the difficulty of replicating
every aspect of the strategy then integrating them in the right manner.
Is SIA’s Competitive Advantage
Sustainable?
• Other airlines could invest in new aircraft, staff training, and ticketing
and check-in technologies
• Culture of cost-effective services is ingrained in the company
• They want to be the most profitable rather than the largest airline
• Cabin crew members work together for significant periods of time
• All of these things put together with the new fleet makes it tough to
imitate
Sources of Competitive Advantage
Strategy and Cost Advantage
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Cost Drivers

Economies of Scale
 Economies of Learning
 Production Techniques
 Product Design
 Input Costs
 Capacity Utilization
 Residual Efficiency
Value Chain Analysis
1. Break down the firm into separate activities.
2. Establish the relative importance of different activities in
the total cost of the product.
3. Compare costs by activity.
4. Identify cost drivers.
5. Identify linkages.
6. Identify opportunities for reducing costs.
Strategy and Differentiation Advantage
Differentiation- capturing a
price premium in the
market that exceeds the
cost of providing the
differentiation.
Stages of Value Chain Analysis for
Differentiation Advantage
1. Construct a value chain for the firm and the
customer
2. Identify the drivers of uniqueness in each
activity
a.
b.
Examine each activity in the firms value chain
Identify variables that contribute to uniqueness
Stages of Value Chain Analysis...
3. Selecting the most promising differentiation
variables for the firm
a. Greatest potential for differentiation
b. Identify linkages between activities
c. Sustainability
Stages of Value Chain Analysis...
4. Locate linkages between the value chain of
the firm and that of the buyer
a. Create value for the consumer
b. Reorganize product distribution
i. Proctor and Gamble
Singapore Airlines’ Value Chain Analysis
Porter’s Generic Category
Example
Differentiation Initiatives
Operations
Ticketing, Flight Scheduling
Employs more cabin crew than
other airlines = more personal
attention
Outbound Logistics
Flight connections, partnerships
Introduced non-stop business
class only service between
Singapore and NY
Service
Pre and post flight service
Loyalty marketing
Summary
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Making money in business requires establishing and sustaining
competitive advantage
Recognise how resource conditions create imperfection in the competitive
process
Distinguish two types of competitive advantage: cost advantage &
differentiation
Use value chain framework to analyse potential sources of cost and
differentiation advantage