Strategy AND THE SOURCES OF
STRATEGIC ADVANTAGE
Wai Chamornmarn
Thammasat university 2005
Key Theme…
CHANGE HAS REDEFINED STRATEGY AND
THE SOURCES OF STRATEGIC
ADVANTAGE.
Competitive
Outcomes
Firm A’s
Actions
Rivalry
Organizational
Characteristics
Firm B’s
Actions
Industry
Characteristics
Focus
• The best strategy is
always to be very strong,
first generally then at the
decisive point… There is
no more imperative and
no concentrated.
simpler law for strategy than to keep the for
Karl von Clausewitz (1780–1831)
What is strategy?
• Strategy is the creation of a unique and valuable
position involving a different set of activities
• “Tradeoffs are essential to strategy”
• “The essence of strategy is to choose activities
that are different from rivals,” Michael Porter.
• “The essence of strategy is to convince your
competitors not to invest in ‘your business’ area,”
Bruce Henderson (BCG founder)
Breaking the Rules...
SOUTHWEST
Strategic Capability
Product Concept (Product Development, Sales/Service)
• User / Market Class (Marker/User Research, Consumer Loyalty)
• Technology (Technology Research, Application Marketing)
• Production (Manufacturing Efficiency, Substitute Marketing)
• Sales / Marketing (Sales Recruitment, Selling Effectiveness)
• Distribution Method (System Effectiveness, System Organization)
• Natural Resources (Exploration, Conversion)
• Size / Growth (Volume Maximization, Asset Management)
• Return / Profit (Portfolio Management, Information Systems)
.
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Overview of the different strategic possibilities
•Focus
• Product focus
• Segment focus
• Geographic focus
•Differentiation
• Ingredient or component
• Superior product offering
• Added service
• Broad product line
• Quality
• Brand name
Strategic
Thrust
•Synergy
• Enhance customer value
• Reduce operation cost
• Reduce required investment
•Low Cost
• No-frills product
• Product design
• Production/Operations
• Scale economies
• Experience curve
•The Preemptive Move
• Product
• Production system
• Gain customer
loyalty/commitment
• Distribution/service
Attacking a Competitor’s Strengths
• Offer equally good product at a lower price
• Develop low-cost edge, then use it to under-price
rivals
• Leapfrog into next-generation technologies
• Add appealing new features
• Run comparison ads
• Construct new plant capacity ahead of the rival or
in the rival’s market strongholds
• Offer a wider product line
• Develop better customer service capabilities
Generic Business Strategies
High
Low Cost
Producer
“stuck in the
middle”
Low Cost
efficiencies
No
Advantage
Competitive
Advantage
Differentiated
Provider
Low
Low
Differentiation
High
customer value (pricing)
Adapted from M. Porter: Competitive Strategy, 1980.
Choices That Drive Costs
Economies of scale
Product features
Asset utilization
Performance
Capacity utilization pattern
- Seasonal, cyclical
Mix & variety of products
Interrelationships
- Order processing
and distribution
Small vs. large buyers
Value chain linkages
- Advertising & Sales
- Logistics & Operations
Wage levels
Service levels
Process technology
Hiring, training, motivation
Drivers of Differentiation
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information
Continuous Improvement
Organizational Learning
High
Low Cost
Producer
?
Low Cost
Differentiated
Provider
Low
Low
Differentiation
High
Continuous Improvement
High
Hyundai
Toyota
(-)
Low Cost
Jaguar
Low
Low
Differentiation
High
Strategies for Competing on Value
• Time-based competition
– Quick Response, Rapid Deployment, Wal-Mart
• Mass Customization
– Building unique products at mass production speed and
prices
• Total Quality Management
– Corporate strategy for generating value through quality
Mass Customization
High
Low Cost
Producer
Mass
Customization
?
Low Cost
Differentiated
Provider
Low
Low
Differentiation
High
How Do We Compete?
• What do we sell to our customer?
–
–
–
–
Product
Capacity
Capability
Process
• Shift from product to process
• Increasing awareness of the importance of process
– general
– customer
New Strategy
• value migration: movement of growth and profit
opportunities from one industry player to another
• co-evolution: by working with direct competitors,
customers, and suppliers, a company can create new
businesses, markets, and industries
• white-space opportunity: overlooked areas of growth
possibilities that don't exactly match existing skills
• strategic intent: corporate goal or destiny that represents a
stretch for the organization, a point of view about the
competitive position a company hopes to build over the
coming decade
Twenty-Two Profit Models
Customer Solutions
Profit
Product Pyramid Profit
Multicomponent Profit
Switchboard Profit
Price
Profit
Buyers
0
Base
Business
Volume
Time
Time Profit
Sellers
Blockbuster Profit
Other
Components
Profit Multiplier Model
Entrepreneurial Profit
Other Forms
$/Unit
$/Project
Price
Cost
Revenue
Base
Business
Cost
Q2
Q4
Q6
Q8
Post-Launch
Q10
Project Type
Key Asset
Spin-Outs
Implications for the Value Chain
Support
Activities
Firm
Infrastructure
Web-based, distributed, ERP
Human
Resource
Management
Self-service benefits admin
Web-based training
Technology
Development
Collaborative product design in multiple locations; knowledge directory
Procurement
Direct procurement in “marketplaces”
Automated
customer
agreements
Customer access
to development
and delivery
status
Integrated
Channel
Management
Real time
integrated
scheduling,
demand
mgmt.
In-process
and
inventory
data
Inbound
Logistics
Integrated
information
exchange
a
On-line
channels
Real-time
access to
customer
data
Real time
information to
back up sales
promises
Dynamic
pricing
Operations
Outbound
Logistics
M
Marketing
& Sales
On-line
customer
support
r
g
i
n
Customer
self-service
Improved
field access
to data
After-Sales
Service
Primary Activities
Source: Michael Porter, Competitive Advantage, 19
Systems and Relationships
Beyond Continuous Improvement
Radical
Incremental
Nonlinear
Innovation
Business
Concept
Innovation
Continuous
Improvement
Business
Process
Improvement
Component
System
Adapted from G. Hamel: Leading the Revolution, HBSP, 2000.
Business
Models
GE
GE’s Business Design Focus
?
Services and
Solutions For
Profit Growth
Work-Out
#1 or
#2
Systems Economics
“Big Box”
The Customers’
Total Economic
Equation
Product
“Little Box”
Big box: The Customers’ Total
Economic Equation
• Evaluation
• Assembly/labor cost
• Procurement
• Energy cost
• Storage
• Yield loss
• Testing/Monitoring
• Production cycle
• Installation
• Services
• Financing
• Repair
• Training
• Maintenance
• Disposal
• Other
GE’s Business Design
Reinvention
1997
4.0
3.2
Market
Value
1.5
1987
1.0
Sales
1.0
1980
0.6
0
Value Inflow
Source: Mercer Value Growth Database.
Stability
Value Outflow
Sources of Competitive Advantage
Sources of Sustainable Competitive
Advantage
Patents
Copyrights
Locations
Equipment
Technology
Organization’s
Skills and Assets
Customer Service
Promotion
Competitive Advantage
•
•
•
•
•
Can be achieved in different ways
Concentration on particular market segment
Products that are different than competitors’
Alternative distribution channels
Selective pricing and different cost structures
Paradigm Shift
• Old Paradigm –
– Large Scale Production
– Cost Reduction
– Adversary Relationships
• New Paradigm–
–
–
–
Continuous Improvement
Total Quality Control
JIT
Cooperative Relationships
Identifying Competitive
Dimensions
• Competitive priorities
Cost
Quality
1.
2.
3.
Time
4.
(or speed) 5.
6.
Flexibility 7.
8.
Low-cost operations
High-performance design
Consistent quality
Fast delivery
On-time delivery
Development speed
Customization
Volume flexibility
Lead Time Strategies
• Engineer to Order
– designed to customer specification
• Make to Order
– standard design, produced only upon order
• Assemble to Order
– subassemblies produced, assembled upon
order
• Make to Stock
– finished product made prior to order
Comparative Lead Times
Engineer to Order
Make to Order
Assemble to Order
Make to Stock
Internal Lead time
Customer Lead time
Flexibility
• Ability of the system to respond quickly in terms of range and
time to changes, either internally or externally generated
• 7 major types
– 1. Mix Flexibility
–
–
–
–
–
–
2. Changeover Flexibility
3. Modification Flexibility
4. Volume Flexibility
5. Rerouting/Program Flexibility
6. Resource Flexibility
7. Flexibility Responsiveness
Basics of Lean Production
•
“Concept Value Stream Map” – Tool of Lean Production:
–
A “Concept Value Stream” maps the flow of materials and information
through an organizations internal processes, creating a clear distinction
between what is Value-Added and what is Waste.
Current State Map:
A
B
C
D
E
D
F
G
F
G
Future State Map:
A
C
VA
Ideal State Map:
A
C
Key:
G
NVAR
NVAW
The dominant firm model
• Network externalities lead to “natural
monopolies”
• Winner takes all
• Winning firm generates lock-in and sets its own
standards
• Other firms become feeders, fortunes rise and
fall with industry leader
The differentiated firms model
• No one firm establishes dominant position
• Open standards and interoperability characterize
this model
• Firms compete on differentiated basis—cost,
features, quality, etc.
Critical functions and resources
• The firm’s knowledge base become significant sources
of value
– Data mining—understanding and selling your information
• Marketing becomes a critical function
– Position, product, price, promotion
• IT becomes a critical function
– Low Cost
– Differentiation
– Focus
Third Generation R&D and innovation: the Partnership Model
First Generation
Second Generation
Third Generation
No long-term strategic
framework
No explicit link with the
value chain
Cost center approach
Partial strategic
framework
Some customer-supplier
relationships
Project-based approach
Holistic strategic
framework
R&D contributes along
the value chain
Value creation approach
Professional control of
resource allocation
Customer/supplier
Partnership approach to
involvement in resource
resource allocation
allocation
No clear performance
Project performance
Regular performance
indicators
indicators
reviews
No targeting of expected
Consistency between
Combining business &
results
business / R&D objectives technological objectives
World Class Companies Have In Common
Quality
Totally deployed company-wide
Simplicity
Linked continuous flow
Flexibility
High variety at any volume
Engagement Focused on today’s problems
Supply Chain Tight responsive networking
Kenichi Ohmae
“In business as on the battlefield…
…the object of strategy is to bring about the conditions most favorable
to one’s own side.
“In strategic thinking, one first seeks a clear understanding of the
particular character of each element of a situation…
…and then makes the fullest possible use of human
brainpower to restructure the elements in the most
advantageous way.
Kenichi Ohmae
“Phenomena and events in the real world do not always fit a
linear model.
“Hence, the most reliable means of dissecting
a situation into
its constituent parts…
…and then reassembling them in the desired pattern is not a
step-by-step methodology such as systems analysis.
“Rather, it is that ultimate non-linear thinking tool,
the human brain.”
Kenichi Ohmae
“No matter how difficult or unprecedented the problem, a
breakthrough
to the best possible solution
can come only from a combination
of rational analysis based on
the real nature of things,
and imaginative reintegration of all the different items into a
new pattern…
…using non-linear brainpower.”
The Competitive Advantage
“
An organization’s ability to learn, and
translate that learning into action, is
the ultimate competitive advantage.
Jack Welch
GE
”
Questions and Answers