STRATEGIES FOR COMPETITIVE
ADVANTAGE
Chapter 6
The Nature of Competitive Advantage
 What is competitive advantage?
 Competitive advantage is the reason a purchase is
actually made at a profitable price and that one
supplier is chosen over the other various alternatives.
 Competitive advantage occurs at the intersection of
two distinct sets of forces:
 External: customers, industry environment, macro, etc.
 Internal: firm capabilities and resources
Focusing on Transactions
 “Transactions represent key linking pins between goals
and objectives, the competitive environment, a firm’s
resources and capabilities, and a firm’s performance.”
 Customer decisions reflect their own individual values
and judgments, influenced by the variety of options
available.
 As a result, what appears to be an advantage on paper
can often fail to translate into an advantage in the
marketplace.
Focusing on Transactions
 Determined by the Customer
 A Reflection of Context
 Episodic
Determined by the Customer
 Customers determine value based on:
 Attributes that are valuable, rare, inimitable, and difficult
to substitute.
 The challenge is that customer tastes vary and
change; so creating value for them is like hitting a
moving target.
 Competitive advantage then is an ongoing pursuit of
trial and error, learning, and adaptation, where
customers are ultimately the arbiters of success.
A Reflection of Context
 Customers reveal their judgments about value and
competitive advantage through their purchasing
decisions.
 These purchasing decisions reflect the conditions
in which they take place.
 Changes exogenous to buyers/sellers—conditions
changed outside of the buyer-seller relationship
 Technological change
Episodic
 Competitive advantage occurs in particular instances,
when particular products and services are valued and
scarce, with no immediate or acceptable substitutes, in
the eyes of customers.
 Changes in any of the conditions have the potential to
change the nature of the competitive advantage.
 So, no competitive advantage is completely safe or
completely insurmountable.
Focusing on Transactions
 Demand Curves
 Mathematical functions used to illustrate the
relationship between consumption and price
 Shift periodically based on:
 Changes in disposable income
 Changes in expectation
 Changes in tastes and preferences
 Changes in the prices of related goods (complementary
and substitute goods)
 Changes in demographics (e.g. population size,
composition, etc.)
Types of Competitive Advantage
In his 1980 work, Porter argued for three types of
competitive advantage.
Focus
Differentiation
Low Cost
Types of Competitive Advantage
Better represented as…
Competitive Advantage
Porter’s Generic Strategies
Cost
Uniqueness
Broad Target
Low Cost
Differentiation
Narrow
Target
Focused Low Cost
Focused
Differentiation
Scope of
Operations
Types of Competitive Advantage
 More commonly known as “Porter’s generic strategies”
 Customers, acting rationally and to the best of their
ability, seek the best value in relation to their own
interests (BIG ASSUMPTION)
 The best value offers the greatest level of consumer
surplus.
 Consumer surplus reflects:
 Use value
 Transaction cost / price
Differentiation
 Focuses on high use value.
 High use value increases the desirability of the
product or service, even when the price is high.
 Differentiation leverages inelastic demand.
 Consider, for example, Nordstroms or Market
Street.
Low Cost
 Focuses on lowering the costs to the buyer.
 Lower costs increase the desirability of the product
or service, even when use value is identical to or
lower than other products of services.
 Low cost then leverages elastic demand.
 Consider, for example, Wal-Mart or Chevrolet.
Focused Differentiation
 Requires offering unique features that fulfill the
demand requirements of a narrow market
 Some focused differentiators focus on a particular sales
channel (e.g. internet only)
 Others target a limited demographic group (e.g.
Sandals resorts—couples only, no kids)
 Consider, for example, Natural Grocer or Land Rover
Focused Low Cost
 Requires competing based on price to a narrow
target market
 Charges lower prices relative to other firms in that
target market
 Consider, for example, RedBox or Papa Murphy’s
Pizza
Differentiation, Low Cost, and Performance
 Generic strategies are equifinal
 Each of the generic strategies can lead to
competitive advantage and financial success.
 Because of various operational differences in these
two strategies, each will produce different patterns
of financial success.
Differentiation, Low Cost, and Performance
 Consider the following:
Nordstrom
Target
(sales) 551,339 / 7,722,860
(profit) = .071 (profit margin)
Store profit per square foot =
$369
SGA % of sales = 27.2%
Inventory turnaround = 4.84
(sq. ft) 132,039 x 187 (stores)
= 2,4691,293
(sales) 2,408 / 51,271 (profit)
= .047 (profit margin)
Store profit per square foot =
$307
SGA % of sales = 21.8%
Inventory turnaround = 5.98
(sq. ft.) 127,000 x 1300
(stores) = 65,100,000
Final Thoughts & Caveats
 Monopoly, Limits to Competition, and
Competitive Advantage
 Strategic management can be seen as a process of
cultivating small, pseudo-monopolies.
 Even monopoly profits are limited by the resource
constraints of the buyers but profits are certainly easier to
achieve and sustain.
 Strategic management can be viewed as a process where
firms seek to attract customers and to limit competition, in
effect creating for themselves monopoly-like conditions.
Final Thoughts & Caveats
 Monopoly, Limits to Competition, and
Competitive Advantage
 Gain a measure of power over elastic consumers by limiting
the range of options that consumers can consider. That
power then yields above market prices and margins.
 Gain a measure of power by making consumers less elastic,
thereby limiting the options that they will consider. This
monopoly power yields above market prices and margins
because customers see higher use value in the particular
brand of the specific providers.
Final Thoughts & Caveats
 Stuck in the Middle
 Remember that all competition is local.
 Simply because a firm is not the lowest cost provider
anywhere does not mean that it cannot be the lowest
cost provider for some groups of customers.
 Because a firm is not the most differentiated among
all providers does not mean that it is not the most
differentiated for some groups of customers.
Final Thoughts & Caveats
 Stuck in the Middle
 It can be helpful to think of these two strategies as
combinations of two basic types of effort. Such a
combination is best represented by the concept of a
production possibilities frontier.
Final Thoughts & Caveats
 The Dynamic Capabilities Perspective
 Competitive advantage is not static.
 Firms can acquire competitive advantage and then
lose it, even though industry conditions remain
attractive.
 Maintaining competitive advantage requires
managing a dynamic process, where demand is
constantly shifting and adapting, where competitors
are moving into and out of the market, imitating one
another and innovating themselves, and creating and
refining new alternatives from which customers can
choose.
Final Thoughts & Caveats
 The Dynamic Capabilities Perspective
 What can we learn from the example of Home Depot
and Lowe’s?
 What could either firm do differently?