Business 42001- Knez

Business 42001- Knez

Competitive Strategy

Lecture 3: - Sustainable Competitive Advantage

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Core Competitive Strategy Analysis Business Strategy Core Elements Target Markets

Strategic Position Value created relative to competition Benefit Position

Value Proposition

Cost Position

Resource/Activity Analysis  Benefit Drivers  Cost Drivers What are the specific resourses/ activities that enable the firm to generate higher benefits and/or lower costs?

Critical Capabilities

+ Market/Industry Environment Industry 5-Forces Industry Factors

Economic Profitability

Competitive Advantage In what ways does the firm create higher benefits and, or lower costs? That is, what are the specific forms of the higher benefits or lower costs?

Sustainable Competitive Advantage What factors prevent the competition from duplicating or neutralizing the firm’s competitive advantage? 2

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The Structure of Sustainable Competitive Advantage

 Sustainable Competitive Advantage: a competitive advantage that persists despite efforts by competitors or potential entrants to duplicate or neutralize it.  Competitive Advantage
firm possesses core resources and/or capabilities (mix of resources deployed to activities).  Sustainability requires that core resources and/or capabilities are both scarce and imperfectly mobile: Scarce core resources and capabilities  Economics rents go to the owner of the core resources and capabilities

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Isolating Mechanisms  Isolating Mechanisms: Forces which limit the extent to which a competitive advantage can be duplicated or neutralized through the resource creation activities of other firms.  Isolating mechanisms keep competitors or new entrants from imitating the superior firm’s efficient production (C) or the attributes of its product (B).  Analogous to barriers to entry except: – Entry barriers protect profitability of an entire industry – Isolating mechanisms sustain the competitive advantage of a single firm.

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Taxonomy of Isolating Mechanisms

“They can’t get the resources they need to imitate my competitive position”

Barriers to imitation

“They can’t figure out my formula for success or re-create the process by which I became successful” “They know how to imitate my competitive position, but they wouldn’t want to since it would be unprofitable for them to do so.”

Early mover advantages

“By the time they imitate my current position, I’ll be in a superior position.”

feedback effects

*Generated by David Besanko (NW), used with his permission. University of Chicago/Knez

• Legal barriers (patents, trademarks, licenses) • Privileged access to inputs, channels, or customers • Causal ambiguity • Path dependence • Social complexity • Positional barrier to imitation based on economies of scale and sunk costs • Experience advantages in markets with learning curves • Product “track records” in markets for experience goods • Consumer switching costs • Installed base advantage in markets with network externalities

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Positional Barriers to Imitation: Economies of Scale and Sunk Costs  Suppose a prospective imitator tries to compete on your terms (low unit costs via large sales volumes).  They must achieve rates of sales that exceed the minimum efficient scale. But how? – They can’t drive you out of business. You will stay in as long as you can cover your variable costs! – Because MES is large relative to market demand, prices must fall significantly in order to absorb both your volume and that of the prospective imitator. – The NPV on the investments they need to make to copy the basis of your cost advantage are likely to be negative. If they are smart, they will stay out!

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Isolating Mechanisms: Early-Mover Advantages

 This category refers to a cluster of advantages revolving around the idea that "the rich get richer"  Because your business unit has entered a market early (either by happenstance or superior foresight), your past success in the market sustains a dynamic whereby your cost or benefit advantage becomes more pronounced over time.

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Taxonomy of Early-Mover Advantages:

 Experience advantages in markets with learning curves  Product “track records” in markets for experience goods  Consumer switching costs  Installed base advantage in markets with network externalities

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Experience Advantages in Markets with Experience Curves

 Because you got into the market early, your business unit has an edge over existing competitors in cumulative production experience.  You have lower unit costs than your rivals and thus can underprice them in bidding for new business. This increases your volume even more, moves you even further down the experience curve, increasing your cost advantage in the future.

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Product “Track Records” in Markets for Experience Goods  Applies to markets where … – high costs to consumer of poor product quality – product quality cannot be inferred “by inspection”  Because you got into the market early, your business unit has developed a track record for acceptable performance. – Buyers know your product "works". They can't be so sure about a potential entrants'. – Risk-averse buyers are reluctant to switch to newcomers offering same price. Newcomers must offer price concessions to induce consumer trials.

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Consumer Switching Costs  The consumers of your product have accumulated stocks of "capital." This capital enhances the "B" of your product, but it does not carry over to the products of rivals.  Examples of "capital" – accumulated know-how about using your product – “credits" toward rebates or free goods.  Why "switching cost"? By switching some or all of its purchases from your unit to another firm, a consumer would sacrifice some "B" and thus sacrifice some consumer surplus.

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Installed Base Advantage in Markets with Network Externalities  Network externalities exist when a product's "B" to a given consumer increases when more consumers use the product or are expected to adopt it in the future.  Because you got into the market early, your business unit has a larger installed base than other competitors. The smaller installed bases of latecomers makes their products less attractive than your at similar prices.  Your large installed base makes it more attractive for suppliers of complementary products to design products that are tailored to your standard, which gives you an edge in persuading consumers to buy your product, which adds to the installed base, making the product even more attractive to consumers in the future.

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Sustainability - Summary 

Business strategy is about formulating and executing a strategy that both creates a competitive advantage, and is sustainable over time.



Sustaining a competitive advantage requires: – A clear understanding of the isolating mechanisms that support sustainability – Investments and adjustments that either strengthen existing isolating mechanisms, or create new ones.



Beyond innovative strategies from competitors that threaten sustainability, sustainability is always eventually threatened by changes at the industry level: –

Technology: Exogenous technological change that impacts an industry or endogenous investments in R&D by firms in industry

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Consumer taste and demographics • Exogenous change from demographic shifts or industry life cycle (market saturation) • Endogenous change from innovative marketing or product design

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Regulatory Changes

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Week 4 Write-Up Questions Case 4: Power Play (A) and (B) Power Play (A) Write-Up Question 1. Identify what you believe to be the three most important features of Nintendo’s strategy that allow them to capture and sustain such a big slice of industry profits in the 8-Bit video game industry, and briefly explain why? (65%) Power Play (B) Write-UP Question: 2. Why did Nintendo delay introducing a 16-bit video system? What tradeoffs did it face? (35%) Note that you have to answer both write-up questions for the case write-up.

Case Discussion Preparation Questions: Power Play (A): • How did Nintendo's strategy expand the size of video game industry? Power Play (B): • Evaluate NEC's and Sega's strategies for challenging Nintendo in video games. • Standards in the video game industry are closed, Why? What’s different about this industry versus the PC industry? 14 University of Chicago/Knez