Students
Chapter 6
Chapter Outlines
Strategies for Competitive Advantage
The goal of any strategic manager is to gain competitive advantage. However, no two competitive advantages are alike, and each is achieved through different unique strategies. This chapter explores some of the different strategies utilized by managers to bring competitive advantage to their firms.
Home Depot and Lowe's
Home
Depot Homepage
Lowe's Homepage
Lowe's
Challenging Home Depot for Improvement Sector Preference
Mike Duff's Business Net article chronicles Lowe's recent competitive
offensive against Home Depot
Home Depot's entry into the home improvement market proved to be far too much competition for smaller stores like Ace Hardware or other locally owned building supply firms. Home Depot's model of large warehouse stores, with a large selection and low costs dominated the competitive environment. In response to this, Lowe's adapted by launching its own warehouse stores. However, Lowe's also refined the model, making slight changes to appeal to a wider demographic. In so doing, Lowe's offered a real competition challenge to Home Depot. To date these stores remain the other's largest competition, while both do very well financially.
The Nature of Competitive Advantage
Using
Customer Insight to Build Competitive Advantage
Lane Michel's article
stresses the importance of customers in the process of building competitive
advantage
Your Competitive Advantage
Tony Alessandra explains that winning over
customers creates competitive advantage
Competitive advantage occurs when a firm has a product or service with value generating capability that its competition does not have. Thus, competitive advantage then yields profitable transactions. These transactions reveal the customer's perception of the products and services a firm provides in relation to its competition. Affecting these transactions are the forces discussed in chapters 4 and 5: the competitive environment in which the customer's choices take place, and the resources and capabilities of the firm, which enable the characteristics of the products and services. Amidst these interacting forces, customers select and purchase the products and services which provide them with the most value. Individual transactions then are the building blocks of competitive advantage and organizational performance. Indeed, viewing competitive advantage at the transactional level should serve to keep management hungry and motivated.
In and of themselves, resources are not intrinsically valuable. Rather, they become valuable when used for some purpose. Customers ultimately decide a resource's value by choosing whether or not to use it or to use the products and services it enables. The pursuit of competitive advantage then should focus first on customers and on resources as a reflection of those customer's choices. The pursuit of customers is never ending, as taste and trends are often changing, and many times not as a result of the customer demands. Something like a technological advancement can change the flow of supply and demand without warning. The nature of change must always be considered in competitive advantage. No competitive advantage is safe, and the struggle for it must be constantly renewed.
Types of Competitive Advantage
Porter's Generic
Strategies
Quick MBA's detailed explanation of Porter's
three generic strategies
Porter identifies three generic strategies that can lead to competitive advantage: focus, low cost, and differentiation. Some firms achieve competitive advantage by focusing on a specific customer group or a specific set of products and services. Some firms have a product or service which appeals to the specific tastes and preferences of particular customers. Those customers are said to be inelastic. Inelastic customers only want one specific product, and the firm with that product has monopoly power as a result. This is the idea behind differentiation. The flip side of this is low cost, which is a strategy used to appeal to elastic customers. These customers have little preference for any particular product; they simply want the lowest overall transaction cost. The time and energy required to purchase a product are just as important to the customer as the actual price, and all these things together make the total cost of ownership. Creating a low total cost of ownership, as necessary to appeal to elastic customers, is the real heart of a low cost strategy.
Differentiation, Low Cost, and Performance
Target Homepage
Nordstrom Homepage
A
Critique of Porter's Cost Leadership and Differentiation Strategies
Y.
Datta of Northern Kentucky's College of Business examines the nuances of these
two strategies
Differentiation and low cost are both effective strategies for gaining competitive advantage, but they each operate very differently. Target is a firm that has succeeded using the low cost strategy, while Nordstrom is a firm that has succeeded using the differentiation strategy. Both have achieved great performance, but for different reasons. Target supplies a large, elastic customer base with a large range of products in a low overhead environment at the expense of high profit margins. Nordstrom achieves a high profit margin in their sales by having high quality products sought after by an inelastic customer base, but this requires a more intensive effort, with more resources devoted to each sale, than that of Target.
Concluding Thoughts and Caveats
- The process of strategic management is more than just a formula. Success in a competitive environment requires creativity and innovation based on the uniqueness of the environment.
- A monopoly is the absence of competition. One objective of every competitive strategy is the elimination of competition, to create a monopoly-like environment. This can be achieved through either a low cost or a differentiation strategy.
- It is important for firms not to be “stuck in the middle” of more highly differentiated and lower cost competitors. However, all strategies involve some combination of both elements. Remember, each strategy is unique to its environment. So being stuck in the middle is a relative condition.
- The pursuit of sustained competitive advantage is ongoing. The most valuable assets to a firm are those that are flexible and able to change.
Summary
Competitive advantage is best understood at the level of the individual transaction. Each individual transaction demonstrates both the customer's desire for a given product, relative to the alternatives, and the firm's ability to provide it at a cost that renders profit. It is the strategies that focus on improving these individual transactions that ultimately lead to the greatest success.
Key Terms
Commodities
Goods of value and uniform quality that are produced by multiple suppliers, such that buyers see them as being interchangeable.
Demand curve
A graphical representation of a mathematical function, describing the relationship between the price of commodity and the quantity demanded at that price.
Dynamic capabilities
This perspective, as articulated by Teece, Pisano, & Shuen (1997), is the ability to develop and sustain competitive advantage through renewing competences so as to achieve congruence with a rapidly changing environment.
Elasticity
A condition whereby a certain percentage change in the cost of a good results in a more than equal percentage change in the demand for that same good.
Exogenous
From the Greek exo, meaning “outside,” and genes, meaning “production”, The exogenous change is a change in the state of system from factors external to the model and not explained by the model.
Generic strategies
A term coined by Michael Porter (1980) to describe three basic approaches to achieving competitive advantage: “Cost leadership,” “Differentiation,” and “Focus.”
Inelasticity
A condition whereby a certain percentage change in the cost of a good results in a less than equal percentage change in the demand for that same good.
Industrial economic view
The explanation of competitive advantage provided by the field of industrial organization economics. I.O. economics, often referred to as the economics of imperfect competition, studies the strategic behavior of firms and the structure of competitive markets.
Monopoly power
The ability to charge above marginal costs, even in the presence of competition. Suppliers with monopoly power can behave as if they were monopolies because of the inelasticity of the demand for their products and services.
Production possibilities frontier
The term used to describe a graphical depiction of the different combinations of goods that a rational producer can make with certain fixed amounts of resources.
Scarcity
In economic terms scarcity is defined as not having sufficient resources, goods, or services to fulfill the extant demand. By implication, then, scarcity implies that wants and needs cannot be satisfied simultaneously, which means that trade-offs must be made.
Tautology
A self-evident true statement with multiple parts that is true regardless of the truth of the parts. For example, the statement “either all sheep are white or not all of them are” is a self-evident truth.
Total cost of ownership
A term originally developed by the Gartner group and reflects all the various direct and indirect costs related to purchasing an asset. TCOO includes not only its purchase price but all other aspects of its further use, such as installation, training, and maintenance.