Opportunities for Distinction: Building Competitive Advantage pps

91 CHAPTER OUTLINE CASE 7-Eleven Introduction Routes to Building Competitive Advantage Low-Cost Leadership Strategies Building a Low-Cost Advantage Benefits and Costs of Low-Cost Leadership Strategies Differentiation Strategies Building Differentiation-Based Advantage Benefits and Costs of Differentiation Strategies Focus Strategies Focus-Based Advantages Benefits and Costs of Focus Strategies An Emerging View of Strategy: Mass Customization for Best Value Advanced Manufacturing Technology Modular Product Designs Internet-Driven Distribution Systems New Market Segmentation Techniques Distinctive Competence Revisited and Why Quality Dominates The Role of Distinctive Competence The Importance of Quality Strategy and Competitive Advantage over the Life Cycle Introductory Stage Growth Stage Mature Stage Decline Stage Life Cycle Dynamics and Competitive Advantage Ethical Dimension Worthy Need Safe Product Ample Information Summary Exercises and Discussion Questions Opportunities for Distinction: Building Competitive Advantage WHAT YOU WILL LEARN • The three types of “generic” competitive strategies that can be used to build competitive advantage, including low-cost leadership, differentiation, and focus • The benefits and costs of pursuing each type of generic strategy • The rise of mass customization as a new strategy • The value of quality as a key pillar of any competitive strategy • The evolution of strategic considerations over a product’s life cycle 92 PART 1 Building Competitive Advantage The food retailing industry has long been dominated by large chains such as Safeway, Albertson’s, and Kroger, and regional chains such as Tom Thumb, Fred Meyer, Randall’s, H.E.B., Giant Food, and Piggly Wiggly. All these large chains tend to follow a similar approach. The established firms operate large stores, each designed to serve a given geographical market. By operating large stores they can provide wide merchandise selection and achieve economies of scale and experience curve effects in managing distribution systems and inventory practices. In many cases, these firms can garner considerable cost savings that they sometimes pass on to customers in the form of low prices. This competitive arrangement appears quite formidable. Nevertheless, until recently, Southland Corporation’s 7-Eleven retailing chain has achieved considerable success over a long period from the 1970s to the early 1990s by using a different approach. Instead of establishing large stores, 7-Eleven built a number of small stores in each geographical region. It also lengthened the service time during which stores remained open. These two innovations enabled it to enhance customer convenience in several ways. First, because its stores are much smaller than the typical supermarket, shoppers have less difficulty locating merchandise. Second, checkout lines are shorter, since patrons typically buy only a few items at a time. Third, because 7-Eleven operates more units within each geographical area, its stores tend to be somewhat closer to customers than the huge units of industry leaders. Finally, by operating longer hours, it is accessible to shoppers for more hours of the day. Although most supermarket chains have since matched many of 7-Eleven’s innovations (and in some cases, exceeded them), 7-Eleven is still considered an important player in the food retailing industry. Nevertheless, its approach has left it vulnerable in several important ways. Offsetting 7-Eleven’s initial advantages are reduced consumer benefits in two key areas: selection and price. Its small stores carry fewer products and brands than the typical supermarket, so shoppers have less choice when selecting merchandise. 7-Eleven’s approach is also less efficient than the large-store configuration of supermarkets. To earn a profit in the face of its higher costs, it must charge higher prices (10 percent to 15 percent on average). These dif- ferences are summarized in Exhibit 4-1. Following this distinctive approach, 7-Eleven expanded rapidly, quickly achieving a leadership position in the convenience store segment of the industry. It ran into trouble in the late 1980s, however. By then, a number of competitors had entered its niche—Stop and Go, Circle K, Handimart—and many gas stations had also begun retailing food. By the early 1990s, the larger grocery chains (Albertson’s, Safeway, Kroger) began offering 24-hour service in some key metropolitan areas, while aggressively promoting different products each week with significant discounts. Moreover, new competitors were entering the food retailing business, such as the Wal-Mart and K-Mart, who began to offer a broad range of grocery offerings at enormous discounts. Thus, 7-Eleven faced increasing competition in its niche. Even more damaging to the company was the growing belief among consumers that 7-Eleven’s prices were too high and that its food products were perceived as stale. Although many 7-Eleven stores attempted to offer ready-to- serve convenience foods, such as hot dogs, sandwiches, and sal- ads, the quality of these offerings varied significantly from store to store. Inventory management and control also varied sharply from store to store, with some products and food staples lan- guishing on the shelves for sometimes weeks at a time. The combination of these factors, plus the growing capabilities of large grocery store chains to match 7-Eleven’s initial strengths, resulted in stagnant growth and gradual eroding of market share in some regions during the early 1990s. Now, 7-Eleven is in the midst of an aggressive marketing and advertising promotion to retake market share that was lost to gas stations, other convenience stores, and grocery store chains. 7-Eleven is still the top name in convenience stores, and it possesses strong location advantages in major cities and sub- urban areas that attract considerable traffic. Its most recent advertising blitz stresses 7-Eleven’s new approach to value pricing and convenience, with low prices, fast replenishment of food to promote freshness, and quality name brands. Some of its television advertisements even use well-known comedians to poke fun at itself and to show how previous weaknesses have been fixed. Since the time 7-Eleven was purchased by the large Japanese firm Ito-Yokado in 1990, the company has sought to redefine the way it manages its inventories and pricing sched- ules. (Ito-Yokado, 7-Eleven’s joint venture partner in Japan, purchased a majority 65 percent interest of 7-Eleven’s U.S. operations because 7-Eleven’s parent company, Southland Cor- poration, experienced financial difficulties in the late 1980s for other reasons stemming from bad real estate deals and declining land values.) 7-Eleven is now making great strides to improve its inventory activity turnaround. Ito-Yokado is currently helping improve 7-Eleven’s U.S. operations by transferring to U.S. stores the sophisticated computer expertise it has developed in Japan. There, each 7-Eleven store is equipped with a personal (Case) 7-Eleven 1 CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage 93 computer network custom-made for 7-Eleven. Every time a purchase is made, data are fed directly from the cash register into the store’s computer. This sophisticated electronic tracking system enables fast reordering of products directly from the manufacturer. This investment in a similar information technology system made by Wal-Mart during the 1980s was a key factor in propelling this once-small discount chain into the largest retailer in the United States. Although many grocery chains have since installed similar types of computer-intensive tracking and ordering systems, its implementation at 7-Eleven’s U.S. operations has proved somewhat more uneven. To a large extent, the computerized ordering system’s implementation was complicated by the fact that 7-Eleven often sells widely different products in different stores, depending on regional prefer- ences. While this originally helped 7-Eleven provide those items that local neighborhood customers wanted, it also saddled the company with a massively complex ordering and inventory control system that defied easy product classification across numerous geographical sales regions. Now, managers and employees at many 7-Eleven stores around the nation are receiving training in how to use the system to manage in-store operations. When fully implemented nationwide, the information generated by each 7-Eleven will enable store managers to make such decisions as what items to drop, which ones to add, when to reorder, and what the proper inventory level for different items should be. It also helps relationships with suppliers (e.g., Coke, Pepsi, Frito-Lay, Interstate Bakeries). The information downloaded from 7-Eleven’s computers will enable both the company and its suppliers to better forecast demand for their own products. Customers in Japan have long been big fans of 7-Eleven, and their faith in 7-Eleven’s rapid-response inventory control system is shown by their frequent purchases of sushi in 7-Eleven’s Japanese stores. The fact that customers are ready and willing to purchase sushi (a fish product that spoils quickly) in 7-Eleven stores throughout Japan indicates the degree to which the company has transformed its food-stocking and inventory management practices into a much leaner, more efficient delivery system. This 7-Eleven’s Differentiation from Supermarkets Inbound Logistics Operations Outbound Logistics Marketing/ Sales Service S U P P O R T A C T I V I T I E S Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Faster inventory turnaround Purchasing in bulk Franchising Smaller stores; higher store density; narrower product line Higher prices; new ad compaign Franchising Open longer hours exhibit(4-1) Reprinted/Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright © 1985 by Michael E. Porter. 94 PART 1 Building Competitive Advantage INTRODUCTION In Chapter 3, we presented an overview of some of the generalized sources of competitive advantage that established firms within an industry are likely to possess. Although first- mover, scale, experience, and interrelationship advantages are important, especially for large firms, in practice companies of all sizes need to build their own specific sources of competitive advantage based on their distinctive competences. Each firm is likely to possess its own set of distinct strengths and weaknesses among its set of value-adding activities. Developing a distinctive competence that builds on a firm’s strengths while minimiz- ing its weaknesses enables a firm to lay the foundation for a sustainable competitive advantage. In this chapter, we explore the opportunities and routes available for firms to build competitive advantage over their rivals. We begin by examining the concept of competitive advantage as it applies to specific value- adding activities performed by the firm. Competitive advantage arises when a firm can perform an activity that is distinct or different from that of its rivals. Generally speaking, there are three sources of competitive advantage: low-cost, differentiation, and focus. However, other emerging sources of competitive advantage have also surfaced for firms that seek to provide improved customer value through customization of product and service offerings. We also analyze the advantages and disadvantages that accompany each approach to building competitive advantage. We explore each of these “generic” strategies in separate sections and point out the benefits and costs associated with each one. In the last section, we investigate how competitive strategy depends significantly on the product life cycle. We consider how sources of competitive advantage may shift over the span of the product life cycle as well. ROUTES TO BUILDING COMPETITIVE ADVANTAGE Competitive strategies must be based on some source of competitive advantage to be successful. Companies build competitive advantage when they take steps that enable them to gain an edge over their rivals in attracting buyers. These steps vary: for example, making the highest quality product, providing the best customer service, producing at the lowest cost, or focusing resources on a specific segment or niche of the industry. Regardless of which avenue to building competitive advantage the firm selects, customers must receive superior value than that offered by its rivals. Providing superior value to customers also translates into superior financial performance for the firm. Numerous studies demonstrate that firms providing superior value in the form of lower-cost products or services or distinctive, high-quality products are able to sustain high profitability and competitive advantage. 2 sophisticated system has helped 7-Eleven’s Japanese stores achieve high profit margins and become a dominant player in the rapidly emerging convenience store category. By 1999, revenues are now climbing at the U.S. operations of 7-Eleven after having plateaued for a few years. Same sales stores are now registering an annual increase of close to 9 percent. Most important, the company is beginning to benefit from the massive computer and inventory-tracking investments made in the early 1990s to improve productivity and product turnaround. By the end of 1998, parent Southland Corporation expects to have these computerized systems in more than half of its 5,500 7-Eleven units. In addition, to secure major cost savings in its supply and distribution systems, 7-Eleven is start- ing to consolidate a number of its delivery operations for regional markets into combined mega-distribution centers, where vendors ship their goods to a centralized site rather than to each store. Southland would then deliver everything a store needs in one shipment each day. This system, somewhat modi- fied from 7-Eleven’s Japanese operations, enables the company to rapidly expand its offerings of fresh foods such as deli-style sandwiches and fresh fruit, two major growth areas in the food retailing convenience segment. The introduction of new products such as Cafe Coolers, Slurpee drinks with iced mocha fla- vors, and other innovations also helped boost revenues. CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage 95 Competitive advantage is developed at the industry or business level of analysis. Recall that business-level strategy focuses on how to compete in a given business or industry with its different types of competitors aiming to sell to the same or similar group of customers. In practice, competitors within an industry may be companies with no other lines of business (single-business firms) or business units belonging to larger, diversified companies that operate across many industries. Analysis at the business or industry level is the basis for building competitive advantage. Firms have long attempted to build competitive advantage through an infinite number of strategies. Competitive strategies are designed to help firms deploy their value chains and other strengths to build competitive advantage. Thus, in practice, each company for- mulates its specific competitive strategy according to its own analysis of internal strengths and weaknesses, the value it can provide, the competitive environment, and the needs of its customers. Although there are as many different competitive strategies as there are firms competing, three underlying approaches to building competitive advantage appear to exist at the broadest level. They are (1) low-cost leadership strategies, (2) differentiation strategies, and (3) focus strategies. These strategies are depicted in Exhibit 4-2. These three broad types of competitive strategies have also been labeled generic strategies. All three generic strategies are designed to achieve distinction relative to a rival. 3 Let us now examine how each generic type of competitive strategy can build competitive advantage. LOW-COST LEADERSHIP STRATEGIES Low-cost leadership strategies are based on a firm’s ability to provide a product or service at a lower cost than its rivals. The basic operating assumption behind a low-cost leadership Generic Strategic Approaches to Build Competitive Advantage Differentiation- based focus Cost-based focus Differentiation Low-cost leadership Industrywide (Broad) Target Market Specific Niche or Segment (Narrow) Competitive Advantage Defined by DistinctivenessDefined by Cost exhibit(4-2) generic strategies: the broad types of competitive strategies—low-cost leadership, differentiation, and focus—that firms use to build competitive advantage (see low-cost leadership, differentiation, focus strategies). low-cost leadership: a competitive strategy based on the firm’s ability to provide products or services at lower cost than its rivals. Reprinted/Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright © 1985 by Michael E. Porter. 96 PART 1 Building Competitive Advantage strategy is to acquire a substantial cost advantage over other competitors that can be passed on to consumers to gain a large market share. A low-cost strategy then produces a competitive advantage when the firm can earn a higher profit margin that results from selling products at current market prices. In many cases, firms attempting to execute low-cost strategies aim to sell a product that appeals to an “average” customer in a broad target market. Often- times, these products or services are highly standardized and not customized to individual customer’s tastes, needs, or desires. A central premise of the low-cost leadership strategy is the following: By making products with as few modifications as possible, the firm can exploit the cost reduction benefits that accrue from economies of scale and experience effects. Examples of firms that have successfully used a low-cost leadership strategy to build competitive advantage include Whirlpool in washers and dryers, Black and Decker in power tools, BIC in ball point pens, Procter-Silex in coffee makers, Gillette in razor blades, Texas Instruments and Intel in semiconductors, Samsung in color television sets, Sharp in flat-panel screens and LCD technology, Citigroup in credit card services, Emerson in color televisions and VCRs, and DuPont in nylon and other synthetic fibers. Building a Low-Cost Advantage The low-cost leadership strategy is based on locating and leveraging every possible source of cost advantage in a firm’s value chain of activities. As Exhibit 4-3 shows, numerous exhibit(4-3) Competitive Advantage Based on Low-Cost Leadership S U P P O R T A C T I V I T I E S Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Inbound Logistics Operations Outbound Logistics Marketing/ Sales Service Intensive training to emphasize cost saving means; encourage employees to look for new ways to improve methods Centralized cost controls Economies of scale of R&D and technology development; learning and experience amortized over large volume Purchasing from numerous sources; strong bargaining power with suppliers Economies of scale in plants; experience effects Mass marketing; mass distribution; national ad campaigns Bulk or large order shipment Large shipments; massive warehouses Centralized service facilities in region Reprinted/Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright © 1985 by Michael E. Porter. CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage 97 opportunities are available for firms seeking to build cost-based advantages among their primary and supporting value-adding activities. Once a firm pursuing a low-cost leadership strategy has discovered an important source of cost improvement and reduction, however, it must then seek new ways to lower its activity costs even further over time. In other words, the sources of low-cost advantage are not enduring or sustainable without continuous improvement and ongoing searches for improved process yields, streamlined product design, or more efficient means of delivering a service. Building a cost-based advantage thus requires the firm to find and exploit all the potential cost drivers that allow for greater efficiency in each value-adding activity. A cost driver is an economic or technological factor that determines the cost of performing some activity. Important cost drivers that shape the low-cost leadership strategy include (1) economies of scale, (2) experience or learning curve effects, (3) degree of vertical integration, and even (4) location of activity performance. Firms can tailor their use of these cost drivers to build low-cost leadership across different value-adding activities. In pursuing a cost-based advantage, no firm can obviously ignore such product attributes as quality, service, and reliability. If it does, its offering may become so unacceptable that consumers will refuse to buy it or will buy it only if the price is reduced to a level below what is needed to sustain profitability. A firm pursuing a cost-based advantage must therefore strive to achieve some degree of quality parity or proximity with other firms that have defined the standards of product quality valued by customers. 4 Economies of Scale and Experience Effects. Economies of scale and experience curve effects (as initially discussed in Chapter 3) enable firms to successively lower their unit costs as both capacity and experience grow. Economies of scale and experience curve effects are particularly significant in the inbound logistics, operations, outbound logistics, procurement, and technology development activities of the value chain. For example, large factories (e.g., steel mills, semiconductor plants) and service delivery centers (e.g., overnight delivery facilities, call centers) often have operating systems characterized by high fixed costs and capital-intensive processes that are sensitive to economies of scale. Experience effects are important in these activities, too, because employees have opportunities to become more proficient in performing their tasks over time. For example, work- ers in a factory or scientists in a laboratory setting often become better accustomed to performing their work over time so that output yield rises with greater familiarity. In another vein, procurement and technology development costs (associated with research and development, or R&D) can also be shared and spread among a variety of different products and activities. All of these activities are based on significant scale or experience drivers that lower unit costs. Firms that are able to build a low-cost strategy on both scale and experience effects can thus reap higher returns for products sold at market prices. Vertical Integration. Vertical integration is an economic concept that refers to the degree of control a firm exerts over the supply of its inputs and the purchase of its outputs. For example, when an automobile manufacturer acquires a steel maker (a key supplier of crucial materials needed to produce cars), it is pursuing one form of vertical integration. Here, the car company is attempting to control a supply source. Similarly, when the automobile manufacturer purchases a car rental firm, it is pursuing another form of vertical integration. In this case, the automobile company is extending its control over an important buyer of its products. Extending control over sources of supply (upstream operations) or buyers (downstream operations) is vertical integration. Firms may find that different approaches to vertical integration enable them to produce at low costs, although the nature of this relationship requires some explanation. Vertical integration can be an important cost driver, depending on the nature of the firm’s cost driver: a technological or economic factor that determines the cost of performing some activity. 98 PART 1 Building Competitive Advantage product, degree of technological change, the relative strength of buyers and suppliers in that industry, and other external factors. How it contributes to building cost-based competitive advantage depends on the specific situations facing the firm. (Although a brief overview of vertical integration is presented here, this topic is covered much more exten- sively in Chapter 6 on corporate strategy.) High levels of vertical integration help firms control all of the inputs, supplies, and equipment needed to convert raw materials into the final end product. In many instances, a high degree of vertical integration allows the firm to leverage scale and experience effects from one activity to another. For example, vertical integration is prominent in the oil refining, paper, and steel industries, where the firm is better able to control costs and potentially reduce total costs for all of the firm’s activities by bringing many production or conversion activities in-house. For oil, paper, and steel companies, the transaction costs of dealing with numerous external suppliers and buyers are removed, which often results in large cost savings, greater predictability of supplies, and greater production efficiency. Transaction costs refer to the costs of finding, negotiating, selling, buying, and resolving disputes with other firms in the open market. Thus, high vertical integration is a significant cost driver when products and technologies tend to remain fairly stable over long periods of time. For example, Matsushita Industrial Electric of Japan is highly vertically integrated in the manufacture of televisions, VCRs, office equipment, and medical equipment. Mat- sushita makes circuit boards, switches, semiconductors, controls, wiring harnesses, plastic casings, and power supplies that become important components for its end products (e.g., consumer electronics products). By performing most of these activities in-house, Mat- sushita can reap substantial cost advantages through numerous value-adding activities of components that directly “feed” into its final products. In other situations, firms can sometimes achieve a strong cost advantage by having very little vertical integration. By deliberating choosing not to perform certain activities in- house, a firm avoids the start-up and fixed costs that often accompany high integration. Firms can thus seek to lower their costs by buying more than they make. By concentrating its effort on lowering the costs of pursuing one or two sets of activities, the firm may avoid high fixed-cost capital investments in other parts of the value chain. This approach to minimal vertical integration is particularly well suited for firms in rapidly evolving industries. Firms do not seek to invest in those technologies or production processes that could become obsolete in a short time. For example, low levels of vertical integration have served fast- growing Dell Computer well in the rapidly evolving personal computer (PC) industry. Mak- ing chips and designing software are expensive activities, so Dell does not invest in these areas. By devoting its effort to assembling and distributing personal computers, Dell avoids many of the fixed costs that come with vertical integration. In fact, Dell benefits significantly from its lack of vertical integration, since it can purchase key components and computer peripherals from a number of different suppliers and thus contain its inventory and production costs. These savings translate directly into enhanced profitability margins. Thus, firms can pursue a low-cost strategy with either high levels or low levels of vertical integration, depending on the nature of the industry and the competitive environment. 5 Location of Activities. The actual location where a value-added activity is performed may be a significant cost driver in determining a firm’s cost advantage. Perhaps one of the best examples of how location can be used to build cost-based competitive advantage is Toyota’s strategy for dealing with its suppliers in the automobile industry. To keep inventory costs minimal and quality of parts high, Toyota works with key suppliers to build their component factories near its own assembly plants. By having suppliers’ factories close to its own assembly plants, Toyota can implement just-in-time (JIT) inventory transaction costs: economic costs of finding, negotiating, selling, buying, and resolving disputes with other firms (e.g., suppliers and customers) in the open market. CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage 99 management. This means that Toyota can receive the parts it needs almost immediately without the costs of holding inventory. This “lean production” strategy enables Toyota to further reduce the costs of building and assembling cars. Moreover, lean production and just-in-time inventory practices enable both Toyota and its key suppliers to continuously improve the quality of their products. In addition, all of the components must be of the highest production quality standard, since neither Toyota nor its suppliers can afford a shutdown because of defects or missing parts. Inbound logistics costs at Toyota are thus reduced substantially, since little inventory sits in the warehouse. In addition, operations run more efficiently and seldom experience a shutdown due to unscheduled deliveries or poor-quality components/parts. In a similar vein, location is a vital strategic cost driver for FedEx. By centralizing all inbound and outbound logistics or distribution activities near its Memphis headquarters, FedEx can achieve tremendous economies of scale and experience in sorting the overnight packages and letters that are key to its business. Because Memphis is centrally located in the United States, Fedex can use its location-based strategy to develop its low-cost, highly efficient air-flying routes across its entire system. Benefits and Costs of Low-Cost Leadership Strategies Low-cost leadership strategies carry their own set of advantages and disadvantages to firms that practice them. Many of the advantages associated with low-cost leadership strategies are based on the relatively large size of the companies pursuing them. However, the disadvantages associated with low-cost strategies may outweigh some of the benefits. Advantages of Low-Cost Strategies. The appeal of the low-cost leadership strategy is based on the strong relationship that appears to exist between high market share and high profitability. Numerous studies have found that firms with high market share, for various reasons, can command above-average industry profitability over extended periods of time. 6 Some of the empirical findings that appear to explain, at least partially, the relationship between high market share and profitability include economies of scale, risk avoidance by customers, strong market presence, and focused management. 7 Risk avoidance by customers means that buyers who are currently familiar with the low-cost leader’s products are unlikely to switch to a competing brand of a similar product, unless that brand has something very different or unique to offer. Thus, low-cost pro- ducers that achieve a dominant market share position may induce risk aversion on the part of the industry’s buyers. Customers often prefer to buy from well-known, dominant-share companies because they feel these firms will be around a long time after their purchase. This reasoning is particularly true for products that are costly or require after-sales service, such as computers. Strong market presence means that low-cost firms are able to “convince” their competitors not to start price wars within the industry. This means that low-cost firms can set the stage for pricing discipline within the industry. In turn, prices are kept stable enough over time to ensure that all firms in the industry maintain some degree of profitability. Attempts to establish pricing discipline were used by leaders in the U.S. steel, aluminum, and heavy machinery industries during the 1960s. The arrival of intense global competition, however, has made this type of discipline difficult to enforce in most manufacturing industries today. Low-cost firms are often able to keep potential competitors out of the industry through their price-cutting power, which can generate substantial obstacles to firms contemplating entry into the industry. In other words, low-cost leadership strategies, when effectively 100 PART 1 Building Competitive Advantage implemented and understood by potential entrants, constitute a very effective barrier to entry that governs industry rivalry. For example, Intel currently dominates the production of microprocessors that serve as the “brains” for personal computers. By investing heavily in the latest generation of new technologies and processes, Intel has become the lowest- cost producer of these microprocessors. Its cutting edge manufacturing skills complement its fast product development cycles. Other competitors such as National Semiconductor’s Cyrix unit, Advanced Micro Devices (AMD), Motorola, and IBM, have begun to enter this industry, but Intel has enormous power to lower the prices of its popular Celeron, Pentium II and Pentium III classes of chips in advance of its rivals’entry. Intel’s price-cutting power manufacturing skill thus reduces the ability of other chipmakers to grab significant market share from Intel. However, even Intel must continually remain vigilant as AMD and National make their presence felt in the sub-$1,000 PC segment. Low-cost firms also have the advantage of being able to sustain price increases passed on by their suppliers. By operating at more cost-efficient levels of production, low-cost firms can more easily absorb increases in the prices of raw materials and components used in their products. For example, Hershey Foods, a low-cost producer of chocolates and can- dies, is probably in a better position to absorb increases in cocoa prices than other smaller chocolate and candy manufacturers. Disadvantages of Low-Cost Strategies. Cost-based strategies are not without their disadvantages, some of them rather extreme. The biggest disadvantage associated with low- cost leadership is the high level of asset commitment and capital-intensive activities that often accompanies this strategy. To produce or deliver services at low cost, firms often invest considerable sums of resources into rigid, inflexible assets and production or distribution technologies that are difficult to switch to other products or uses. Thus, firms can find themselves locked in to a given process or technology that could rapidly become obsolete. Such was the case with Timex during the 1960s and 1970s when the company was the low-cost producer of mechanical watches. When quartz and digital watches became popular during the late 1970s, Timex was so committed to its mechanical watch and process technology that it could not easily adapt to technological change. A huge disadvantage facing low-cost firms is that cost-reduction methods are easily imitated or copied by other firms. Cost advantages, particularly in standardized production or service delivery processes, are often short-lived and fleeting. U.S. steelmakers were caught in this situation during the 1970s when they faced the rising tide of cheaper Japan- ese steel imports. In fact, many Japanese steelmakers were able to leapfrog ahead of U.S. companies by innovating an even more advanced manufacturing process called continuous casting that made U.S. processes using open-hearth furnaces obsolete. Japanese steelmakers were able to forge better quality steel at lower costs than comparable U.S. plants. What made the situation even worse for U.S. companies was their failure to reinvest in new technologies; companies such as U.S. Steel, Bethlehem, and National believed their low-cost production was a long-standing, enduring advantage. Now, Korean steelmakers are doing the same thing to their Japanese competitors. Korean steel companies have found new techniques to lower steel production costs even further, thus making it difficult for Japan- ese firms to respond effectively. More important, companies fixated on cost reduction may blind themselves to other changes evolving in the market, such as growing customer demand for different types of products, better quality, higher levels of service, competitor offerings, and even declining customer sensitivity to low prices. Intel now faces this growing dilemma in the micro- processor business that it still dominates. Although no other firm can match Intel’s enormous manufacturing prowess, massive R&D and capital expenditures, and brand identity [...]... boost Opportunities for Distinction: Building Competitive Advantage CHAPTER 4 e x h i b i t (4-5) The Relationship between Quality and Competitive Advantage Market share Product/ service recognition Strong market presence Competitive advantage and high profitability Quality emphasis Distinctive product features Avoids firm rivalry 117 Opportunities for differentiation performance and competitive advantage. .. differentiation approaches to building competitive advantage Thus, many of the sources of competitive advantage discussed earlier for cost and differentiation also apply to focus strategies at the niche or segment level It is important to remember that focus strategies attempt to pursue low-cost or differentiation with CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage respect to a much... maturity and decline stages, cost efficiency becomes important It is generally difficult to find new opportunities for differentiation Introductory Stage e x h i b i t (4-6) The Impact of the Product Life Cycle on Sources of Competitive Advantage CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage Introductory Stage This early or emerging stage of the product’s life cycle is often characterized... Service Reprinted/Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E Porter Copyright © 1985 by Michael E Porter CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage ity or, at the very least, cost proximity relative to competitors by keeping costs low in areas...CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage 101 for its Celeron, Pentium II and Pentium III line of chips, Intel has come under assault recently from National Semiconductor’s Cyrix unit and Advanced Micro Devices for microprocessors designed for the sub-$1,000 personal computer (PC) market Despite Intel’s commitment... Cost-based drivers (favors larger firms over time) CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage of any memory chip’s life cycle, factors such as design expertise, creativity, and product innovation are important sources of competitive advantage New ways to think about designing chips, the creation of electronic “silicon layers” to form the chip’s architecture, the incorporation of... way to achieve differentiation is to increase the satisfaction of the buyer consistently, which usually means increasing the performance and CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage quality characteristics of a product over that of a rival’s For example, manufacturers of tennis rackets, such as Head, Prince, and Wilson, race each other in providing better, more powerful,... how firms build different sources of competitive advantage. 23 In this section, we examine the impact of the product life cycle on formulating competitive strategies The product life cycle exerts significant influences on both the competitive dynamics of the industry environment, and on the sources of competitive advantage that may be most effective in designing a competitive strategy.24 As products... approaches can be used to build competitive advantage In reality, each firm will custom-design and formulate its own set of competitive strategies that will approximate many of the characteristics we have analyzed Yet, two themes seem to pervade our discussion of building competitive advantage: the role of distinctive competence and why quality dominates successful performance The Role of Distinctive... its own capacity additions, and to calculate the potential capacity expansion made by rivals High growth may actually set the stage for a CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage much less attractive industry resulting from overcapacity For example, the large number of firms now producing and selling different types of cellular telephones, CD players, and video games . Product Ample Information Summary Exercises and Discussion Questions Opportunities for Distinction: Building Competitive Advantage WHAT YOU WILL LEARN • The three types of “generic” competitive strategies. and other innovations also helped boost revenues. CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage 95 Competitive advantage is developed at the industry or business level. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright © 1985 by Michael E. Porter. CHAPTER 4 Opportunities for Distinction: Building Competitive

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