SG7001 / Managing Strategy, Operations and Partnerships

Topic Overview – Competitive Advantage and Industry Analysis

3.1 Introduction
This topic overview elaborates on the importance of competitive advantage and industry analysis.
The success of a strategy depends on the firm's competitive advantage, or whether its position in a competitive
market allows it to achieve its goals, which might include higher returns on investments, greater efficiency or
superior effectiveness in comparison to competitors. What sets your product or service apart from the competition?
Two generic strategies for developing a competitive advantage are cost leadership and differentiation. Cost
leadership is a strategy that Walmart follows. This company aims to offer the lowest prices in order to draw in
customers. Differentiation is a strategy designed to make your product or service so unique that it stands out from
the competition in a desirable way to a target market. Nintendo launched the Wii video game console by
differentiating their product with motion sensitive controllers. This company pursued a cost leadership strategy in
conjunction with this differentiation strategy.
There are a number of ways to achieve competitive advantage, and they all require a focus on the competitors. It is
important to keep this in mind when studying this unit. This unit's primary takeaway should be the concept of
sustainable competitive advantage. As soon as your competitors see a strategy of yours working, they will either
copy or leapfrog it. Sony immediately attempted to copy Nintendo by developing its own motion-sensitive
controllers, and Microsoft has moved to motion recognition via cameras. Sustainable competitive advantage
involves not only jumping ahead, but staying there.

3.2 Learning Outcomes from the Module Outline

LO.1 Define competitive advantage
LO.2 Learn how to use strategy tools in order to analyse competitive advantage, such as Porter’s Value Chain
model.
LO.3 Explore competitive positioning and business level strategy

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3.3 Industry Analysis

An industry is made of the group of companies that produce essentially the same goods or services. Industries often
are comprised of many markets. Markets are customer groups for essentially the same goods or services (Johnson et
al, 2014)
• For a Business this is the particular level at which they compete.
• For a Corporation it is at the SBU level that competition can be most effectively analysed
– The presence of a Corporate ‘Parent’ can inevitably inform the forces within the analysis
• The boundaries for an industry need to be understood
• It is important to be able to determine and analyse the different elements that shape the way an industry
operates
• Underlying factors and the position that the company needs to adopt are at the heart of the analysis (Davies,
2017)

3.4 Porter’s Five Forces Model

Porter’s Five Forces Model can be used to analyse the industry
• A key contribution to Industry level analysis is Porter’s 5 Forces model
• Informed by the ‘positioning’ school of strategy the focus is on understanding the way an industry is
structured
• The emphasis is to analyse the deeper structural factors that exist and not be overly swayed by more
temporary signals
• Understanding the competitive forces, and their under- lying causes, reveals the roots of an industry’s current
profit- ability while providing a framework for anticipating and influencing competition (and profitability) over time
(Porter, 2008)

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Figure 1. Five Forces Analysis (adapted from Porter, 1980)

Porter’s Five Forces Framework is a tool that helps to identify the attractiveness, in terms of profitability potential,
of an industry based on these five forces: 1) threat of entry, 2) threat of substitutes, 3) power of buyers, 4) power of
suppliers, and 5) extent of rivalry between competitors.

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3.4.1 Competitive Rivalry (Johnson et al, 2014; Davies, 2017)

Competitive Rivalry involves the members of an industry that serve the same customer group. The aspects that
define the level of rivalry are:
• Number of existing competitors
• Market structure-competitor balance, equal size
- fragmented or not
- whether there is a dominant organisation
• Industry life cycle and growth rate
• Exit barrier
• Degree of product differentiation
• Profit Margins and level of fixed costs

3.4.2 Threat of entry (Johnson et al, 2014; Davies, 2017)

The ease of entry affects competition. Although the impact of these barriers varies by industry, the main entry
barriers are:
• Economies of scale and experience
- reduction in unit costs as sales volume increases, i.e. the experience curve effect
• capitalisation (start-up cost)
• control over distribution channels
- vertical integration of supply and distribution channel
- customer or supplier loyalty
• cost advantage (experience curve)
• expected retaliation
- price wars
- marketing blitz
• legislation/ government intervention
- patents
- market regulation

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- tariffs
• Differentiation
- Quality
- Branding
• Perceived value

3.4.3 Threat of substitutes (Johnson et al, 2014; Davies, 2017)

Substitutes are products or services that are similar to those of an industry, but have a different classification.
Substitutes can reduce a product’s demand. Points important when evaluating potential substitutes are:
• development of new technology
• alternative products for existing demand
• similar products with improved performance-price/performance ratio
• changes in consumer behaviour
• cost of switching to substitutes

3.4.4 Power of buyers (Johnson et al, 2014; Davies, 2017)

If buyer power is high, then buyers can demand low prices and/or product improvements.
• Identify the buyers – immediate customers, may not be ultimate consumers. Are there a few large customers?
• Essentially informed by Supply & Demand factors
- Degree of Choice
• When do the buyers have power
- Not brand sensitive
- Limited switching costs-easy to switch suppliers
- Alternative options-backward vertical integration likely?

3.4.5 Power of suppliers (Johnson et al, 2014; Davies, 2017)

Suppliers include those that provide the company with materials needed for production in addition to fuel,
equipment, labour and sources of finance.

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• Identify the suppliers-are there just a few that dominate supply?

• Essentially informed by Supply & Demand factors
- Degree of Choice
• When do the suppliers have power:
- Scarcity of product/service
- Particular value of product/service
- Switching costs are involved and high-supply would be disrupted if a change of supplier is made
- Not vertically integrated

3.4.6 Video
View the video: The Five Competitive Forces That Shape Strategy (Harvard Business Review) which is an interview
of Michael Porter.
(https://www.youtube.com/watch?v=mYF2_FBCvXw)

Key questions to consider in the analysis:

• What are the key forces?
• Are there underlying forces?
• Will the forces change?
• Competitive standing & position?
• What can be done to influence the competitive forces affecting the organisation?
• Are some industries more attractive than others?
• What are the industry critical success factors?
(Davies, 2017)

Key considerations when using the Five Forces:

• The focus should be at the SBU level not the corporate
• Understand connections between forces
• It is dangerous to consider the forces as separate from each other

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• Behaviour may come from disrupting the forces • The model should not be seen as a static picture
• Are there more forces?
• What are the underlying industry critical success factors?
(Davies, 2017)

Common Pitfalls:
• Defining the industry too broadly or too narrowly.
• Making lists instead of engaging in rigorous analysis.
• Paying equal attention to all of the forces rather than digging deeply into the most important ones.
• Confusing effect (price sensitivity) with cause (buyer economics).
• Using static analysis that ignores industry trends.
• Confusing cyclical or transient changes with true structural changes.
• Using the framework to declare an industry attractive or unattractive rather than using it to guide strategic
choices.
(Porter, 2008 in Davies, 2017)

3.5 Competitive Advantage and Competitive Positioning

When evaluating competitive advantage and position, it is important to first identify Business Level Strategy and
SBUs.
• Identify an organisation’s SBUs-distinct divisions or profit centres
- Criteria used in identifying SBUs can be either market- or capabilities-based.
• Identify the SBUs key competitors. This will assist in:
- Competitive analysis-Generic Strategies Identification
- Competitive position analysis (Cost/Value Matrix; Bowmans’s Strategy Clock; differentiation mapping;
BCG Matrix)
- Comparative analysis-the hybrid strategy shown in Bowman’s Strategy Clock
(Johnson et al, 2014; Davies, 2017)

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Competition
• It is a basic aspect of business that markets are competitive
• Successful companies are able to identify how they can provide products or services that their customers
want
• This requires a clear understanding of themselves and the industry/environment
• A help in achieving this is to have a sense of what they are good at and how this is attractive
• Basic starting points are generic strategies and can be viewed as:
- Cost based
- Offering something of difference
- Establishing a ‘niche’ market
(Johnson et al, 2014; Davies, 2017)

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(Porter M E, 1985)

3.5.1 Cost Based Competition and Low-Price Strategies

Cost Based Competition:
• Very much a philosophy of the business.
• Everything that the business does must question the cost of activities and whether they are required.
• Tends to be associated with low price for consumers.
• The competitive position is based on the profit margin that can be achieved.
• Danger exists in price wars escalating and the strategy becoming difficult to sustain.
(Johnson et al, 2014; Davies, 2017)

Low Price Strategies Could Be Successful If:

• The firm is the cost leader ... but is this sustainable?
• All sources of cost advantages are exploited, developing competences in low cost management
• ... but the danger is a low (perceived) value product or service
• A firm has cost advantage over competitors in a price sensitive market segment
• ... but this may mean focusing on that market segment
(Johnson et al, 2014; Davies, 2017)

Low cost is difficult for many companies to effectively manage in the long term. Therefore, it is necessary to think
about how the product/service is different from the competition. There is potentially more scope to work with as
there are many ways in which difference can be achieved. However, this does not mean it is going to be easy to pull
off. The focus is very much on the way that difference is understood (Davies, 2017).

Ways to Differ:
• The product or service is an obvious starting point.
• However, the processes of a company can also be areas where a competitive advantage can be identified.
• To help consider each context characteristics of competition can be explored.

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• An instructive element of thinking is to identify the direct and indirect competitors in an industry.
• Plotting your competitors can identify ‘clusters’.
(Johnson et al, 2014; Davies, 2017)
Differentiation Strategies Could Be Successful If:
• Clear identification of who is the customer
• Understanding what is valued by the customer
• Clear identification of who the competitors are and the value they offer
• Bases of differentiation which are difficult to imitate
• The recognition that bases of differentiation may need to change
(Johnson et al, 2014; Davies, 2017)

Focused Differentiation (Niche Markets):

• Global market developments increase the need for focus
• Clear definition of market segments in terms of customers’ needs is required
• Within a market segment, choices of strategic direction relate to competitors within that segment
• Multi-focused strategies may be possible in some markets
• New ventures started through focus strategies may be difficult to grow
• Differences between segments may be eroded making bases of focus redundant
• The angle here is a particular market segment that all of your efforts are aimed at.
• Such a market displays specific values that clearly distinguish the product/service.
Examples could include:
▪ Haute Couture fashion
▪ High performance motor cars
(Johnson et al, 2014; Davies 2017)

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Following are two versions of Bowman’s Strategy Clock:

Figure 2: Bowman’s Strategy Clock (adapted from Bowman & Faulkner, 1996)

3.5.2 Competitive Position Analysis

How an organisation stands in relation to those other organisations competing for the same resources, or customers,
as itself (Johnson et al, 2014 in Davies, 2017).
• At the outset it is essential to ascertain the relative competitive position of an organisation
• Therefore the strategist has to ask:
How and where do organisations compete?
• This will indicate which organisations should be used as comparators
• The process includes:
• Strategic Business Unit Identification, Strategic Group Analysis & Market
Segmentation
▪ identify firms with similar strategic characteristics
▪ therefore identify the most direct competitors
▪ identify mobility barriers
▪ identify strategic opportunities (“strategic spaces”) • strategic threats and problems
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Basis for comparison:

• Product or Service Diversity
• Geographic Coverage
• Market Segments Served
• Distribution Channels
• Branding
• Marketing Effort
• Vertical Integration
• Quality
• Technological Leadership
• R & D Capability
• Size
• Gearing

3.5.3 Competitor Analysis

Once the direct competition to the organisation have been identified the following features of the competition should
be analysed:
➢ their objectives
➢ their resource strengths
➢ their performance
➢ their current strategy
➢ the underlying assumptions behind their strategy
- How will the above effect your organisation?
- How might the features change in the future (scenarios)?
▪ Relative Position Matrices :
➢ Generic Strategies
➢ Market Share & Market Growth
➢ Market Attractiveness & Business Strength

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➢ Product Attractiveness & Business Strength

➢ Competitive Position & Stage in Life Cycle
➢ Your own
(Porter, 1980; Davies, 2017; McGee and Thomas, 1986)

3.5.4 Market Segments: Bases for Segmentation

By Characteristics of People/Organisation
Consumer Markets Industrial/Organisational Markets
• Age • Industry
• Sex • Location
• Family Size • Size
• Life-Cycle Stage • Technology
• Location • Profitability
• Lifestyle • Management
(Johnson et al, 2014)
By Purpose/Use situation
Consumer Markets Industrial/Organisational Markets
• Product Similarity • Performance Requirements
• Price Preference • Assistance from Suppliers
• Brand Preference • Brand Preferences
• Desired Features • Desired Features
• Quality • Quality
(Johnson et al, 2014)

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Following are several examples, taken from Davies (2017) of competitive position tools that are available:

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3.6 Summary
This week you have analysed of theories and models related to the Competitive Advantage and Industry Analysis. In
the next week we will evaluate the strategy in the global environment.

References
Bowman, C. & Faulkner, D.O. (1996) Competitive and Corporate Strategy. 1st ed. Irwin Professional Publishing.

Davies, P (2017a) 5 - Industry Analysis, Class Slides, University of South Wales, viewed July 13, 2017, <ST4S38
Blackboard site>.

Davies, P. (2017b) 3 – Competitive Advantage, Class Slides, University of South Wales, viewed July 13, 2017,
<ST4S38 Blackboard site>.

Harvard Business Review. (2008). The Five Competitive Forces That Shape Strategy. 30 June 2008. Available from:
https://www.youtube.com/watch?v=mYF2_FBCvXw. [Accessed: 31 July 2017].

Johnson, G., Whittington, R., Scholes, K., Angwin, D. and Regner, P (2017) Exploring Strategy: Text and Cases.
Harlow: Pearson.

Johnson, G., Whittington, R., Scholes, K., Angwin, D. and Regner, P. (2014) Exploring Strategy: Text and Cases.
Harlow: Pearson.

McGee J. and Thomas H. (1986) ‘Strategic groups: theory, research and taxonomy’, Strategic Management
Journal, 7(2), pp. 141-60.

Porter, M. E. (2008) ‘The Five Competitive Forces That Shape Strategy’, Special Issue on HBS Centennial, Harvard
Business Review 86(1), pp. 78–93.

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Porter, M. E. (1985) The Competitive Advantage: Creating and Sustaining Superior Performance. NY: Free Press.

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