External and Internal Analysis and Competitive Advantage

In this lecture, we focus

• Company’s present strategy
• Internal strength and weakness and
external opportunity and threat
• Five generic competitive strategy
• Competitive advantage and strategy for
Diversification

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 External and Internal Analysis and Competitive Advantage

Considerations for Present

Performance can be evaluated by
Strategy: • Growth of sales
 Cost (low cost?)
• Acquiring new and retaining
existing customers
 Quality (superior • Profit margin
quality?) • Trends on return on investment
(ROI)
 Customer based
(broad or narrow
• Efficiency in production cost,
segment) defects rate, inventory,
distribution, supply chain
 Product-distribution management
(logistic, inventory • Image and reputation
strategy) 2
External and Internal Analysis and Competitive Advantage

Basis of developing strategy

SWOT analysis is based on the principle that

• Strategy making efforts aim at producing a

good fit between company’s resource
capability (balance of resource strength
and weakness) and its external situation
(market opportunities and threats to
profitability and market standing)

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 Strategy Formulation
• Managers analyze the current situation to
develop strategies achieving the mission.
• SWOT analysis: a planning to identify:
– Organizational Strengths and Weaknesses.
• Strengths: manufacturing ability, marketing skills.
• Weaknesses: high labor turnover, weak financials.
– Environmental Opportunities and Threats.
• Opportunities: new markets.
• Threats: economic recession, competitors

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 External Analysis
• Analyzing the dynamics of the industry in
which an organization competes to help
identify:

– Opportunities: conditions in the environment

that a company can take advantage to
become more profitable

– Threats: conditions in the environment that

endanger the integrity and profitability of the
company’s business
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The Computer Sector: Industries and Segments

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 Porter's Five Forces Model

Potential
Entrants

Threat of
Entry

Bargaining
Power
Competitive Buyers
Suppliers
Rivalry
Bargaining
Power Threat of
Entry

Substitutes

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 Risk of Entry by Potential Competitors
Potential for entry: how easy is it for new firms to
enter the industry?
• Easy entry leads to lower prices and profits.

• Barriers to entry
– Brand loyalty
– Absolute cost advantage
• Superior production operations and processes
• Control of particular inputs required for production
• Access to cheaper funds because existing companies
represent lower risks than new entrants
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 Risk of Entry by Potential Competitors
• Barriers to entry
– Economies of scale
– Cost reductions from mass production of standardized output
– Discounts on bulk purchases of inputs
– Advantages of spreading fixed costs over a large production
volume
– Cost savings from marketing and advertising for a large
volume of output

• Customer switching costs

• Government regulation

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 Rivalry Among Established Companies

Level of Rivalry in an industry: how intense

is current competition with competitors?
• Increased competition results in lower
profits.

• Industry competitive structure

– Fragmented vs. consolidated (oligopoly or
monopoly)
• Industry growth
• Fixed (or storage) cost
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 The Bargaining Power of Buyers
Power of Buyers: If there are only a few buyers, they can
bargain down prices.

• Buyers are most powerful when

– The industry that is supplying a particular product or
service is composed of many small companies and the
buyers are large in size and few in number (when Wal-
Mart is a buyer)
– Buyers purchase in large quantities
– The supply industry depends on the buyers for a large
percentage of its total orders
– Switching costs are low
– It is economically feasible for buyers to play one supplier
against another
– Buyers can threat to produce the product themselves
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 The Bargaining Power of Suppliers
Power of Suppliers: If there are only a few suppliers of
important items, supply costs rise.
• Suppliers are most powerful when
– There are few substitute for the supplier's products
(raw materials)
– Switching costs are high for companies/consumers
switching to a different supplier
– Suppliers can threat to compete directly with buyers by
entering their industry
– Supplier's contribution to quality or service of the industry
products is high
– Total industry cost contributed by suppliers is high
– Buyers cannot threat to enter the suppliers’ industry
– Importance of the industry to supplier's profit 12
 Substitute Products
• Substitutes: More available substitutes tend to drive
down prices and profits.
• Many substitute products
– Are a threat and limit the price that companies in one
industry can charge for their product, and thus industry
profitability
• Few or weak close substitutes
– Gives the industry the opportunity to raise prices and earn
additional profits
• Substitute producer's profitability & aggressiveness
• Substitute price-value
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 Market Feasibility and Strategy Development

Sixth Force: Complementors

• When complementors are important and their
number is increasing

– Demand and profits in the industry are boosted

• When complementors are weak

– Industry growth can slow and profits can be limited

• Example: Hotel and Tourism
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 Market Feasibility and Strategy Development

Porter’s Five Forces model identifies

• Attractiveness of an Industry

• Attractiveness reflects overall profitability

• Overall industry attractiveness does not imply that

every firm in the industry will return the same
profitability. Firms are able to apply their core
competencies, business model or strategy to
achieve a profit above the industry average. 

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 External and Internal Analysis

• Internal analysis
–Identify organizational strengths and
weaknesses

– Sources of competitive advantage:

• superior efficiency
• quality
• innovation, and
• responsiveness to customers 16
Competitive Advantage

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 Internal Analysis
Identifying strength and weakness of company
• Managers must understand
– The role of resources, capabilities, and distinctive
competencies in the process by which companies
create value and profit

– The importance of superior efficiency, innovation,

quality, and responsiveness to customers

– The sources of their company’s competitive advantage

(strengths and weaknesses)
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 Distinctive Competences and Competitive Advantage

• Distinctive competencies

– Firm-specific strengths that allow a

company to gain competitive
advantage by differentiating its
products and/or achieving lower costs
than its rivals

– Arise from resources and capabilities

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 The Role of Resources
• Resources
– Capital or financial, physical, social or human,
technological, and organizational factor

• A firm-specific and difficult to imitate resource

is likely to lead to distinctive competency (for
Grameen Optical Fiber Network from Railway)

• A valuable resource that creates strong

demand for a firm’s products may lead to
distinctive competency
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 The Role of Resources
Tangible Resource
•Financial
•Human
•Physical (Equipment, Land etc.)

•Intangible Resource
•Technology
•Knowledge
•Reputation

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 The Role of Capabilities
• Capabilities
– A company’s skills at coordinating and using its
resources
• Capabilities are the product of organizational
structure, processes, and control systems
Capability or Competence depends on three
issues
• Knowledge
• Experience
• Skill 22
 The Role of Capabilities
Capability includes
–Corporate Management
–Human Resource Management
–Information Management
–R & D
–Quality Control
–Manufacturing
–Marketing
–Product Design

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RESOURCE-BASED APPROACH TO STRATEGY ANALYSIS

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Value Creation per Unit

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Comparing Toyota and General Motors

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 The Value Chain

• A company is a chain of activities for

transforming inputs into outputs that
customers value

• The transformation process is composed of

primary and support activities that add value
to the product
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The Value Chain: Primary and Support Activities

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 KEY SUSSESS FACTOR MATRIX
• External Factor Evaluation Matrix
• Internal Factor Evaluation Matrix

• List Key Factors

• Assign relative weight
• Assign a rating for strength/weakness or
opportunity/threat
• Multiply each factor’s weight by company’s
rating for that factor
• Sum up the weighted scores
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 KEY SUSSESS FACTOR MATRIX

                                                                                                                                  

               

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The Five Generic Competitive Strategies

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 Low-Cost Provider Strategies
Keys to Success
• Make achievement of meaningful lower costs
than rivals is the theme of firm’s strategy
• Include features and services in product
offering that buyers consider essential
• Find approaches to achieve a cost advantage
in ways difficult for rivals to copy or match
• Pride Textile, Maruti Car

Low-cost leadership means low

overall costs, not just low 32
manufacturing or production costs!
 Low-Cost Advantage
Strategy

Option 1: Use lower-cost edge to

– Underprice competitors and attract price-sensitive

buyers in enough numbers to increase total profits

Option 2: Maintain present price, be content with present

market share, and use lower-cost edge to

– Earn a higher profit margin on each unit sold, thereby

increasing total profits

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 Securing Cost Advantage
Approach 1
Do a better job than rivals in performing value
chain activities efficiently and cost effectively

Approach 2
Revamp value chain to bypass cost-producing
activities that add little value from buyer’s
perspective

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 Approach 1: Controlling the Cost Drivers

• Capture scale economies; avoid scale

diseconomies
• Capture learning and experience curve effects
• Manage costs of key resource inputs
• Consider linkages with other activities in value chain
• Find sharing opportunities with other business units
• Compare vertical integration vs. outsourcing
• Assess first-mover advantages vs. disadvantages
• Control percentage of capacity utilization
• Make prudent strategic choices related to
operations 35
 Approach 2: Revamping Value Chain
• Make greater use of Internet technology
applications
• Use direct-to-end-user sales/marketing methods
• Simplify product design
• Offer basic, no-frills product/service
• Shift to a simpler, less capital-intensive, or more
flexible technological process
• Find ways to bypass use of high-cost raw materials
• Relocate facilities closer to suppliers or customers
• Drop “something for everyone” approach and focus
on a limited product/service
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 Success in Achieving Low-Cost Leadership
• Scrutinize each cost-creating activity, identify cost drivers
• Use knowledge about cost drivers to manage costs of each
activity down year after year
• Find ways to restructure value chain to eliminate nonessential
work steps and low-value activities
• Work diligently to create cost-conscious corporate cultures
– Feature broad employee participation in continuous cost-
improvement efforts and limited perks for executives
– Strive to operate with exceptionally small corporate staffs
• Aggressively pursue investments in resources and capabilities
that promise to drive costs out of the business

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 When Low-Cost Strategy Work Best
• Price competition is vigorous
• Product is standardized or readily available
from many suppliers
• There are few ways to achieve differentiation
that have value to buyers
• Most buyers use product in same ways
• Buyers incur low switching costs
• Buyers are large and have significant
bargaining power
• Industry newcomers use introductory low
prices to attract buyers and build customer
base 38
 Pitfalls of Low-Cost Strategies
• Being overly aggressive in cutting price
• Low cost methods are easily imitated by rivals
• Becoming too fixated on reducing costs and
ignoring
– Buyer interest in additional features
– Declining buyer sensitivity to price
– Changes in how the product is used
• Technological breakthroughs open up cost
reductions for rivals
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Low Cost and Differentiation

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 Differentiation Strategies
Objective
• Incorporate differentiating features that cause buyers to
prefer firm’s product or service over brands of rivals
(General Motors Automobiles in International
market, Retail superstore like Nandan, Agora,
Mina Bazar etc. in Bangladesh)

Keys to Success

• Find ways to differentiate that create value for buyers

and are not easily matched or cheaply copied by
rivals

• Not spending more to achieve differentiation than

price premium that can be charged 41
 Benefits of Successful Differentiation

A product / service with unique, appealing

attributes allows a firm (consider different
features of NSU and its premium price) to
Command a premium price and/or
Increase unit sales and/or
Build brand loyalty
= Competitive Advantage
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 Types of Differentiation Themes
• Unique taste -- Dr. Pepper
• Multiple/Friendly features -- Microsoft
Windows and Office
• Wide selection and one-stop shopping --
Home Depot and Amazon.com
• Superior service -- FedEx, Ritz-Carlton
• Service availability– Dutch-Bangla Bank by
ATM booth
• Spare parts availability -- Caterpillar

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 Types of Differentiation Themes
• More for your money – Benaroshi Saree in
Mirpur, KFC in Bangladesh
• Prestige – Rolex, Harrods departmental
store
• Quality manufacture – General Motors,
Honda
• Unique Fashion -- Aarong
• Technological leadership -- 3M Corporation
• Top-of-line image -- Ralph Lauren, Chanel,
Cross
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 Differentiation: Keys to Competitive Advantage
• Most appealing approaches to differentiation
– Those hardest for rivals to match or imitate
– Those buyers will find most appealing
• Best choices to gain a longer-lasting, more profitable
competitive edge
– New product innovation
– Technical superiority
– Product quality and reliability
– Comprehensive customer service
– Unique competitive capabilities
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 Differentiation Opportunities in Value Chain
Differentiation Opportunities in Value Chain
• Purchasing and procurement activities (Starbucks
in buying coffee beans)
• Product R&D and product design activities (Omega,
Swiss Army, Swiss Legend--Swiss Watch)
• Production process / technology-related activities
(Samsung)
• Manufacturing / production activities (Toyota)
• Distribution-related activities (Dell)
• Marketing, sales, and customer service activities
(Rahimafrooz)
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 Achieve Differentiation-Based Advantage

Approach 1

Incorporate product features/attributes that

lower buyer’s overall costs of using product (Hybrid car: Fuel
consumption low, Energy savings bulb)

Approach 2

Incorporate features/attributes that raise the

performance a buyer gets out of the product (Hybrid car: better
speed, Sony — picture tube)
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 Achieve Differentiation-Based Advantage

Approach 3

Incorporate features/attributes that enhance buyer satisfaction

in non-economic or intangible ways (Hybrid car: status, CK
brand handbags for women)

Approach 4
Compete on the basis of superior capabilities to serve
(CNN to cover breaking news, Unilever through
excellent distribution channel)

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 Differentiation Strategy Work Best
• There are many ways to differentiate a product
that have value and please customers

• Buyer needs and uses are diverse

• Few rivals are following a similar differentiation

approach

• Technological change and product innovation are

fast-paced

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 Pitfalls of Differentiation Strategies
• Buyers see little value in unique attributes of product
• Appealing product features are easily copied by
rivals
• Differentiating on a feature buyers do not perceive
as lowering their cost or enhancing their well-being
• Over-differentiating such that product features
exceed buyers’ needs
• Charging a price premium buyers perceive is too
high
• Not striving to open up meaningful gaps in quality,
service, or performance features vis-à-vis rivals’
products 50
 Best-Cost Provider Strategies
• Combine a strategic emphasis on low-cost with a
strategic emphasis on differentiation
– Make an upscale product at a lower cost
– Give customers more value for the money
Objectives
• Deliver superior value by meeting or exceeding buyer
expectations on product attributes and beating their price
expectations (Toyota)

• Be the low-cost provider of a product with good-to-

excellent product attributes, then use cost advantage to
under price comparable brands

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 Competitive Strength of Best-Cost Strategy
• A best-cost provider’s competitive advantage
comes from matching close rivals on key product
attributes and beating them on price
• Success depends on having skills and capabilities
to provide attractive performance and features
at a lower cost than rivals
• A best-cost producer can often out-compete both
a low-cost provider and a differentiator when
– Standardized features/attributes won’t meet
diverse needs of buyers
– Many buyers are price and value sensitive
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 Focus / Niche Strategies
• Involve concentrated attention on a narrow piece of
the total market
Objective
Serve niche buyers better than rivals
Keys to Success

• Choose a market niche where buyers have

distinctive preferences, special requirements, or
unique needs
• Develop unique capabilities to serve needs of target
buyer segment 53
 Defining Market Niche

• Geographic uniqueness

• Specialized requirements in using product

/service

• Special product attributes appealing only to

niche buyers
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 Focus Strategies
• eBay
– Online auctions
• Porsche
– Sports cars
• Jiffy Lube International
– Maintenance for motor vehicles
• Pottery Barn Kids
– Children’s furniture and accessories
• KFC
– Rich People
• Bangla Link
– Young group

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 Focus / Niche Strategies

Approach 1
• Achieve lower costs than
rivals in serving the segment --
A focused low-cost strategy (Bangla Link)
Which hat
Approach 2 is unique?
• Offer niche buyers something
different from rivals --
A focused differentiation strategy (Dom-
Inno builders)
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 Attractive for Focusing
• Big enough to be profitable and offers good growth
potential
• Not crucial to success of industry leaders
• Costly or difficult for multi-segment competitors to
meet specialized needs of niche members
• Focuser has resources and capabilities to effectively
serve an attractive niche
• Few other rivals are specializing in same niche
• Focuser can defend against challengers via superior
ability to serve niche members

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 Generic Strategy: Which One to Use
• Each positions a company differently in its market
and competitive environment
• Each establishes a central theme for how company
will endeavor to out-compete rivals
• Each creates some boundaries for maneuvering as
market circumstances unfold
• Each points to different ways of experimenting with
the basics of the strategy
• Each entails differences in product line, production
emphasis, marketing emphasis, and means to
sustain the strategy
The big risk – Selecting a “stuck in the middle” strategy!
This rarely produces a sustainable competitive
advantage or a distinctive competitive position. 58
 Diversification
• Diversification
– As long as company has strong foothold on its
current industry, there is no urgency to pursue
diversification
• It depends on
– Partly on company’s growth opportunity in
current industry
– Partly on the opportunities to utilize its
resources, expertise, and capabilities in other
industries
– The question is “what kind and how much
diversification?”
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 Diversification
• Diversification
– The process of adding new businesses to the
company that are distinct from its established
operations

• Vehicles for diversification

– Internal new venturing
• Starting a new business from scratch
– Acquisitions
– Joint ventures
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 Beyond a Single Industry
• Advantages of staying in a single industry
– Focus resources and capabilities on
competing successfully in one area
– Focus on what the company knows and does
best
• Disadvantages of being in a single
industry
– Danger of the industry declining
– Missing the opportunity to leverage resources
and capabilities to other activities
– Resting on laurels and not continually learning

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 Portfolio of Distinctive Competencies
• Reconceptualize the company as a
portfolio of distinctive competencies rather
than a portfolio of products (Sony from
Music to Kids games; Akiz from tobacco to
soft drinks)
• Consider how those competencies might
be leveraged to create opportunities in
new industries
• Existing product vs. self competencies
• Existing industries in which a company
competes vs. new industries
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Establishing a Competency Agenda

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 Single Business Strategy

• Concentrate in single business: McDonalds

focuses in the fast food business.

– Can become very strong, but can be risky.

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 Profitability Through Diversification
• Transferring competencies

– Taking a distinctive competence developed

in one industry and applying it to an
existing business in another industry

– The competencies transferred must involve

activities that are important for establishing
competitive advantage

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Tobacco Industry
Cement Industry
Transfer of Competencies at Akiz Group

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 Profitability Through Diversification
• Leveraging competencies
– Taking a distinctive competence developed by a
business in one industry and using it to create a
new business in a different industry

• Sharing resources: economies of scope

– Cost reductions associated with sharing
resources across businesses

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Sharing Resources at Proctor & Gamble

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 Diversification Strategies
• Diversification: Organization moves into
new businesses and services.
Related diversification: firm diversifies in
similar areas to build upon existing divisions.
Synergy: two divisions work together to obtain more
than the sum of each separately.
Unrelated diversification: buy business in new
areas.
• Build a portfolio of unrelated firms to reduce risk or
trouble in one industry. Very hard to manage.

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