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					           COMPETITIVE
           ADVANTAGES




Janez Prašnikar
January, 2011
Structure

 New business models in globalization
 Competitive advantages and strategic positioning
    Horizontal boundaries
    Vertical boundaries/The Transaction Cost Theory
    Diverzification
 How to analyze competitive advantage?
 Sustainable competitive advantage
 Complementary capabilities
The traditional view (Ch 1, 8)


Structure-Conduct-Performance
 Paradigm:

Market structure → Firm’s behavior
 → Performance
Picture: Rate of competition

                       Number of suppliers
 LOW                                                     HIGH


monopoly   oligopoly    monopolistic competition     perfect competition




    Company C      Company B                 Company A

                       differentiated products

    HIGH                                                 LOW

                           entry barriers



                                                                           4
        Market structure
•       Market concentration (number of sellers)
•
•       Distribution of market shares

•       Measures of market structure

    –   Let us order M firms on the market by their market shares S1 >
        S2 > … > SN > … > SM.

    –   N-firm concentration ratio: CN is the market share held by N
        largest firms.




                                                                         5
Market structure



– Herfindahl index:   HI   (S i ) 2
                             i



– Suppose there are two firms on the market.
   • They split the market 50:50, C2 and H ?
   • They split the market 90:10, C2 and H ?




                                               6
Market
structure




            7
Market structure and competition

Nature of competition   Herfindahl index    Intensity of price
                                            competition


Perfect competition     Usually below 0.2   Fierce



Monopolistic            Usually below 0.2   Depending on product
                                            differentiation
competition


Oligopoly               0.2 – 0.6           Depending on interfirm
                                            rivalry


Monopoly                Above 0.6           Light, if no entry threats




                                                                         8
              New business models
Old economy: Firm-centric, Focus on Transformation Costs


                                Inputs          Transformation           Outputs


New Economy: Net-centric, Focus on Transactions Costs and Interaction
                   Costs (Risks, Profits, Volatility, …)


                                Inputs          Transformation               Outputs



                                         Transaction and interaction costs


   Source: Kleindorfer, 2005.
Partnerships and Value Constellations
                     Porter Value Chain (1985)
Support Activities


                                           Firm Infrastructure
                                     Human Resource Management
                                        Technology Development
                                               Procurement


                      Inbound     Operations    Outbound        Marketing     Service
                      Logistics                 Logistics        & Sales




                                                                             Total        Cost
                                           Primary Activities      Margin = Value To - Producing
                                                                             Buyers       Value
             Core Competency Theory and
             Process Management


                                             Market
                                            Segments

                                              Strategy
                                            Development
       Technology &                           Core
        Knowledge                                                  Competitive
                                           Competencies
       Development                                                   Forces
                                        Key & Core Processes

                                           Re-Sourcing
                             Internal       SA      JV     BPO&O
Source: Hamel and Prahalad, 1994.
Value Chain Restructuring in 1980-
2010 period
                                   2005
          Global Fulfillment Architecture and Risk Management




                                           Distributors
  Suppliers            Producers                                   Customers
                                           & Retailers


              1980s             1990s                     2000s
               JIT              ECR                       CRM




                              2010
                    Sustainable Management
Lean Operations Pervade and Permeate the Entire Life of the Product,
 Including the Management of Product Recovery and Reverse Flows
  Some Emerging Net-centric Models
The Strategic Partnership Model with Stable and Optimized Supply
  Chains (e.g., Contract Manufacturing in Electronics and
  Semiconductors)

 The Reconfigurable Model (possibly driven by a particular
product or particular company)
            Contract Manufacturing Models

            All Value Chain Activities Outsourced


Raw                          EMS Company                          Products
Materials



             Parts of the Value Chain Outsourced

Raw             Outsourced       Outsourced         Outsourced   Products
Materials



                         OEM, OED, OEB Functions
                            and Competencies
                   e-markets as primary intermediators
                                                                      Supplier
                                           Supplier




                       Supplier                                                            Supplier




                                                                                     Information
                       Third Party                    B2B Market                      Sources
                    Service Providers




                                                                                             Buyer
                      Buyer

                                   Buyer                                         Buyer
                                                 Buyer             Buyer




                                                      Buyers
Source: Ravi Aron, 2002.
Global Puzzle
Company has to focus on what it is best at and let others fill
other parts of the puzzle
Global Puzzle
Company has to focus on what it is best at and let others fill
other parts of the puzzle
Global Puzzle
Company has to focus on what it is best at and let others fill
other parts of the puzzle
    Outsourcing and Networking


                                                       Publisher
                                          Retailer




            Manufacturer   Distributor   Value-Added
                                           Reseller                End User




Suppliers

                                          Corporate    Financing
                                           Reseller     Provider
Structure

 New business models in globalization
 Competitive advantages and strategic positioning
    Horizontal boundaries
    Vertical boundaries/The Transaction Cost Theory
    Diverzification
 How to analyze competitive advantage?
 Sustainable competitive advantage
 Complementary capabilities
Benchmarking and Strategic
Management
                               OBJECTIVES




                   BENCHARKING
                                          BENCHARKING       STRATEGIES
     MISSION      OF COMPETITIVE
                                          OF STRATEGIES
                    ADVANTAGE




                                   EVALUATION         PROCESS
                                                    BENCHARKING




                                         PERFORMANCE
      MISSION                                                EXECUTION
                                         BENCHARKING
    REALISATION




                                   BUSINESS
                                   RESULTS
Case 1: Benchmarking and
Strategic Management

 The role of Benchmarking
 Benchmarking and Strategic Management

  •   Benchmarking of Competitive Advantages
  •   Benchmarking of Strategies
  •   Benchmarking of Strategies
  •   Performance Benchmarking
Competitive Advantage and
Value Creation (Ch. 13)

 A firms is said to have a competitive advantage in a market if
  it earns a higher rate of economic profit compared to the
  average economic profit in the industry

 Economic profit earned by a firm depends on the market
  conditions as well as the economic value created by the firm
               Competitive Advantage and
               Value Creation


                                 BUSINESS
                               ENVIRONMENT


        BENEFIT POSITION                        ECONOMIC
           RELATIVE TO                         PROFITABILITY
          COMPETITORS
                               VALUE CREATED
                                 RELATIVE TO
                                COMPETITORS
           COST POSITION
            RELATIVE TO
           COMPERITORS



Source: Besanko et al., 2003
HORIZONTAL BOUNDARIES:
Sources of cost benefits (BDSS,
Ch. 2)
 Economies of scale
    Declining average cost with volume

 Economies of scope
    Cost savings when different goods/services are
     produced “under one roof”

 Learning curve
    Cost advantage from accumulated expertise and
     knowledge
 L-Shaped Cost Curve

      Cost
($ per unit
 of output)




                                    AC




               Minimum Efficient Size    Output
Measuring Economies of Scale

 Measuring Economies of Scale
Measuring Economies of Scope

 The degree of economies of scope measures the savings
  in cost can be written:




   –   C(Q1) is the cost of producing Q1
   –   C(Q2) is the cost of producing Q2
   –   C(Q1Q2) is the joint cost of producing both
       products
Sources of Economies of Scale/Scope
 Production related:
    Spreading of fixed costs
    Inventories
    Cube-Square rule

 Related to other functions:
    Purchasing
    Advertising
    R&D
    Other
The Learning Curve


 Hours of labor
per machine lot


            10
             8
             6
             4
             2
             0
                  0   10 20 30 40 50   Cumulative number of
                                       machine lots produced
         Economies of Scale
         Versus Learning

   Cost ($ per
unit of output)




                                 Economies of Scale
                             A
                                 B
                                      AC1
                  Learning   C
                                   AC2

                                            Output
Transaction cost theory (
Prašnikar + BDSS, Ch 3,4)


•   The neoclassical model of profit maximisation
•   The sales maximisation hypothesis
•   Williamson’s model of managerial discretion
•   The Baumol multi-period profit maximising model
•   Marris’s multi-period managerial model
•   Satisficing and organisation coalition
•   A firm as an internal organisation. The theory of transaction
    cost
  Profit Maximization Firm
                                          C(q)

       Cost,
                                                 R(q)
                                A
  Revenue,
      Profit
$ (per year)
                               B




                0   q0          q*
                                            π(q)
                                         Output (units per year)

               Profits are maximized when MC = MR.
The sales maximisation
hypothesis
                                         TC

Profit, revenue, costs




                                                   TR



                                              p0



                                              p0'




                                     p
               0              Q3Q1        Quantity
                         Q2
             Firm’s reaction on the rise of fixed cost

Profit




                                                          p

         0
                              Q3    Q2    Q1             Quantity

                                                    p1
                                               p2
         Firm’s reaction on the rise of variable
         cost

Profit




                                                p

     0
                     Q1   Q2 Q3     Q4      Quantity

                                           p1
                                    p2
                                                    37
         Firm’s reaction on the rise of a
         corporation tax


Profit


                       p2

                                                 p

     0
                            Q3     Q2 Q1     Quant

                                            p1

                                                 38
Williamson’s model of managerial
discretion
 Williamson argues that the most imporatnt motives of
  business men are the desires for salary, security, dominance
  and professional excellence. This can be gained by:

    additional expenditures on staff, S
    managerial perquisites, M
    discresionary investment, ID




                                                            39
Williamson’s model of managerial
discretion
 Williamson argues that the most imporatnt motives of
  business men are the desires for salary, security, dominance
  and professional excellence. This can be gained by:

    additional expenditures on staff, S
    managerial perquisites, M
    discresionary investment, ID
– U = f (S, M, ID)


– Actual profit: p = R - C - S
– Reported profit: pR = p - M = R - C - S - M
– Minimum (post-tax) profit constraint: p0
– Discretionary investment: ID = pR - p0 - T
    Comparative static predictions



Model        Lump   Fixed    Output   Variable   Corporation
             sum    costs    tax      costs      tax
             tax
             (T )   ( FC )   ( Qt )   ( VC )       (t )

Profit
              0       0                              0
maximiser
Sales
maximiser

Managerial
discretion
                                          The Baumol multi-period profit
                                          maximising model
Present value of expected profit growth


                                                                            PV(TR)
                                                                                 PV(TC)




                                                                               PV(p)
                                0                      Rate of growth (g)
         The Marris model: Supply growth curve,
         demand growth curve and equilibrium growth
         (B)
profit




                                  Supply-growth curve
                    A

                              B




                                         Demand-growth curve




   0                                Rate of growth (g)
                                                               44
         The Marris model: Shareholders
         equilibrium and managerial
         equilibrium.


                                                              Managerial indiference
                 Shareholders indiference                     curves




                                            Valuation ratio
         Z       curves
profit




                                                                B’           M3
                                  I3                                        M2
                                 I2                                      M1
                            I1
             Demand-growth curve



  0                       growth                      0                 growth
Satisficing and the organisational
coalition
 Since managers have imperfect knowledge on which to base
  decisions, they act with “bounded rationality (Simon).

 Business men “satisface”, they do not maximise  search
  behavior (rebalancing). If aspiration levels are not achieved,
  the managers become apathetic and aggressive.
•
 Firms are composed of individuals who make up the
  “organizational coalition” (Cyert and March).

 For the firm, as an organisation, to remain in existence, the
  coalition members must be satisfied with less than their
  maximum objectives since the resources are not available to
  satisfy them all.
 Organizational slack:

•             1) capacities are not fully utilised;
•             2) the finger decision-making rule;
•             3) a firm is a nexus of contracts
Decision making by committee and
Arrow’s impossibility theorem
 V = M + P + F

•   M = marketing manager’s sub-goal (sales
•           maximisation)


•   P = production manager’s sub-goal (cost
•       minimisation, specialisation on a narrow group of
    products)

•   F = finance manager’s sub-goal (capital outlay
•       minimisation, minimal inventories)
                     1st choice   2nd choice   3rd choice
Marketing manager         M            P            F
Production manager        P            F            M
Finance manager           F            M            P
A firm as an internal organisation.
The theory of transactions costs

 A firm is a nexus of contracts (Cyert, March). The firm is
  embracing both external market relationship as well as
  internal contracts (Coase, 1937).
Coase Theorem

 The parties to any contract have value maximisation as an
  objective. If they bargain efficiently, if they bargain until there
  is no further possibility of mutual benefit, the parties draw up a
  contract which maximises the aggregate value (Coase, 1960).
                               Land use rights awarded to

                    Cattle farmer      Grain farmer
Profits on cattle   Cattle will be     Cattle will be farmed. Cattle
£1,000              farmed earning     farmer will pay grain farmer a
Profits on grain    cattle farmer      rental of > £600 and < £1,000
£600                £1,000
Profits on cattle   Grain will be      Grain will be farmed earning
£600                farmed. Grain      grain farmer £1,000
Profits on grain    farmer will pay
£1,000              cattle farmer a
                    rental of > £600
                    and < £1,000
Transaction costs fall into two main
categories


   coordination costs:


      outside the firm (costs of using the
       price system)

      within the firm (transmission of
       directions downwards and gathering
       and trasmissions of     informations
       upwards)
 motivation costs:


    information asymmetries
    imperfect commitments (Bosch:
     Kolektor)
Transaction dimensions


 Specific assets

 Frequency and duration

 Complexity and uncertainty

 Difficulty of measuring performance

 Connectedness to other transactions
Bounded rationality and strategic
behavior

 Economic subjects attempt, within the limits of the information
  available to them, to achieve a satisfactory level of
  performance

 Since each is attempting to satisfice, or optimise within
  constraint of information, strategic behavior is ecpected




Pre- contractual opportunism and
adverse selection

 Pre-contractual opportunism is a result of informational
  asimetries.

 When the costs and benefits of different plans are known to
  one party alone or when the likelihood of different possible
  outcomes are private information, these informational
  asimetries can prevent any agreeement.


 IF ASSYMETRIC INFORMATIONS, THE INEFFICIENT
  OUTCOME IS AVOIDED WHEN BENEFITS OF EXCHANGE
  ARE LARGE ENOUGH FOR BOTH PARTNERS.
Market for lemons



 Informational asymmetries cause adverse selection  the
  market for lemons

 The Market for Used Cars


        Buyers and sellers can distinguish
         between high and low quality cars
        There will be two markets
     PL
          Initially, the supply of
          low and high quality
SH            are as shown...




                                     SL
  PH                    PL
                              …and the demand
                              for high and low
                  SH           quality cars are
10,000                            as shown.


                  DH
                                                   SL

                   5,000



                                                  DL

         50,000    QH        50,000                    QL
                                                Buyers will find it difficult to
                                      PL     determine quality. They lower their
                                            expectations of the average quality of
                                                 used cars. Demand for low
                                SH         and high quality used cars shifts to DM.
10,000


                                DH
                                                                               SL
                           DM
                                 5,000                                       DM


                                                                             DL

         25,000   50,000         QH                  50,000      75,000           QL
 PH                                    PL      The increase in QL
                                            reduces expectations and
                                                demand to DLM.
                                 SH
10,000


                                 DH
                                                                        SL
                            DM
                                  5,000                                DM
                           DLM
                                                                       DLM
                                                                       DL

         25,000   50,000          QH          50,000     75,000             QL
                                           PL      The adjustment process
                                                continues until demand = DL.

                                     SH
10,000


                                     DH
                                                                               SL
                                DM
                                      5,000                               DM
                            DLM
                           DL                                             DLM
                                                                          DL

         25,000   50,000              QH            50,000     75,000          QL
 With asymmetric information:


       •   - Low quality goods drive high quality
           goods out of the market.
       •   - The market has failed to produce
           mutually beneficial trade.
       •   - Too many low and too few high
           quality cars are on the market.
       •   - Adverse selection occurs; the only
           cars on the market will be low quality
           cars.
The Lemons Problem - applications

 Medical Insurance

   –   Question

        •     Is it possible for insurance
            companies to separate high and low
            risk policy holders?
   –   If not, only high risk people will purchase insurance.
   –   Adverse selection would make medical insurance
       unprofitable.
 Asymmetric Information and Daily Market Decisions

       •   - Retail sales
       •   - Antiques, art, rare coins
       •   - Home repairs
       •   - Restaurants
•        Question

    –    How can these producers provide high quality goods
        when asymmetric information will drive out high-
        quality goods through adverse selection?

    –   Answer
    –    Reputation
    –    Screening
    –    Signaling
    –    Quaranties
    –    Standardized supply (Pizza Hut)
Post-contractual opportunism and moral
hazard

 Post-contractual opportunism is an ex post concept and
  refers to opportunistic hidden action occuring after contracts
  are entered into realisation.
 Moral hazard occurs when the party to be insured can affect
  the probability or magnitude of the event that triggers
  payment.
Determining the Premium for Fire Insurance

     Warehouse worth $100,000
     Probability of a fire:


        .005 with a $50 fire prevention
         program
        .01 without the program
Moral hazard in the real life




 Examples
    Partnerships
    team work (job shirking)
 Re-contracting and hold-up
 How to proceed against moral hazard?
    controllers
    P-A problem
    hostages
    franchising
Transaction costs and the modern corporation

 Te rise of a modern corporation is explained by the
  transaction costs (Chandler):

         First mover advantage
         Oligopoly power and geographical
          expansion
         Investments in physical assets,
          marketing and management
         Diversification
 Divisional organization (M-form) supplemented centralized
  organization (U-form) and holding organization (H-form).
Picture 9: The Divisional firm




                CENTRE




 DIVISION 1    DIVISION 2        DIVISION 3
VERTICAL BOUNDARIES (BDDS,
Ch. 5,6)
The Position of the Firm in a Vertical
Chain
• For each step in the vertical chain the firm has to decide
  between market exchange and vertical integration
• The degree of vertical integration differs
   – Across industries
   – Across firms within an industry
   – Across transactions with in firm
        Benefits and costs of using the market




     A. Benefits of using the market        B. Costs of using the market


1.    Economies of Scale               1.     Coordination Problems
2.    Agency and Influence Costs       2.     Leakage of Private
                                              Information
                                       3.     Transactions Costs
Differential Agency and Technical Efficiency


 $




              k**       T
                             k
        k*




                A C
Case 2: Nucleon
•   Case allows us to explore common manufacturing strategy
    dilemma-make or buy decision
•   This dilemma is presented on the case of small biotechnological
    company Nucleon that has to decide whether or not to V.I
•   The purpose of this case is to present how to methodologically
    approach such a problem


• Questions:
1. Develop a proper decision tree
2. Develop a table with pros. and cons for
    a. phase I&II
    b. phase III
3. Calculate Pilot manufacturing + V.I.
DIVERSIFICATION (BDSS, Ch. 7)
• Firms can diversify in different ways
   – They can develop new lines of business internally
   – They can form joint ventures in new areas of
     business
   – They can acquire firms in unrelated lines of business
   Strategic styles of diversified
   enterprises

             Multidivisional Firm

                      CENTRE




DIVISION 1            DIVISION 2    DIVISION 3
   Strategic management styles
            Largely
            corporate
                                       Centralized


            High
            corporate
                           STRATEGIC
                           PLANNING
Planning
influence
                                                     STRATEGIC
                                                      CONTROL

            Low
            corporate

                                                                     FINANCIAL
                                                                      CONTROL
                              Holding
            Largely           Company
            business
                        Flexible strategic      Tight strategic   Tight financial


                                              Control influence
Rationales for diversification



1.   Economies of scale and scope
2.   Financial synergies
3.   Economizing on transactions costs
4.   Managerial self interest
SCALE AND SCOPE ECONOMICS: Nokia
sales by region




                   1988
         Other               Other W
       countries             Europe
         13%                countries
                              40%
   Finland                Other nordian
    30%                     countries
                              17%
               1998

    Asia/Pacific
       21%
                               Other
America                      European
 21%                         countries
     Other         Finland     52%
      2%             4%
SCALE AND SCOPE ECONOMICS:
Norwegian School of Management


•   One of the largest business schools in Europe
•   18000 students, 9000 part-time students
•   750 fully employed, 750 part-time employed
•   revenue: 100 milions ECU, 11% from the state
•   international network
                                                    BI Norwegian      BI Norwegian
                                                      School of         School of
                                     BI Oslo         Marketing          Retailing    BI Nordland
                      BI Lithuania
                                                                                              BI Bergen
          BI Shanghai

    BI Centre for                                     Graduate                                     BI Stavanger
 Net Based Education                                   studies
                                                                                                        BI Agder
   BI Centre for
Financial Education                                RESEARCH
                                                          Executiv                                      BI Tromsø
BI Kristiansund                                 Under-        e
                                               graduate                                       BI Trondheim
         BI Møre                                studies    school
                                                                                          BI Telemark
                 BI Østfold
                             BI Buskerud                                        BI Vestfold
                                               BI Skedsmo          BI Gjøvik
             International network to exchange
             students and professors




8
                       61              5
    16
         1


                                        4
            Europe


        1


                                             9
                                         9

    2                               6
            3           4
                    2           7
                                         1
                8           1           3

3                                   2
         FINANCIAL STRATEGIES: Financial
         markets

                             FINANCIAL MARKET
                                (broad term)




          MONEY MARKET                            CAPITAL MARKET




Bilateral credit     Open market         Bilateral credit       Open market
 agreements            (tradable         agreements (no       (securities: bonds
(non tradable)        securities)          securities)           and shares)




                   Interbank market                              Secondary
                                             Primary market
                                                                  market
         Internal financing


 Cost
  of                                                                        )
                                                                         S(W1
                                                                                S(W2)
Funds




    r




                                                                                        D


                                    Wo        W 1 Ko    K1          K°            Capital Stock



        Figure 1. Informational Imperfections and Underinvestment
Case 3: Kolektor
• The period before 2000:
   –   Single product development
   –   The role of internal financing
   –   Internal growth
   –   Building capabilities in production of commutators
• The period after 2000:
   –   The need for diversification
   –   Internal growth and acquisitions
   –   Complementary competencies
   –   Related diversification
Structure

 New business models in globalization
 Competitive advantages and strategic positioning
    Horizontal boundaries
    Vertical boundaries/The Transaction Cost Theory
    Diverzification
 How to analyze competitive advantage?
 Sustainable competitive advantage
 Complementary capabilities
Competitive Advantage and
Value Creation
 Competitive Advantage and Profitability: Evidence
           How to analyze competitive
           advantage
                     2 VIEWS ON ORGANIZATION

    Resource-based view                        Activity-based view

     Organization as a                    Organization as a system
  collection of resources:                      of activities:
 Attributes of the firm that could         Processes that deliver value to
  not be varied in the short run                    customers


    Physical resources (plants,
   locations), intangible assets              Procurement, logistics,
  (patents, brands), knowledge,           production, marketing, sales …
organizational culture, composite
           resources …

       Where is the “root” of competitive advantage: in company’s
                         resources or activities?
              Porter’ s tools (BDSS, Ch. 12)



                                     Support
                                     Activities
                                                                 Value
                                                                 What
                                                                 buyers
                                                                 are
                                                                 willing
                                                                 to pay




                                                    Primary
                                                    Activities

 A distinct strategy is needed for each business
                       HIT Case
Threat of entry                             Competitors                                      Guests/Customers
Limited No. of Concessions                  Ca’Noghera                                       Purpose of visit
and restricted investments                  Casino Austria                                   ↑potential of Italian market
(legislation)                               New competitors (theme parks)                    bipolarity
Low entry barrier for getting                                                                Low replacement cost, high
a license                                                                                    customer power→ demand price
                                                 Threat from competition                     sensitive
Lower entry barriers for
narrowly focused guests
High entry barriers for widely
                                                                                           Economic power of
focused guests (location)
                                                                                           customers

                   Power of the state




                                                                           Threats from substitute products
Tax legislation in Slovenia
Gaming tax-proportional
Concession fee-progressive→             Rivaliry between firms                         Substitute products
negative impact on investment in        Location                                       Broader: all forms of free time activities
expanding of business                   Extent of differentiation (purpose of          Narrow: classical gambling, gambling
Effective use of concession fee in      visit)                                         on the internet, slot machines outside
local community                         Benefit vs price                               casinos
                     Effect of Casino Venice on
                     competitiveness of HiT
          P
          P0
          P1

          P2



                                                                        Dt
                                                              DHIT
                                                                         AC’’
                                                                         AC’
                                                                  MC    AC
                                                          D’HIT

                                                        MRt       MC’
                                       MR’HIT
                                                MRHIT

Source: Prašnikar et al., 2002.
                                  Q2    Q1       Q0
HIT covers:




              99
Smaller investment captures:




                               100
Big investment captures:




                           101
Cournot After Tough Commitment
(BDSS, Ch. 9)




                                 102
              Zara Case
       Word-of-                                                                                        Cutting-
        mouth                                                                                       edge fashion at
     marketing and                                                                                  moderate price
     repeat buying                               Widely                                               and quality
                                                 popular
                                                  styles

                                                                                                    Customers
                                                                                                     chic but
                                                    Very                                              cost-
                                                  frequent                                          conscious
                     Little media                                                  Global team
                                                  product
                     advertising                                                    of trend-
                                                  changes
                                                                                     spotters
                                                                                                 Advanced
                                                                                                 production
                                                                           Production            machinery
                                                 Extensive                 in Europe
                                                use of store
                                                 sales data
       Prime store                                                   Tight                           Very flexible
    locations in high                 JIT                      coordination with                      production
      traffic areas                 delivery                      20 wholly-                            system
                                                                owned factories


                    Fit is about leveraging what is different to be more different
Source: Zara Case, 200?.
Structure

 New business models in globalization
 Competitive advantages and strategic positioning
    Horizontal boundaries
    Vertical boundaries/The Transaction Cost Theory
    Diverzification
 How to analyze competitive advantage?
 Sustainable competitive advantage
 Complementary capabilities
Sustainable Competitive
Advantage (BDSS, Ch. 12)

 Competitive advantage is sustainable if it persists despite
  competitors’ efforts to duplicate it or neutralize it

 Sustainability can occur in two ways

     Firms may differ with respect to resources and
      capabilities and the differences persist
     Isolating mechanisms (analogous to barriers to entry)
      may work to protect the competitive advantage of
      firms
Sustainable Competitive Advantage
DIFFERENCES OF RESOURCES AND
CAPABILITIES

 Scarce resources and capabilities that are critical for value
  creation can be imperfectly mobile and cannot be acquired in
  the open market:
     Resources may be non tradable (Example: Customer
      loyalty built through a frequent flyer program)
     Resources may be relationship specific (Example:
      Landing slots in an airline’s hub, Location of retail
      outlets)
Sustainable Competitive Advantage

ISOLATING MECHANISMS

 Isolating mechanisms are to firms what entry barriers are to
  industries

 Two distinct types of isolating mechanisms can be observed

     Impediments to imitation
     Early mover advantage
Sustainable Competitive Advantage

IMPEDIMENTS TO IMITATION

 These mechanisms impede the potential entrants from
  duplicating the resources and capabilities of the incumbent
  firm

 Five important types of impediments exist

       Legal restrictions
       Superior access to inputs/customers
       Market size and scale economies
       Intangible barriers
       Strategic fit
Sustainable Competitive Advantage

EARLY MOVER ADVANTAGE

 Four different isolating mechanisms fall under the category of
  early mover advantage

       Learning curve
       Network externalities
       Reputation and buyer uncertainty
       Switching costs
     Sustainable Competitive Advantage
      Benchmarking of Competitive Advantages
           SCARCE RESOURCES AND             SUSTAINABLE         BENEFIT
               CAPABILITIES               COMPETITIVE ADV.    ADVANTAGES         CREATED
                                                                                ECONOMIC
INTERNAL                                                                          VALUE
FACTORS
           IMMITATION BARRIERS &           CONTESTABLE       COST ADVANTAGES
             FIRST MOVER ADV.             COMPETITIVE ADV.




                                                                                           ECONOMIC
                           BENCHMARKING OF COMPETITIVE ADVANTAGES                           PROFIT




                                                                     BUSINESS
                   SPECIFICS OF BUSINESS ENVIRONMENT                KNOWLEDGE




                INDUSTRY                 BROADER
                                         BUSINESS
                                       ENVIRONMENT
Structure

 New business models in globalization
 Competitive advantages and strategic positioning
    Horizontal boundaries
    Vertical boundaries/The Transaction Cost Theory
    Diverzification
 How to analyze competitive advantage?
 Sustainable competitive advantage
 Complementary capabilities
Capabilities and competencies
(Rajkovič, Prašnikar,BDSS, Ch. 13)


         COMPETENCIES

   Sustainable and synchronized utilization of resources
   Spread across multiple products, markets, functions
   Network of capabilities




          CAPABILITIES

Patterns of activities
Utilize firm’s resources (physical, intellectual, cultural capital)
Product and industry specific
                       Technological, marketing and
                       complementary capabilities
Capabilities
Utilization of scientific and technical knowledge for R&D of
products/processes
                                                                   Capabilities
               Competencies                                        Synergy/fit between technological and marketing capabilities;
               Practical & teoretical know-how, methods,           new applications of existing knowledge
               procedures, experience                                             Competencies
                                                                                  Integration of specialties and functions,
                              TECHNOLOGICAL                                       exploitation of synergies, integration of
                          capabilities  competencies                             internal&external resources, generation of
                                                                                  dynamic capabilities


                                                                   COMPLEMENTARY                             Competitive
                                                               capabilities  competencies                    advantage


                                  MARKETING
                          capabilities  competencies


                    Capabilities
                    Knowledge and skills that generate customer value and facilitate effective response to
                    market challenges
                                   Competencies
                                   Marketing research, channel management, customer relationship
                                   management, forecasting and responding to competitors’ strategies
Technological, marketing and
complementary competencies in
Slovenian companies
Methodology
Sample of 50 medium-sized and large Slovenian manufacturing
  companies
Questionnaire tested in 12 companies
         (R&D managers, production line managers)


Questionnaire structure
Competencies
         Technological, marketing, complementary

Industry characteristics
Innovation performance
The characteristics of the R&D function
Business performance


 Competencies’ development                         Analysis of the segments
                Transfer of technological and marketing
                 knowledge within the company
                Contribution to the industry trends
                Strategy explicitness
                R&D knowledge transfer between strategic
                 partners




          TECHNOLOGICAL                       MARKETING
           COMPETENCIES                      COMPETENCIES


   Developmental processes               Perception of changes in customer
      R&D advancement                     preferences and needs
                                       Acquirement
      Number & width of technological competencies of real time information about
                                           competitors
      Efficiency in predicting technological trends
   Product development COMPLEMENTARY  Establishment and management of long-
                                           term customer relations
      Time needed to develop completely new product
                               COMPETENCIES
                                      
      Time needed to improve product Establishment and management of long-
                                           term supplier relations
   Production: product quality
   Cost efficiency of product development
                  Three segments of companies
                         The leading firms       Technology           Followers with         Followers with
                                                   leaders                strong                  weak
Innovative performance                                                competencies           competences
Technological competencies
Marketing competencies

Complementary competencies

New product development
                                                 Product quality     Lag behind in         The smallest
                                                 Number of            terms of the           number of new
                                                  available quality    number of              products and the
                                                  technological        innovations but        poorest quality
                     Innovative firms             capabilities         high quality of       Lags behind in
                     The best business           Obtaining real       new products it        terms of
                         performers               time information     does produce           obtaining real
                                                  on customers                                time information
                     Low market
                                                 Participation in                            on customers
                         uncertainty                                                          and relationship
                                                  strategic
                                                  technological                               building
                                                  partnership
                                                 New product
                                                  development
                                                  lead times
Case 4: Technological and
marketing capabilities in
Gorenje Inc.
Questions:

1. Methodology for measuring technological
   and marketing capabilities
2. Application of the methodology to Gorenje
3. Complementary capablities
                       Linear and interactive innovation
                       models and the role of design (d)
   Linear innovation model
                                                (R)
                                                                                                    (D + d)

               BASIC RESEARCH
                                                               APPLICATIVE                   DEVELOPMENT &              PRODUCTION             SALES
   BASIC SCIENCE               APPLICATIVELLY
                                                                RESEARCH                        DESIGN
       (Bohr)                  ORIENTED BASIC
                                                                 (Edison)
                                 RESEARCH
                                   (Pasteur)                       6.2
         6.0
                                      6.1




                                                              Interactive innovation model with design (d)

                                       RESEARCH (R)
                                                      Postojeće zalihe znanja (sveučilišta, instituti, tvrtke...)

                                                                               (D)
                                                                                                                                   Sales
                   Potential                                    Exploratory       Extended                                  KNOWING MARKETS:
                                     INVENTION
                                                                                                           Production     MARKETING CAPABILITIES
                   markets                                     development       development
                                                                    6.3              6.4                                      (Market Brands)




                                                                                              (d)

                                                          Designers and product leaders
Source: Forbes, Wield, 2000, Amsden, Tschang, 2003.

				
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