Competitive strategies

How to measure the firm’s ability to create/capture value and build competitive advantage?

We have to categories of measures: short-term and long term ones.

Short-term:

- ROI

- ROA

- ROE

2.3 social performance and economic performance

A firm is not evaluated on its financial performance alone. Especially in recent years, increasing

attention has been paid to its social image. Corporate social responsibility (CSR) studies highlight

the importance of “doing well by doing good”.

Strong economic performance cannot be maintained with a poor social image; good social

relationships are in danger if the economic returns of the firm are in crisis.

3 SECTOR ANALYSIS

Michael Porter, 1970.

Sector characteristics are mostly responsible for the lebel of value creation, and the firm’s position

explains how much of this value the firm will capture.

5 FORCES:

1- actual competition in the sector: the higher is the number of competitors, the lower is the

possibility of obtaining stable profits. We can calculate the market share with datas on sales

of each firm. These are quantitative infos, but also qualitative infos are fundamental, such as

“are the main clients firms or individuals?” or “is competition oriented toward price or

quality?”.

2- future competition in the sector: to understand a sector it is important to evaluate the

probability of new competitors emerging. Entry barriers: fixed costs that new entrants must

pay just to be able to compete in the market.

a. Ex ante

i. Exogenous: for example legal barriers or taxes

ii. Endogenous: barriers posed from the incumbents firms to make the sector

less attractive to the entrant

b. Ex post: aggressive reaction of competitors, for example price war, tightening

controls over distribution ,channels, challenging or accommodating.

3- power of suppliers: if the power of suppliers increases, they can decide to charge more costs

on the products they sell.

4- power of buyers: it’s high if

a. the buyer purchases large volumes compared to the seller’s sales

b. the products sold/bought are standard: alternative suppliers are easy to find

c. few switching cost

d. few buyers and many sellers

e. if buyers can easily backward integrate: the buyer can produce the product itself

f. the product sold is not an important part of the buyer’s business

5- presence of substitutes and complements

4 COST ADVANTAGE AND DIFFERENTIATION ADVANTAGE

Cost advantage consists in the capability of the firm to produce a good or service at lower average

costs than the competitors, without compromising its perceived uniqueness.

What produces cost advantage:

a) Scale economies

b) Load factor

c) Scope economies

d) Learning economies

e) Organization of production

f) Corporate strategy

g) Product design

h) Residual efficiency

To exploit cost advantage we have two ways:

1) The first is to align the price of the product with competitors’ prices in order to gain higher

margins per product sold.

2) The second is to aggressively lower the product price: it will increase the quantity of product

sold, which should lead to higher profits than the competitors earn. On the other hand,

lowering the price could lead to a price war which could be detrimental for everyone.

In conclusion, to pursue a cost advantage strategy we should know: 1 its cost structure; 2 the cost

structure of its competitors; 3 the price elasticity of the market.

Differentiation advantage results when the firm can produce a good or a service that the customers

perceive with higher uniqueness than the average products in the sector, so they express a higher

willingness to pay.

What produces differentiation advantage:

a) organization of production

b) corporate strategy

c) first mover advantage

d) complementarities with other products

e) product design

ReD and marketing investments are the main responsible for the tangible and intangible

differentiation of a firm.

Tangible differentiation – differenziazione verticale: physical product characteristics.

Intangible differentiation – differenziazione orizzontale: it reflects customers’ different tastes.

To exploit a differentiation advantage the usual way is to obtain a premium price

Defence:

1- protection from imitation:

a. formal intellectual property rights eg patenta, trademarks

b. secrecy

c. obtaining ex ante monopoly power over strategic resources

2- adaptation: ability of the firm to cope with dynamics, to regenerate (to maintain the

competitive advantage alive, such as with investments in ReD) and to reconfigure the

sources of competitive advantage.

Competitive advantage Defensibility

Fit with the environment Threat of substitution Adaptation

Innovation Threat of imitation Protection from imitation

8 INDUSTRY DYNAMICS

Life cycle of the sector: introduction, growth, maturity and decline.

Present strategy, future strategy and intentional strategy compose the basis for a successful industry.

Then there is: perception, pattern/position and plan.