Chapter 5: Strategies for competitive advantage

Chapter learning objectives

Upon completion of this chapter you will be able to:

• apply the value chain in a scenario
• describe the meaning of value networks in a commercial setting
• explain, in a scenario, through the strategic clock, the generic strategy options of: cost leadership, differentiation, focus
• explain the competitive advantages that might develop from cost efficiency
• explain, for a range of organisations, the importance of innovation in supporting business strategy
• explain the importance of knowledge management for both profit-seeking and not-for-profit organisations
• define 'hyper competition' and describe the strategies of: repositioning, overcoming competitors' barriers, competing successfully, overcoming competitors' market-based moves and explaining how these can be helpful in dealing with hyper competition
• explain strategies (such as lock-in) for sustaining competitive advantage
• describe the three different types of benchmarking (historical, industry/sector, best-in-class).

1 Value chain analysis

The best way to assess whether an organisation has achieved a competitive advantage is by examining its value chain.

The value chain

Porter developed the value chain to help identify which activitieswithin the firm were contributing to a competitive advantage and whichwere not.

The approach involves breaking down the firm into five 'primary'and four 'support' activities, and then looking at each to see if theygive a cost advantage or quality advantage.

Explanation of the value chain activities

Primary activities:

• Inbound logistics – receiving, storing and handling raw material inputs. For example, a just-in-time stock system could give a cost advantage.
• Operations – transformation of the raw materials into finished goods and services. For example, using skilled craftsmen could give a quality advantage.
• Outbound logistics – storing, distributing and delivering finished goods to customers. For example, outsourcing delivering could give a cost advantage.
• Marketing and sales – for example, sponsorship of a sports celebrity could enhance the image of the product.
• Service – all activities that occur after the point of sale, such as installation, training and repair, e.g. Marks & Spencer's friendly approach to returns gives it a perceived quality advantage.

Secondary activities:

• Firm infrastructure – how the firm is organised. For example, centralised buying could result in cost savings due to bulk discounts.
• Technology development – how the firm uses technology. For example, the latest computer-controlled machinery gives greater flexibility to tailor products to individual customer specifications.
• Human resources development – how people contribute to competitive advantage. For example, employing expert buyers could enable a supermarket to purchase better wines than competitors.
• Procurement – purchasing, but not just limited to materials. For example, buying a building out of town could give a cost advantage over high street competitors.

All organisations in a particular industry will have a similar value chain, which will include activities such as:

• obtaining raw materials
• designing products
• building manufacturing facilities
• developing co-operative agreements
• providing customer service.

It is vital that the linkages between the different elements of avalue chain are considered. Firstly this is to ensure consistency –for example, a differentiator will want to ensure that any costadvantages within the value chain do not compromise overall quality.Secondly it may be that through linking separate activities moreeffectively than competitors, a firm can gain a competitive advantage.

Test your understanding 1

Identify the primary activities in the value chain for a publisher of educational study guides.

Apply the value chain in a scenario

To gain a competitive advantage over its rivals a company must either:

• perform value creation functions at a lower cost than its rivals or
• perform them in a way that leads to differentiation and a premium price.

In an exam situation you might use Porter's value chain analysis todecide how individual activities might be changed to reduce costs ofoperation or to improve the value of the organisation's offerings.

Illustration 1 – Using the value chain to gain a competitive advantage

Value chain analysis looks at each of the processes that make up the chain of activity and:

• rates how important it is in a given company's production or service activity
• rates how the company compares to its competitors
• helps to decide how individual activities might be changed to reduce costs of operation
• helps to improve the value of the organisation's offerings.

For example, a clothes manufacturer may spend large amounts on:

• buying good quality raw materials (inbound logistics)
• hand-finishing garments (operations)
• building a successful brand image (marketing)
• running its own fleet of delivery trucks in order to deliver finished clothes quickly to customers (outbound logistics).

All of these should add value to the product, allowing the company to charge a premium for its clothes.

Another clothes manufacturer may:

• reduce the cost of its raw materials by buying in cheaper supplies from abroad (inbound logistics)
• making all its clothes by machinery running 24 hours a day (operations)
• delay distribution until delivery trucks can be filled with garments for a particular request (outbound logistics).

All of these should allow the company to be able to gain economiesof scale and be able to sell clothes at a cheaper price than its rivals.

Illustration 2 – Real world value chains

Marks & Spencer plc compete in the food and grocery market byconfiguring their value chain to give a differentiated service.

Whereas Kwik Save compete by cost leadership in the same market.

Value networks

The organisation's value chain does not exist in isolation. Therewill be direct links between the inbound logistics of the firm and theoutbound logistics of its suppliers, for example. An understanding ofthe value system and how the organisation's value chain fits in to itwill therefore aid in the strategic planning process.

Illustration of value chain analysis

A value network is a web of relationships that generates economicvalue and other benefits through complex dynamic exchanges between twoor more individuals, groups or organisations.

• Tangible value exchanges – involve all exchanges of goods, services or revenue, including all transactions involving contracts and invoices, return receipt of orders, request for proposals, confirmations or payment.
• Intangible knowledge exchanges – include strategic information, planning knowledge, process knowledge, technical know-how, collaborative design, policy development, etc.

Illustration

Amazon, for example, not only revolutionised the business model forselling books, but also formed an entire new value network of suppliersand buyers that redefined the value chain for acquiring books andmusic. Replacing the retail bookstore with a website and the 'over thecounter' delivery process with FedEx and UPS delivery created a newvalue network that delivered customer convenience and an entirelydifferent and lower-cost business model.

Test your understanding 2

How might the owner of a restaurant create value?

2 Competitive strategy options

Generic strategies: cost leadership, differentiation and focus

Professor Michael Porter identified three generic strategies through which an organisation could achieve competitive advantage.

A business that fails to achieve one of these generic positions will be stuck in the middle â€“it will lose some customers who will move downmarket to the costleader, other customers who will move upmarket to differentiators, andothers will move to rivals who focus on their specialist needs.

Porter's generic strategies

Cost leadership

Set out to be the lowest cost producer in an industry. By producingat the lowest possible cost the manufacturer can compete on price withevery other producer in the industry and earn the highest unit profits.

How does one become a cost leader?

• Decide whom you are competing against (e.g. Tesco, M&S or Harrods food hall)?
• Perform value analysis to determine why customers value the product – what are key features that have to be matched and which product attributes could be dropped or reduced?
• Understand your own costs and cost drivers.
• Try to make a product of comparable quality for a lower cost – this may involve a full analysis of the value chain.

Advantages

• Better margins through lower costs.
• Ability to undercut competitors on price, thus reducing competitive rivalry.
• Low costs act as a barrier to entry deterring new entrants.
• Low prices make substitutes less attractive.
• Better margins give more scope to absorb pressure from powerful buyers/suppliers.
• Low costs give a platform for expansion – both gaining market share and moving into new markets.

Drawbacks of such a strategy

• In industries that only require a low critical mass of production output to achieve economies of scale, cost leadership would be difficult to achieve, because many other firms would be able to match the costs. It is only when the critical mass of production is high that a cost leadership strategy is likely to be effective.

Other drawbacks

• Only room for one cost leader – no fallback position if the cost advantage is eroded.
• Cost advantage may be lost because of inflation, movements in exchange rates, competitors using more modern manufacturing technology or cheap overseas labour, etc.
• Customers may prefer to pay extra for a better product.

Differentiation

Here the firm creates a product that is perceived to be unique in the market.

Consider the following case.

Suppose you wanted to develop a better coffee percolator. To decidewhat makes it 'better' you need to ask why people need a percolatorrather than making instant coffee; the answer is taste.

The key issue is therefore to discover how the design of a percolator affects the taste.

(1)The most important issue is thewater quality. A 'better' percolator thus needs to remove chlorine inthe water and ensure it is at the correct temperature when meeting thecoffee.

(2)Another key factor is the timebetween grinding the beans and pouring on the water. A 'better'percolator should thus grind the beans and control when the water isapplied.

Ways of achieving differentiation

Quality differentiation

This has to do with the features of the product that make it better – not fundamentally different but just better.

Design differentiation

Differentiate on the basis of design and offer the customersomething that is truly different as it breaks away from the dominantdesign if there is one.

Image differentiation

Marketing is used to feign differentiation where it otherwise doesnot exist, i.e. an image is created for the product. This can alsoinclude cosmetic differences to a product that do not enhance itsperformance in any serious way (e.g. packaging).

Support differentiation

More substantial but still has no effect on the product itself, isto differentiate on the basis of something that goes alongside theproduct, some basis of support, such as after-sales service.

Rewards of a differentiation strategy:

• better margins through being able to charge higher prices
• higher quality offsets competitive rivalry
• product uniqueness reduces customer power
• quality acts as a barrier to entry
• quality reduces the attractiveness of substitutes.

Risks of such a strategy:

• cheap copies
• being out-differentiated
• customers unwilling to pay the extra (e.g. in a recession)
• differentiating factors no longer valued by customers (e.g. due to changes in fashion).

Focus

Position oneself to uniquely serve one particular niche in themarket. A focus strategy is based on fragmenting the market and focusingon particular market segments. The firm will not market its productsindustry-wide but will concentrate on a particular type of buyer orgeographical area.

Cost focus

This involves selecting a particular niche in the market andfocusing on providing products for that niche. By concentrating on alimited range of products or a small geographical area the costs can bekept low.

Differentiation focus

Select a particular niche and concentrate on competing in that niche on the basis of differentiation.

Reward

You become an expert in your field and understand the marketplace more.

Risks

The segment is not sustainable enough to provide the firm with a profitable basis for its operations.

Test your understanding 3

What types of generic strategies are the following companies adopting?

(1)Walmart

(2)Saga Holidays (specialises in holidays for those over 55)

(3)Bang and Olufson

The strategy clock

An alternative way of identifying strategies that might lead tocompetitive advantage is to look at 'market facing' generic strategies.

• This approach is based on the assumption that competitive advantage is achieved if a firm supplies what customers want better or more effectively than its competitors.
• Better could mean a more suitable product or service, or could mean a cheaper one of adequate quality.
• In effect, customers are looking for what they perceive as best 'value for money'.

Explanation of the strategy clock strategies

(Adapted from the work of C. Bowman and D. Faulkner 'Competitive and Corporate Strategy – Irwin – 1996)

Routes 1 and 2 are price-based strategies.

• 1 = no frills

  Commodity-like products and services. Very price-sensitive customers. Simple products and services where innovation is quickly imitated – price is a key competitive weapon. Costs are kept low because the product/service is very basic.

• 2 = low price

  Aim for a low price without sacrificing perceived quality or benefits. In the long-run, the low price strategy must be supported by a low cost base.

• 3 = hybrid strategy

  Achieves differentiation, but also keeps prices down. This implies high volumes or some other way in which costs can be kept low despite the inherent costs of differentiation.

Routes 4 and 5 are differentiation strategies.

• 4 = differentiation

  Offering better products and services at higher selling prices. Products and services need to be targeted carefully if customers are going to be willing to pay a premium price.

• 5 = focused differentiation

  Offering high perceived benefits at high prices. Often this approach relies on powerful branding. New ventures often start with focused strategies, but then become less focused as they grow and need to address new markets.

• 6, 7, 8 = failure strategies

  Ordinary products and services being sold at high prices. Can only work if there is a protected monopoly. Some organisations try option 8 by sneakily reducing benefits while maintaining prices.

Note that an organisation can have identified several strategic business units (SBUs).

A SBU is a part of an organisation for which there is a distinctexternal market. Different strategies can be adopted for different SBUs.For example, Toyota and Lexus (part of Toyota) operate as separate SBUswith different strategies. Some fashion businesses successfullyseparate their exclusive ranges of clothing from their diffusion lines.

Illustration on the strategic clock

Illustration – Competitive strategy options – strategic clock

No frills

RyanAir (a very successful, no-frills airline). Ferocious attentionto keeping costs down: non-reclining seats (break, extra weight); noback-of-seat pockets (extra cleaning); discouraging checked-baggage(airport charges for loading/unloading baggage); use of cheap airports.

Low price

Dell computers. Good quality computers at low prices. Relies onvery efficient production techniques to keep costs low to preserve areasonable margin.

Hybrid

IKEA. Cheap furnishings, but smart design and large range ofinventories. Costs are kept low by self-service, efficient production,high volumes and excellent logistics.

Differentiation

Full service airlines such as British Airways. Prices are usuallyhigher, but there is in-flight service, more leg-room and customers arebetter looked after if there are scheduling problems.

Focused differentiation

Business/first class on full service airlines. Another examplewould be couture fashion – small markets, high prices, sustained bybrand names.

Test your understanding 4

Where on the strategy clock should the following companies or products be placed?

(1)MacDonalds

(2)Zara

(3)Apple i-Pods.

3 Further examples of competitive strategies

Cost Efficiency

Managing costs needs both resources and competences. For example,modern, flexible machinery can cut production time and costs; having thecompetence to organise an efficient just-in-time inventory system willsave inventory costs.

Illustration on cost efficiency (Dell)

Dell Computers is widely admired for its inventory and productionsystem that has enabled the company to become one of the most successfuland resilient computer manufacturers in the world. It sells goodquality computers at very competitive prices. There is great emphasis oncost efficiency.

Broadly, their system is as follows.

(1)Orders are received by phone andover the web. The orders are consolidated every 15 minutes and ordersfor the parts needed are automatically transmitted to suppliers.

(2)The suppliers supply the componentswithin an hour and a half. Suppliers all have to have their own plantsclose to Dell's so that supplies can be made quickly. (Note that iforders are consolidated every quarter of an hour, there will be fourdeliveries per hour.)

(3)The suppliers' lorries wait at theDell factory. When an assembly line runs low of components, a forklifttakes a pallet from the appropriate lorry. Only when the forkliftcrosses a specific white line in the factory does Dell take ownership ofthe goods. That's where the brief life on inventory starts.

(4)The ordered goods are assembled,tested and dispatched. The only inventory is the work-in-progress, theunits being tested and the units being shipped.

(5)Every member of staff is involvedin at least one Business Process Improvement project, which are allaimed at squeezing out costs. Typically, parts snap into position ratherthan needing screws, thus shaving 20 seconds or so from assembly time.

(6)The time between receiving an order and dispatch is between four and eight hours.

(7)Dell's manufacturing in the USA is no more expensive than manufacturing in a low labour-cost country.

Note that IBM decided it could not make sufficient profits makinglaptops and sold its business to Lenovo, a company based in China. TheDell TMC plant in Texas and its sister plant in Nashville are the onlymajor computer manufacturing plants still left in the USA. HP, Gatewayand Apple all manufacture outside the USA where costs are lower.

Illustration on cost efficiency (General Motors)

General Motors and Ford Motor Company are both having difficultiesmaking profits in the USA. Toyota is very profitable there. Of course,there are two sides to the profit equation (revenue and costs) but it'sworth looking just at one element of the General Motors' cost side tosee the difficulties facing it.

General Motors is long established in the US and has many retireeswho were promised generous pensions and healthcare provision. Toyota is amuch more recent company in the US and has relatively few retirees. For2004, General Motors' healthcare and pension costs amounted to around$2,200 per vehicle produced. Toyota's comparable costs were around $300per vehicle produced. That's a large cost gap to cover with increasedselling prices. In fact, GM's prices are lower than Toyota's.

Test your understanding 5

Consider how the following technologies could improve cost efficiency:

(1)the internet

(2)computer-aided design

(3)sub-contracting

(4)takeovers.

Differentiation through innovation

Innovation is increasingly seen as important for strategic success. The reasons are:

• increased rate of technical advances
• increased competition
• increased customer expectations.

In all functions that serve to produce goods and services,achieving superior innovativeness, relative to that of competitors, canhelp the firm to acquire new customers. Superior innovation gives acompany something unique, something that its competitors lack until theyare able to imitate the innovation. By the time competitors succeed inimitating the innovator, the innovating company has already built upsuch brand loyalty that its imitating competitors will find it difficultto attack their position.

Innovation can apply to:

• the nature of the product or service being supplied
• how the product or service is produced and delivered
• operating the firm in a new or novel way.

Research and development

Research and development (R&D) can be defined as 'theorganisation of innovation at the level of the firm'. R&D aims tosatisfy a market need by developing new products and by improved methodsof production. It must also find applications for scientific andtechnical developments. However, an R&D (innovation) strategy cannotsensibly be pursued in isolation from the rest of the organisation. Thebusiness strategy will concentrate on the broad range of products thatthe organisation wishes to have and the broad markets in which it wishesto compete. This strategy will be supported by the organisation'scompetence strategy, focused on the technologies the organisation needsif it is to pursue its business strategy successfully.

The R&D function should have a major innovative role in allorganisations. The pressures to introduce new ways of doing things maybe 'demand pulled', that is the innovation filling a market need, or itmay be 'technology pushed', the innovation coming from the applicationof discoveries. In many organisations, there is a group of people, notnecessarily called R&D, whose responsibilities include the creationof new business ideas and techniques.

An innovation strategy calls for a management policy of giving encouragement to innovative ideas. This has a number of aspects.

• Financial backing must be given to innovation, by spending on R&D and market research and risking capital on new ideas.
• Employees must be given the opportunity to work in an environment where the exchange of ideas for innovation can take place. Appropriate management style and organisation structure are needed.
• Management can actively encourage employees and customers to put forward new ideas. Participation by subordinates in development decisions might encourage them to become more involved with development projects and committed to their success.
• Development teams can be set up and an organisation built up on project teamwork.
• Where appropriate, recruitment policy should be directed towards appointing employees with the necessary skills for doing innovative work. Employees should be trained and kept up to date.
• Certain managers should be made responsible for obtaining information about innovative ideas from the environment, and for communicating it throughout the organisation.

The importance of innovation in strategy is one of the most hotlydisputed questions in the subject. In many cases, the most innovativecompanies in an industry consistently fail to be among the mostprofitable. This creates a divergence of opinion over the role ofinnovation-based strategy.

A company that chooses not to be innovative is still influenced bythe effect of innovation. It is innovation that frequently underminesthe basis of competition in existing markets, and creates new marketsthat may supersede old ones. Firms must learn to innovate with greatercommercial effectiveness than is the case at present, or learn toreplicate innovations more quickly than they would choose to. The rateof innovation is often too quick for a balanced assessment of it to becarried out in a sensible time period.

Richard Lynch identifies three distinctive roles for innovation within a business level strategy:

• achieving new growth through entry into new products and markets
• retaining competitive advantage by strengthening the product offering
• achieving competitive advantage through jumping ahead of existing rivals.

The indications are that organisations with high market sharedevelop strategies of higher price and/or higher quality than low-sharecompetition. These organisations tend to be more profitable, thusproviding the cash to invest in R&D to improve and differentiateproducts, enhancing their market position and also justifying higherprices.

Acquiring new technologies

New technologies often emerge in one of two ways. Technology-pushis based upon an understanding of the technology, but a lesswell-developed idea of market pull has important applications. Atechnology push-based innovator always has difficulty in findingproduct/market applications for the discoveries he or she makes.Consequently, a firm using technology push may frequently developstrategies by emergent processes to exploit the latest discoveries. Thedanger is that the new innovation might be ahead of complementaryapplications, and the advantage lost by the time other technologiescatch up. It is possible to see this in the information technologybusiness where hardware runs in excess of the specifications forexisting software, and sellers find it increasingly difficult to justifymargins at the high performance end of the market. On the other hand,breakthrough technologies are almost invariably of the technology pushkind.

New ideas frequently emerge through market-pull. In this case, newtechnologies are developed based upon a good understanding of customerrequirements, or close collaboration with a customer. In such cases,finding a market for a new product is less problematic, but may still befraught with difficulty.

Naturally, these two approaches are not mutually exclusive, andfrequently support each other. For example, an attempt to store films ona compact disc was an example of market-led innovation, but thetechnology was more effectively applied to data storage for computersafter the failure of the original product. It is far better to think ofthese as the two complementary drivers to innovative activity.

Exploitation of existing technologies

An organisation that develops an advantage in a particulartechnology should consider a strategy of market development. That is,that the knowledge and competences can be applied to new markets. Anillustration of switching from entertainment to data storage based uponknowledge of a particular technology is one such example. Where thecompany has a diversified product range, discoveries in one area can bereadily applied to another.

Innovation and existing products

In certain stages of the product life cycle, innovation may be athreshold competence. For example, in mobile telephones and software itis vitally important to maintain product features at least as good asthose of competing products. Technology-driven strategies tend to bemore effective than market ones because many users will be unaware ofthe possibilities of the technology or the uses to which it might beput. Innovation plus good sales skills are threshold competences.

Overall

A successful company is one that:

• is outward-looking, has accepted the reality of constant change and reviews its product-market policy continuously
• is always looking to the future towards new markets, innovative products, better designs, new processes, improved quality, increased productivity
• has a structure designed for innovation in which management and staff are stimulated to think and act innovatively, which recognises potential 'intrapreneurs' and ensures that everyone (particularly senior people) welcome changes for the better
• stimulates creativity, and rewards ideas and supports individual and team abilities.

Illustration 3 – The importance of innovation

Amazon first appeared on the internet in 1995 selling books. It wasa major innovator in the business of internet retailing and soon CDsand DVDs were added to its product lists. The website allows customersto search a very extensive database and to order goods, which wouldnormally be delivered by post in a few days. The website also allowscustomers to write reviews about products, and informs customers abouthow consumers of a particular product also bought other products.Consumer goods such as electronics are now available from Amazon.

Although Amazon is pre-eminent in internet-based sales of books,CDs and DVDs, innovation cannot stop and the company is spending heavilyon technology that will allow customers to download books, music andvideo over the internet rather than having them delivered by post. Thecompany is being forced to innovate because competitors, such as Apple'siTunes, have been very successful in selling audio downloads, and haverecently made movies available for downloading.

On-demand printing of books is particularly suitable forlower-volume books and those that would normally be regarded as out ofprint.

Unless Amazon can provide downloadable material, it risks losingbusiness to those who can – rather like a decade ago when Amazonitself attacked conventional book and music shops.

Test your understanding 6

Consider the importance of innovation in the following businesses and suggest areas that might benefit from innovation:

(1)a car manufacturer

(2)a supermarket

(3)a commercial television company.

Differentiation through knowledge management

Knowledge management involves the processes of:

• uncovering, or discovering, knowledge
• capturing knowledge
• sharing knowledge
• distributing knowledge
• levering knowledge
• maintaining knowledge.

What is knowledge?

Before the importance of knowledge management is discussed, anattempt has to be made to define 'knowledge'. This can only be done bycomparing knowledge with data and information.

• Data is raw fact. For example, a list in ascending order of all outstanding invoices is data.
• Information is data that has meaning. For example, a list of all outstanding invoices sorted by customer and with subtotals calculated for each customer. Now the data has meaning and has become useful.
• Knowledge is information in someone's mind. A printout of the sales ledger contains information, but if it is never read by someone, it will never become knowledge and remains useless until it is read.

Knowledge is of two types.

• Explicit knowledge. This is generally written down and organisations know that it exists.
• Tacit knowledge. Not written, often existing only in employees' minds. Organisations are unlikely to know that it exists, or the extent to which it exists.

Illustration

Members of a sales team will have information available about thesales made to key customers and the sales trends of the company's majorproducts. This information and knowledge is explicit as it exists inreports that are widely distributed.

A sales representative may have personal knowledge about thecharacter, interests and background of the buyers in major customers.This helps the sales person get on with the buyers and this should helpto generate sales. If the sales representative keeps this knowledge tohimself, or herself, this would be an example of tacit knowledge and theorganisation will not usually be aware of it. Indeed, the salesrepresentative might not be actively aware about the importance of thisknowledge and about how it is used in the sales process.

Another sales representative has read an article in a scientificjournal that implies that one of the company's major products may havelong-term health implications for customers. However, that knowledgeremains tacit unless passed on to others and formalised.

Illustration 4 – Knowledge management

Modern IT systems have made sharing and distributing knowledgeeasier. Corporate intranets will make available information on customersand products. Groupware, such as Lotus Notes, allows collaboration ondocuments and projects, customer relationship management systems providequick access to important customer information and can providecustomers with a much better service.

The UK Government has a massive project in progress to computeriseeveryone's health records. The aim is that a patient's medical historywill be available instantly to any health professional in any hospitalor clinic.

The growing importance of knowledge management

Knowledge management has become an important part of gaining andmaintaining competitive advantage. Reasons for this are as follows.

• Both business and not-for-profit organisations are more complex so there is more knowledge to manage. For example, there are many more government regulations that have to be followed for health and safety. The government sets many more targets to monitor the performance of hospitals and schools.
• The environment, technology, competitors and markets are changing rapidly. Look at the pace of change in the broadcast/internet industry.
• The move from manufacturing to service industries means that a greater proportion of an organisation's knowledge is likely to be tacit. It is relatively easy to formally specify a product, but harder to specify everything that should happen in the successful delivery of a service.
• Greater job mobility means that, unless captured and recorded, valuable knowledge can be lost as staff move on.

Test your understanding 7

A barrier to knowledge management is that many people believe thatkeeping knowledge secret gives them unique power. Knowledge management,however, requires that knowledge is uncovered and shared.

What arguments could be used to encourage individuals freely to give up and share knowledge?

4 Hyper-competition

Introduction

Hyper-competition: where the frequency, audacity, innovation andaggressiveness of competitors creates an environment of constantmovement and change.

Examples are seen in:

• the impact of the internet on the music business
• technological developments in telephony
• bio-engineering/pharmaceuticals.

Hyper-competition means that sustaining competitive advantagethrough adopting a stable price-based strategy or differentiation-basedstrategy becomes more difficult as products and markets change quicklyand radically.

Strategies for hyper-competitive environments

• Repositioning on the strategy clock

For example, an organisation that was a differentiator could cut prices so that its former, relatively exclusive products, have price cuts and the products are perceived as being 'no-frills'.

• Competing successfully

Do not be satisfied with current products; be unpredictable and radical; be a leader not a follower. It is, of course, difficult for an organisation to make the case for abandoning a currently successful formula so as to keep ahead of competition.

• Fight and overcome competitors' strategies

For example, act to prevent lock-in by fighting a competitors' plan to gain market dominance with a new product. Imitate competitors and go one better.

• Barriers to entry may be easier to overcome in hyper-competition. If technology is changing, the competitors one-time safe, dominant position can become tenuous.­

Illustration on hyper competition (telecommunications)

Traditional land-line telephone companies were in very dominantpositions because of the cost of installing the infrastructure. Mobilephone technology allowed competitors to overcome this barrier much moreeasily. VOIP (Voice Over Internet Protocol) suppliers, such as Skype,are now able to establish fierce competition in the telecoms market.

Illustration on hyper competition (the i-Pod Nano)

Apple Inc launched its i-Pod Nano model while its previous model,the i-Pod Mini, still had market dominance. One reason was to take themarket by surprise and to stay ahead of what competitors might be doing.

Test your understanding 8

The food industry has undergone a transformation in the last 20years or so, with changes to both the range of food, production,sourcing and distribution methods.

How has fresh salmon changed its position on the strategy clock?

5 Sustaining competitive advantage

Once a competitive advantage is achieved it will be important thatit is sustained. The capabilities (with reference to chapter 3) neededto sustain competitive advantage are.

• Value of strategic capabilities. The strategic capability must be one that is of value to the customer. A distinctive capability is not enough: the strategic capability must be able to generate what customers value in terms of products or services.
• Rarity of strategic capabilities. Competitive advantage will not be attained if competitors have identical strategic capabilities. Unique or rare resources or competences are needed to allow the organisation to outperform its rivals.
• Robustness of strategic capabilities. Capabilities for competitive advantage should be robust, meaning that they are hard to imitate. Therefore, competitive advantage is not so often sustained through physical/tangible resources as these can be copied/acquired over time. More important is the way in which the resources are organised and deployed as these competences are, in general, more difficult to identify and imitate.

Illustration 5 – Sustaining competitive advantage

Dyson vacuum cleaners have sold well for many years, at relativelyhigh prices, in the face of competition from large, more establishedmanufacturers such as Hoover and Philips. The sources of their sustainedcompetitive advantage are.

Value: innovative, bagless, hi-tech styled.

Rarity: high amounts spent on research and development.

Other manufacturers might have a vested interest in selling dust bags at high profit margins and are reluctant to innovate.

Robustness: patented process to centrifuge dust into the collection container.

Test your understanding 9

In terms of margin per unit sold, Porsche is the world's most successful car company.

Suggest how that company might have achieved and sustained such a strong position.

As well as the generic strategies already considered, competitive advantage might be achieved through lock-in.

Lock-in

This approach can work for both price-based anddifferentiation-based strategies. It happens where a business' productsbecome the industry standards. Examples are:

• Microsoft Windows
• Dolby
• Internet explorer

These are not necessarily the best or cheapest products but havesuch market-dominance that competitors find it very difficult to breakinto the market because users are often locked in to the product andwould find it expensive or inconvenient to switch to rivals. The majorthreat to such businesses is likely to be attention from anti-monopolyregulators.

6 Benchmarking

Why benchmark?

Benchmarking is the process of systematic comparison of a service,practice or process. Its use is to provide a target for action in orderto improve competitive position.

Benchmarking involves answering the questions:

• How do we compare?
• Who performs better?
• Why are they better?
• What actions do we need to take in order to improve our performance?

Types of benchmarking

There are various types of benchmarking:

Internal benchmarking

This method examined past performance over a period of time todetermine trends and best performance. Alternatively, a range ofprocesses might be assessed in order to determine internal bestpractice, which can then be used as the benchmark for other processes.There is a danger however that this will result in the continuance ofpoor bad habits and that competitors are ignored.

Competitive benchmarking

This method compares performance of the process against other firmsin the same industry or sector. Major automakers, for example, will buycars made by their competitors then reverse engineer those cars to seehow to improve their own product. However, there is a danger that, ifthis is only carried out on a local level, it may not promoteperformance that is good enough to match wider (e.g. international)rivals.

Activity benchmarking

This method looks at other organisations, not necessarilycompetitors, who are performing similar activities. For example, if afirm wanted to improve its delivery times to customers it mightbenchmark this activity against the delivery times of specialistdelivery companies such as DHL. In this way, commercial best practice isidentified.

Generic benchmarking

For some activities, the process might be so unique that there maynot be competitive or activity benchmarks available. In these cases, aconceptually similar process is sought as a benchmark.

Example of generic benchmarking

When building a rail tunnel connecting Aomori Prefecture on theJapanese island of Honshu and the island of Hokkaido which travels undersea, the construction company would have had no similar activitiesagainst which to benchmark (the under-sea tunnel between England andFrance was yet to be built). However, the tunnelling was conceptuallysimilar to explorations into volcanic crusts and this process was usedas the benchmark.

Illustration 6 – Benchmarking

Xerox used process benchmarking in the early 1980s to help correct aserious cost deficiency. To obtain cost-reducing ideas, they attemptedto identify organisations in other industries that were particularlygood in functional areas similar to those at Xerox. For example, LLBean, a sportswear retailer and mail order house, became one of themodels for the warehouse operations because they also dealt withproducts that were diverse in shape, size and weight. Altogether Xeroxmade six warehouse benchmark studies, which helped it improve its annualproductivity gains in the logistics and distribution area. Company-wideefforts of this type meant that Xerox overcame a cost gap with respectto Japanese manufacturers.

Test your understanding 10

Outline the advantages of internal benchmarking compared with the other types.

Benefits and dangers of benchmarking

The main benefits include:

• improved performance and added value – benchmarking identifies methods of improving operational efficiency and product design and helps companies focus on capabilities critical to building strategic advantage
• improved understanding of environmental pressures
• improved competitive position – benchmarking reveals a company's relative cost position and identifies opportunities for improvement
• a creative process of change
• a target to motivate and improve operations
• increased rate of organisational learning – benchmarking brings new ideas into the company and facilitates experience sharing.

Dangers of benchmarking

• 'you get what you measure' – managers may learn to direct attention at what gets benchmarked rather than at what is important strategically
• Benchmarking does not always reveal the reasons for good/poor performance
• Managers need to be aware that a benchmarking exercise can appear to threaten staff where it appears that benchmarking is designed to identify weaknesses in individual performance rather than how the process itself can be improved. To alleviate this fear, managers need to be involved in the benchmarking exercise and provide reassurance to staff regarding the aims and objectives of benchmarking.
• In today's environment, the more innovative companies are less concerned with benchmarking numbers (for example, costs or productivity) than they are with focusing on the processes. If a company focuses on the processes, the numbers will eventually self correct.

7 Chapter summary

Test your understanding answers

Test your understanding 1

Test your understanding 2

Ways to create value include the following:

• the restaurant can become more efficient, by automating the production of food, as in a fast food chain
• the chef can develop commercial relationships with growers, so he or she can obtain the best quality fresh produce
• the chef can specialise in a particular type of cuisine (e.g. Greek, Thai)
• the restaurant can be sumptuously decorated for those customers who value 'atmosphere' and a sense of occasion, in addition to the restaurant's purely gastronomic pleasures
• the restaurant can serve a particular type of customer (e.g. celebrities).

Each of these options is a way of organising the activities ofbuying, cooking and serving food in a way that customers will value.

Test your understanding 3

(1)Walmart – cost leadership. Legendary attention to keeping costs low.

(2)Saga Holidays – focus.

(3)Bang and Olufson – differentiation. Upmarket, very stylish, home entertainment equipment.

Test your understanding 4

(1) MacDonalds

(2) Zara

(3) Apple i-Pods

Test your understanding 5

(1)The internet. The internet can be used for very cost-effective marketing, distribution of information, support, sales ordering.

(2)Computer-aided design. CAD canreduce the cost and length of time it takes to design a new product, canhelp designing a product that is faster and cheaper to make and mightincrease the chance of using components shared by several products.

(3)Sub-contracting. It might becheaper for an organisation to buy-in goods or services from aspecialist rather than supplying these itself. The specialist will haveefficient large-scale manufacturing plant of its own and its researchand development expense can be divided over many units. Sub-contractinggets rid of some of the fixed costs. Sub-contracting can make use ofmanufacturing based in low-cost economies.

(4)Takeovers. Consolidation within anindustry can lead to economies of scale from greater buying power,R&D and marketing costs being spread over more units, fasterprogression along the learning curve.

Test your understanding 6

Note, you might have suggested other valid areas for innovation.

(1)Innovation is very important in thecar industry and car manufacturers launch new models periodically.Sometimes, the innovation is limited mainly to style, but sometimes itis more fundamental. For example, petrol/electric hybrid cars such asthe Toyota Prius have received very favourable publicity. Innovation haslong been important in safety, for example the development of ABSbraking and airbags. With increasing oil prices, fuel economy isbecoming very important. New materials offer better strength-to-weightratios and new engine design offers lower fuel consumption and lesspollution. Improved design of components and automation of theproduction line can make production faster and cheaper.

(2)Supermarkets can carry out bothproduct innovation and process innovation. For example, manysupermarkets developed and stock a wide range of oven-ready meals, whichare a relatively new phenomenon. Genetically modified foods would, intheory, present great opportunities for new products, but there isconsiderable consumer resistance to this technology.

Process innovation has concentrated in supply chain management,data warehousing and data mining. Many supermarkets now carry noback-room inventories and expect their suppliers to make deliveriesseveral times a day. Some supermarkets give suppliers access to thesupermarket's inventory records and shift the onus of supplying goods atthe right time onto the supplier, rather than the supermarket issuingpurchase orders. In data warehousing an organisation keeps vastquantities of historical data, for example, about customers' purchases.Purchases are related to specific customers when the customer uses hisor her loyalty card. This data can be 'mined' to discover associations,patterns and trends. This information can be used for demand forecastingand for addressing very tailored marketing to customers.

Many supermarkets have launched internet shopping services anddeliver the goods to the customer. Supermarkets are currentlyinvestigating ways in which checkouts can be made more efficient andfaster.

(3)Commercial television companies areall feeling commercial pressure from the internet, because the internetallows very targeted advertising that is very attractive to marketingdepartments. In Google, for example, sponsored links are paid for by theadvertiser only if the user clicks on the link. Obviously, TV companiesare always on the lookout to innovate by launching new programmeformats and gripping series. However, this does not seem to be enough tostop the shift from TV to on-line services. High-definition televisionwill attract viewers back for some programmes; interactive digitaltelevision might have had the same effect. However, commercialtelevision might have to innovate more radically. For example, why arecable viewers of a new series typically allowed to watch only oneepisode per week? Why are episodes rationed out at the TV company'sconvenience? Why aren't viewers allowed to watch all episodes at onesitting (as one might do with a DVD)? Perhaps commercial TV will have tobecome more like an on-line service where the consumer has greaterchoice of what to download and when.

Test your understanding 7

The following arguments could be used to encourage individuals to share knowledge.

• If everyone shares their knowledge, each person should gain more than they give up.

• Organisations are often so complex that it is rare that one person can achieve much alone. Teamwork and sharing knowledge is the best way of assuring a safe future.
• Knowledge is perishable – and increasingly so as the pace of change increases. If knowledge is not used quickly it is wasted. If knowledge is not shared the chances are that it becomes worthless before it can be used.
• Knowledge management is vital to the success of many businesses. If an organisation uses knowledge creatively the chances are that it will beat an organisation with poor knowledge management. Organisations compete with rivals; people within organisations should not be competing with each other at the organisation's expense.

Test your understanding 8

At one time, fresh salmon was a differentiated product. It wasrelatively scarce and expensive, and caught in the wild in small volumesusing hook and line.

Fish farming technology was developed and salmon has become arelatively low-priced food product for many people. Some consumers, ofcourse, differentiate between wild and farmed salmon, and wild salmonstill remains differentiated.

Test your understanding 9

Value – many people value a well-styled, prestigious, well-built, high-performance sports car.

Rarity – Porsche is based in Germany, which has a very goodreputation for auto-engineering. Great history of success in motorracing, relatively rare skills in producing high-quality performancecars.

Robustness – a very strong, iconic brand; a history of famousowners including Steve McQueen, Janis Joplin, James Dean (who was killeddriving one).

Test your understanding 10

The main advantages of internal benchmarking are that access tosensitive data and information are easier; standardised data is oftenreadily available; and, usually less time and resources are needed.There may be fewer barriers to implementation as practices may berelatively easy to transfer across the same organisation. However, realinnovation may be lacking and best in class performance is more likelyto be found through external benchmarking.

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