Competitive Advantage (CA)
Ch-3 of Saloner
Outcomes from External and Internal Analyses
Examine opportunities Examine unique resources,
and threats capabilities, and
competencies
(sustainable competitive
advantage)
Figure 2.8 SWOT analysis
Figure 2.9 SWOT strategic implications
Value creation & CA
• Competitive advantage is a firm’s ability to outperform its competitors (earn higher
profits).
• The source of competitive advantage is value creation for customers.
• Value is created when a product has more utility for a customer than its price.
• Sustained competitive advantage comes from maintaining higher profits than
competitors over long periods of time.
• Value Creation
5-5
Value creation and capture
Who will capture value?
• CASE: EMI and the CT scanner
• Firm
• Competitors
• Customers
• Employees
Distribution of captured value in an
iPod
Apple’s gross margin on an iPod
Is it quality, customer focus or HR?
• There is no universal key to strategic
success.
• There is enormous heterogeneity among
firms and industries.
• Focus of this course is on understanding
sources of competitive advantage.
Two main routes to Competitive
Advantage
• Advantages based on the firm’s position
• Advantages based on the firm’s capabilities
• Consider two hypothetical firms.
– Positions Inc.’s competitive advantage is its
position as the dominant incumbent firm.
– Global capabilities’ competitive advantage is its
ability to miniaturize and its skill in design-for-
manufacturing.
Positions Inc.
• Founded in 1802
• First mover in sending cash over long
distances
• Set up an extensive branch network
• But IT system is archaic
• Shoddy customer service
• CA: Position as the dominant incumbent firm
Global Capabilities
• B2B Japanese firm producing electronics
products
• Customers outsource design and manufacturing
• Expert in miniaturization and manufacturing
• Hard to determine how the firm achieves this
• Complicated routines that bring together the
expertise of its teams
• CA: Ability to miniaturize and skill in design-
for-manufacturing
Miniaturization
FIGURE 3-1 Sources of Competitive Advantage
Examples of Positional Advantage
• Attractive industry structure:
– A duopoly is more profitable than an industry with
many competing firms; Airbus & Boeing
• Dominant position in a fragmented industry:
– Large fast-food chains (scale economies in production
and advertising)
• Network of relationships:
– Venture capital firms: Andreessen Horowitz, Sequoia
capital, Benchmark capital
• First mover advantage
Recent Pakistani startups
VC: Sarmayacar
Examples of Positional Advantage
• Brand name:
– Nike:
https://www.youtube.com/watch?v=Tp6ufSJe
WtQ
• Customer relationships: ‘fair dealing’; M&S
• Government protection & support:
– 200 SOE (state-owned enterprises) in Pakistan;
• Status: Meezan in Islamic banking
Examples of Positional Advantage
• Distribution channels:
– P&G – draws retail traffic
• Geographic incumbency:
– Wal-Mart: stores in small towns
• Installed base and de facto standards: Microsoft Word
• Gatekeepers in the flow of goods or info
– Key connection between other firms or consumers
– Search engines (Google, yahoo)
Capabilities
• Capability is an attribute of the org., not the
trait of an individual employee
– Organizational routines
– The hierarchy that determines formal authority
– Formal procedures & informal rules.
• Latent capabilities provide a potentially rich
source of competitive advantage.
• Distinctive competence.
Examples for capabilities-based CA
• Sony: Miniaturization
• Toyota: Design a new auto in just 3 years
• Alibaba: Build a digital ecosystem
– A community of organisms (businesses and
consumers of many types) interacting with one
another and the environment (the online platform
and the larger off-line physical elements).
– Read Alibaba’s case
Capabilities as competitive advantage
Competitive Advantage
• Sustainability of a competitive advantage is
a function of
– The rate of core competence obsolescence due
to environmental changes
– The availability of substitutes for the core
competence
– The difficulty competitors have in duplicating
or imitating the core competence
Causal Ambiguity
• The difficulty for those outside the firm to
identify exactly what leads the firm to have
the capability-based advantage.
• Complexity of structures, routines &
individual attributes.
• Knowledge underlying capabilities are tacit
or un-codified.
FIGURE 3-2 Sources of Causal Ambiguity
FIGURE 3-3 Capabilities and Position Interact
IO vs. RBV
Industrial Organization (IO) Resource Based View (RBV)
Some Authors: Porter, Rumelt Barney, Wernerfelt
Focus External—describes environmental Internal—describes firm’s internal
conditions favoring high levels of firm characteristics and performance
performance
Assumptions: Firms within an industry have identical Firms have idiosyncratic, not
strategic resources. identical strategic resources.
Resources are highly mobile (easily Resources are not perfectly mobile
bought and sold) and therefore and therefore heterogeneous.
homogeneous.
Resources and capabilities lead to
Competitive Advantage when they are:
Valuable allow the firm to exploit opportunities
or neutralize threats in its external
environment
Rare possessed by few, if any, current and
potential competitors
Costly to Imitate when other firms either cannot obtain
them or must obtain them at a much
higher cost
Nonsubstitutable the firm must be organized
appropriately to obtain the full benefits
of the resources in order to realize a
competitive advantage
Resource Imitation
6-29
FIGURE 3-4 The Cost and Perceived Quality Framework
Saloner, Shepard, Podolny: Strategic Management © 2001, John Wiley & Sons, Inc.
FIGURE 3-5 Using the Cost-Quality Framework to Map Competition
Saloner, Shepard, Podolny: Strategic Management © 2001, John Wiley & Sons, Inc.
FIGURE 3-6 Firm B has a Competitive Advantage over Firm D
Saloner, Shepard, Podolny: Strategic Management © 2001, John Wiley & Sons, Inc.
Successful Pakistani brands
