COMPETITIVE ADVANTAGE: CA
Firm has CA when it creates more value than the other firms. This means that a customer has a total perceived
benefit.
CA can be temporary and sutainable:
- CA typically results in high profits
- High profits a?racts new companies
- Compe@@on limits the dura@on of CA
Thus: CA is temporary
- Compe@@on imitates or offers something be?er
INTENTED VS EMERGENT STRATEGIES
- Intented strategy: we have an idea what our strategy should be.
- Deliberate strategy process: where we try to transform the idea to a real strategy (realiza@on).
- Unrealized strategy: part of the idea is skipped.
- Emergent strategy process: new ideas that were not included now are.
Important: some ideas are leK out and filled up with new ones.
- Realized strategy: end strategy that is implemented.
EXTERNAL ANALYSIS
Make more informed strategic choices.
- Discover opportuni@es and threats
- Analyze poten@al profit
- Understand the compe@@on
LEVELS OF ANALYSIS
- General environment: abstract level (high) analysis, look for things outside of the industry.
- Industry: what industry are we in and what are the relevant aspects.
- Strategic group: Groups within an industry who compete with each other (BMW, AUDI, MERC) not
(BMW, DACIA, LAMBO). There’s more compe@@on within strategic groups than between.
- Individual: just one firm.
GENERAL ENVIRONMENT (PESTEL)
- Poli@cal and legal
- Economic
- Specific interna@onal events
- Technological change
- Demographic
- Cultural
SCP-MODEL
Explains how the structure of a market influences the conduct of firms and ul@mately the market performance.
- Structure
o # of compe@ng firms
o Homogeneity of products
o Cost of entry and exit
- Conduct
o Strategies firms pursue to gain compe@@ve advantage
- Performance model
o Performance of firms
o Performance of the economy
,5 FORCES PORTER
Seeks to explain the expected profit poten@al: all high = low profit expected, all low = high profit expected
The 5 forces:
- Subs@tutes: products from different industries that fulfill similar needs
o High poten@al of fulfilling same need
o Low switching costs
- New compe@tors: industry condi@ons that generate a high threat of new entrants:
o High industry growth rate
o Low barriers of entry:
§ Economies of scale: lower the costs when producing at a higher amound)
§ Product differen@a@on
§ Cost advantages of scale
§ Government regula@on of entry
- Exis@ng compe@@on
o Large number of compe@tors
o Slow or declining industry
o Lack of product differen@a@on
- Suppliers
o Small # of firms
o Highly differen@ated product
o Lack of close subs for supplier’s product
o Focal firm is not important for supplier
- Buyers
o Small # buyers
o Price is high for customer
o Buyers are not making economic profit
INDUSTRY DEFINITION
Set of companies that fulfill a similar need with a similar produc@on process. When we define the industry to
broad, we label subs@tutes as compe@tors. When we define the industry to narrow, we label compe@tors as
subs. This is challenging but very import.
TYPE OF COMPETITION
Type of comp A?ributes Examples Performance expected
Perfect comp Large # of firms Stock market, oils Compe@@ve parity
Hetero products
Monopolis@c comp Large # of firms Shampoo, automobiles CA
Hetero products
Low-cost of entry/exit
Oligopoly Small # of firms US breakfast cereal CA
Homo products
Costly entry/exit
Monopoly One firm Home mail delivery CA
Costly entry/exit
Compe@@ve parity = equal profit levels
, INDUSTRY STRUCTURE AND ENVIRONMENTAL OPPORTUNITIES
Type of industry Characteris@cs Opportunity
Emerging industry No product standard Technology
No dominant firm 1st mover advantage
New tech/product Locking up contracts
Fragmented industry Large # of small firms Buy compe@@on out
No dominant firm/tech Build market power
Low barriers of entry Exploit economies of scale
Mature industry Slow growth in demand Refine current products
Tech standards exist Improve service
Interna@onal compe@@on Process innova@on
Declining industry Decline in sales Market leadership
Stopped inves@ng Niche
Firms exit Divest
WACC
(market value fo debt/firms market value)*aKer tax cost of debt+(market value of equity/firms market
value)*cost of equity
STRATEGIC MANAGEMENT PROCESS
Missionàobjec@vesàExternal/internal analysisàstrategic choice (business level strategie/corporate level
strategy)àimplementa@onàCA
ECONOMIC SURPLUS
Economic surplus = total welfare = Marshallian surplus = consumer surplus+ producer surplus
Consumer surplus = what the consumer was willing to pay but saved.
Producer surplus = higher selling price than they were willing to sell.
MEASURING CA (ALWAYS MEASURE RELATIVE TO OTHER FIRM)
Calculated by using informa@on from a firms profit and loss and balancesheet.
- Profit ra@os: profit/… bijv total assets
- Liquidity ra@os: ability to meet short term financial obliga@ons
- Leverage ra@os: level of a firms financial flexibility, bijv debt to assets
- Ac@vity ra@o: level of ac@vity in a firms business, bijv inventory turn-over
These ra@os are generally compared to the industry average if a firms performance is be?er than this average
they can earn above average accoun@ng performance.
ROA = Return on asset
Economic performance = ROA ten opzichte van WACC
Accoun@ng performance = ROA firm ten opzichte van ROA average industry
INTERNAL ANALYSIS
- What are the firms strengths
- What are the weaknesses
- How do these compare to the compe@@on
This is a crucial part in determining strategy and CA.
Firm has CA when it creates more value than the other firms. This means that a customer has a total perceived
benefit.
CA can be temporary and sutainable:
- CA typically results in high profits
- High profits a?racts new companies
- Compe@@on limits the dura@on of CA
Thus: CA is temporary
- Compe@@on imitates or offers something be?er
INTENTED VS EMERGENT STRATEGIES
- Intented strategy: we have an idea what our strategy should be.
- Deliberate strategy process: where we try to transform the idea to a real strategy (realiza@on).
- Unrealized strategy: part of the idea is skipped.
- Emergent strategy process: new ideas that were not included now are.
Important: some ideas are leK out and filled up with new ones.
- Realized strategy: end strategy that is implemented.
EXTERNAL ANALYSIS
Make more informed strategic choices.
- Discover opportuni@es and threats
- Analyze poten@al profit
- Understand the compe@@on
LEVELS OF ANALYSIS
- General environment: abstract level (high) analysis, look for things outside of the industry.
- Industry: what industry are we in and what are the relevant aspects.
- Strategic group: Groups within an industry who compete with each other (BMW, AUDI, MERC) not
(BMW, DACIA, LAMBO). There’s more compe@@on within strategic groups than between.
- Individual: just one firm.
GENERAL ENVIRONMENT (PESTEL)
- Poli@cal and legal
- Economic
- Specific interna@onal events
- Technological change
- Demographic
- Cultural
SCP-MODEL
Explains how the structure of a market influences the conduct of firms and ul@mately the market performance.
- Structure
o # of compe@ng firms
o Homogeneity of products
o Cost of entry and exit
- Conduct
o Strategies firms pursue to gain compe@@ve advantage
- Performance model
o Performance of firms
o Performance of the economy
,5 FORCES PORTER
Seeks to explain the expected profit poten@al: all high = low profit expected, all low = high profit expected
The 5 forces:
- Subs@tutes: products from different industries that fulfill similar needs
o High poten@al of fulfilling same need
o Low switching costs
- New compe@tors: industry condi@ons that generate a high threat of new entrants:
o High industry growth rate
o Low barriers of entry:
§ Economies of scale: lower the costs when producing at a higher amound)
§ Product differen@a@on
§ Cost advantages of scale
§ Government regula@on of entry
- Exis@ng compe@@on
o Large number of compe@tors
o Slow or declining industry
o Lack of product differen@a@on
- Suppliers
o Small # of firms
o Highly differen@ated product
o Lack of close subs for supplier’s product
o Focal firm is not important for supplier
- Buyers
o Small # buyers
o Price is high for customer
o Buyers are not making economic profit
INDUSTRY DEFINITION
Set of companies that fulfill a similar need with a similar produc@on process. When we define the industry to
broad, we label subs@tutes as compe@tors. When we define the industry to narrow, we label compe@tors as
subs. This is challenging but very import.
TYPE OF COMPETITION
Type of comp A?ributes Examples Performance expected
Perfect comp Large # of firms Stock market, oils Compe@@ve parity
Hetero products
Monopolis@c comp Large # of firms Shampoo, automobiles CA
Hetero products
Low-cost of entry/exit
Oligopoly Small # of firms US breakfast cereal CA
Homo products
Costly entry/exit
Monopoly One firm Home mail delivery CA
Costly entry/exit
Compe@@ve parity = equal profit levels
, INDUSTRY STRUCTURE AND ENVIRONMENTAL OPPORTUNITIES
Type of industry Characteris@cs Opportunity
Emerging industry No product standard Technology
No dominant firm 1st mover advantage
New tech/product Locking up contracts
Fragmented industry Large # of small firms Buy compe@@on out
No dominant firm/tech Build market power
Low barriers of entry Exploit economies of scale
Mature industry Slow growth in demand Refine current products
Tech standards exist Improve service
Interna@onal compe@@on Process innova@on
Declining industry Decline in sales Market leadership
Stopped inves@ng Niche
Firms exit Divest
WACC
(market value fo debt/firms market value)*aKer tax cost of debt+(market value of equity/firms market
value)*cost of equity
STRATEGIC MANAGEMENT PROCESS
Missionàobjec@vesàExternal/internal analysisàstrategic choice (business level strategie/corporate level
strategy)àimplementa@onàCA
ECONOMIC SURPLUS
Economic surplus = total welfare = Marshallian surplus = consumer surplus+ producer surplus
Consumer surplus = what the consumer was willing to pay but saved.
Producer surplus = higher selling price than they were willing to sell.
MEASURING CA (ALWAYS MEASURE RELATIVE TO OTHER FIRM)
Calculated by using informa@on from a firms profit and loss and balancesheet.
- Profit ra@os: profit/… bijv total assets
- Liquidity ra@os: ability to meet short term financial obliga@ons
- Leverage ra@os: level of a firms financial flexibility, bijv debt to assets
- Ac@vity ra@o: level of ac@vity in a firms business, bijv inventory turn-over
These ra@os are generally compared to the industry average if a firms performance is be?er than this average
they can earn above average accoun@ng performance.
ROA = Return on asset
Economic performance = ROA ten opzichte van WACC
Accoun@ng performance = ROA firm ten opzichte van ROA average industry
INTERNAL ANALYSIS
- What are the firms strengths
- What are the weaknesses
- How do these compare to the compe@@on
This is a crucial part in determining strategy and CA.
