10/11/23
Global Marketing
Tenth Edition, Global Edition
Chapter 16
Strategic Elements of
Competitive Advantage
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Learning Objectives
16.1 Identify the forces that shape competition in an industry
and illustrate each force with a specific company or industry
example.
16.2 Define competitive advantage and identify the key
conceptual frameworks that guide decision makers in the
strategic planning process.
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Industry Analysis: Forces Influencing
Competition (see iLearn)
• Industry - group of firms that produce products that are
close substitutes for each other
• Michael Porter developed a five forces model on
competition
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Porter’s Force 1: Threat of New
Entrants
• New entrants mean downward pressure on prices and
reduced profitability
• Barriers to entry determines the extent of threat of new
industry entrants
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Threat of New Entrants: Barriers to
Entry (1 of 2)
• Economies of Scale
– Refers to the decline in per-unit product costs as the
absolute volume of production per period increases
• Product differentiation
– The extent of a product’s perceived uniqueness
• Capital requirements
– Required investment for manufacturing, R&D, advertising,
field sales and service, etc.
• Switching costs
– Costs related to making a change in suppliers or products
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Threat of New Entrants: Barriers to
Entry (2 of 2)
• Distribution channels
– Are there current distribution channels available with
capacity?
• Government policy
– Are there regulations in place that restrict competitive entry?
• Cost advantages independent of scale economies
– Is there access to raw materials, large pool of low-cost labor,
favorable locations, and government subsidies?
• Competitor response
– How will the market react in anticipation of increased
competition within a given market?
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Porter’s Force 2: Threat of Substitute
Products
• Availability of substitute products places limits on the
prices market leaders can charge
• High prices induce buyers to switch to the substitute
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Porter’s Force 3: Bargaining Power of
Buyers
• Buyers=manufacturers and retailers, not consumers
• Buyers seek to pay the lowest possible price
• Buyers have leverage over suppliers when:
– They purchase in large quantities (enhances supplier
dependence on buyer)
– Suppliers’ products are commodities
– Product represents significant portion of buyer’s costs
– Buyer is willing and able to achieve backward integration
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Bargaining Power of Buyers
• Walmart exercises its buying power by refusing to stock CDs bearing
“Parental Advisory” stickers warning of controversial or potentially
offensive lyrics.
In response, Slipknot
vocalist/lyricist Corey Taylor
wrote lyrics for Vol. 3 (The
Subliminal Verses) without
profanity. He recognized that
many fans had no other place
to shop.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Porter’s Force 4: Bargaining Power of
Suppliers
• When suppliers have leverage, they can raise prices high
enough to affect the profitability of their customers
• Leverage accrues when
– Suppliers are large and few in number
– Supplier’s products are critical inputs, are highly
differentiated, or carry switching costs
– Few substitutes exist
– Suppliers are willing and able to develop and sell
product themselves
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Porter’s Force 5: Rivalry Among
Competitors
• Refers to all actions taken by firms in the industry to improve
their positions and gain advantage over each other
– Price competition; Positive when firms rationalize costs;
Negative when prices and profits decline
– Industries with high fixed costs need to operate at
capacity; Excess capacity drives price and profit down
– With lack of Differentiation or absence of switching
costs, buyers treat products as commodities which drives
price and profit down.
– Firms that focus on achieving success are destabilizing
when they are willing to accept below-average profit
margins.
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Competitive Advantage
• Achieved when there is a match between a firm’s
distinctive competencies and the factors critical for
success within its industry
• One way to achieve competitive advantage
– Generic strategies - four types
Note: Strategic Intent, included in the textbook, will not be covered.
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Generic Strategies for Creating
Competitive Advantage
• Broad market strategies
– Cost Leadership-low price
– Product Differentiation-premium price
• Narrow market strategies
– Cost Focus-low price
– Focused Differentiation-premium price
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Broad Market Strategy: Cost
Leadership
• Based on a firm’s position as the industry’s low-cost
producer
• Must construct the most efficient facilities
• Must obtain the largest market share so that its per-unit
cost is the lowest in the industry
• Only works if barriers exist that prevent competitors from
achieving the same low costs
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Broad Market Strategy: Differentiation
• Product that has an actual or perceived uniqueness in a
broad market has a differentiation advantage
• Extremely effective for defending market position
• Extremely effective for obtaining above-average financial
returns; unique products command a premium price
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Narrow Market Strategy: Focused
Differentiation
• The product not only has
actual uniqueness but it also
has a very narrow target
market
• Results from a better
understanding of customer’s
wants and desires
• Ex.: High-end audio
equipment
Theta Digital’s stereo amplifier
costs $12,000.
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Narrow Market Strategy: Cost Focus
• Firm’s lower cost position enables it to offer a narrow
target market and lower prices than the competition
• Sustainability is the central issue for this strategy
– Works if competitors define their target market more
broadly
– Works if competitors cannot define the segment even
more narrowly
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Global Competition and National
Competitive Advantage
• Global competition occurs when a firm takes a global
view of competition and sets about maximizing profits
worldwide
• The effect is beneficial to consumers because prices
generally fall as a result of global competition
• While creating value for consumers, it can destroy the
potential for jobs and profits
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Factor Conditions (1 of 2)
• Human Resources - the quantity of workers available,
skills possessed by those workers, wage levels, and work
ethic
• Physical Resources - the availability, quantity, quality, and
cost of land, water, minerals, and other natural resources
• Knowledge Resources - the availability within a nation of
a significant population having scientific, technical, and
market-related knowledge
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Factor Conditions (2 of 2)
• Capital Resources - the availability, amount, cost, and
types of capital available; also includes savings rate,
interest rates, tax laws, and government deficit
• Infrastructure Resources - this includes a nation’s
banking, healthcare, transportation, and communication
systems
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Demand Conditions (1 of 2)
• Composition of Home Demand - determines how firms
perceive, interpret, and respond to buyer needs
• Size and Pattern of Growth of Home Demand - large
home markets offer opportunities to achieve economies of
scale and learning in familiar, comfortable markets
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Demand Conditions (2 of 2)
• Rapid Home Market Growth - another incentive to invest
in and adopt new technologies faster and build large,
efficient facilities
• Products being pushed or pulled - do a nation’s people
and businesses go abroad and then demand the nation’s
products and services in those second countries?
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Current Issues in Competitive
Advantage (1 of 2)
• Today’s business environment, market stability is
undermined by:
– Short product life cycles
– Short product design cycles
– New technologies
– Globalization
• Result is an escalation and acceleration of competitive
forces
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Current Issues in Competitive
Advantage (2 of 2)
• Hypercompetition is a term used to describe a dynamic
competitive world in which no action or advantage can be
sustained for long
• Competition unfolds in a series of dynamic strategic
interactions in four areas: cost quality, timing and know-
how, barriers to entry, and deep pockets
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Current Issues in Competitive
Advantage (see iLearn)
• In today’s world, in order to achieve a sustainable
advantage, companies must seek a series of
unsustainable advantages
• The role of marketing is innovation and the creation of
new markets
• Innovation begins with abandonment of the old and
obsolete
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