Competitive Advantage: Creating and Sustaining Superior Performance

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he essential complement to the pathbreaking book Competitive Strategy, Michael E. Porter's Competitive Advantage explores the underpinnings of competitive advantage in the individual firm. In some industries, market leaders do not enjoy the best performance because industry structure does not reward leadership. A recent example is Continental Illinois Bank, which adopted the explicit goal of market leadership in wholesale lending. It succeeded in achieving this goal, but leadership did not translate into competitive advantage. Instead, the drive for leadership led to making loans that other banks would not, and to escalating costs. Leadership also meant that Continental Illinois had to deal with large corporations that are extremely powerful and price-sensitive buyers of loans. Continental Illinois will be paying the price of leadership for some years. In many other firms, such as Burlington Industries in fabrics and Texas Instruments in electronics, the pursuit of leadership for its own sake seems to have sometimes diverted attention from achieving and maintaining competitive advantage. Now an essential part of international business thinking, Competitive Advantage takes strategy from broad vision to an internally consistent configuration of activities. Its powerful framework provides the tools to understand the drivers of cost and a company's relative cost position. Porter's value chain enables managers to isolate the underlying sources of buyer value that will command a premium price, and the reasons why one product or service substitutes for another. He shows how competitive advantage lies not only in activities themselves but in the way activities relate to each other, to supplier activities, and to customer activities. Competitive Advantage also provides for the first time the tools to strategically segment an industry and rigorously assess the competitive logic of diversification.

Southwest Airlines' successes were enough to get them listed in Fortune magazine's "Top 100 Companies" list. In the magazine, it is noted that Southwest Airline won the Triple Crown award for Best Airline five times; a fact that shows their success is more than just financial (Moskowitz and Levering 148). Southwest Airline became the best in the industry. Their success shows how effective value chain management leads to competitive advantage. Finally, it is useful to consider how value chain management has changed since it was first introduced by Porter in 1985. The aim is not to improve everything about the organization, but to improve the processes that will allow the organization to gain an advantage on the competition. Porter (39) also identified various generic factors that are part of an organization's value chain. These generic factors are: inbound logistics, operations, outbound logistics, marketing and sales, and service. Porter considered that these five areas add value to a firm. Porter (40) also identified several support factors. These support factors are: infrastructure of the organization, human resource management, technology, and procurement.In 1985, Michael Porter published Competitive Advantage: Creating and Sustaining Superior Performance. In this book, he described how organizations can achieve competitive advantage in their industries. Porter's focus in this book was not on an overall competitive strategy, but on what organizations needed to do on a daily basis to achieve results. As Porter (3) stated, "My aim is to build a bridge between strategy and implementation. " To create the link between the overall strategy of a firm and how that strategy could be achieved, Porter referred to value. Both industry attractiveness and competitive position can be shaped by a firm, and this is what makes the choice of competitive strategy both challenging and exciting. While industry attractiveness is partly a reflection of factors over which a firm has little influence, competitive strategy has considerable power to make an industry more competitive strategy has considerable power to make an industry m( or less attractive. At the same time, a firm can clearly improve or erode its position within an industry through its choice of strategy. Competitive strategy, then, not only responds to the environment but also attempts to shape that environment in a firm's favor. These two central questions in competitive strategy have been at the core of my research."

Porter, M. E. (1989). From competitive advantage to corporate strategy. In D. Asch & C. Bowman (Eds.), Readings in strategic management (pp. 234–255). London: Palgrave. The idea is that if the supplier improves their value chain, the organization that receives the output of the supplier also benefits. In addition, if the supplier can improve efficiency and reduce costs, the benefits can be passed on to the organization by lowering the price of raw materials. The same applies to considering upline organizations, such as distributors and retailers. This is creating an environment where organizations are demanding more from companies that provide them with any type of service. In turn, many companies are becoming less like suppliers and more like partners. Strategies that change industry structure can be a double-edged sword, because a firm can destroy industry structure and profitability as readily as it can improve it. A new product design that undercuts entry barriers or increases the volatility of rivalry, for example, may undermine the long-run profitability of an industry, though the initiator may enjoy higher profits temporarily. Or a sustained period of price cutting can undermine differentiation. In the tobacco industry, for example, generic cigarettes are a potentially serious threat to industry structure. Generics may enhance the price sensitivity of buyers, trigger price competition, and erode the high advertising barriers that have kept out new entrants. Joint ventures entered into by major aluminum producers to spread risk and lower capital cost may have similarly undermined industry structure. The majors invited a number of potentially dangerous new competitors into the industry and helped them overcome the significant entry barriers to doing so. Joint ventures also can raise exit barriers because all the participants in a plant must agree before it can be closed down.Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm's cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation. This book describes how a firm can gain a cost advantage or how it can differentiate itself. It describes how the choice of competitive scope, or the range of a firm's activities, can play a powerful role in determining competitive advantage. Finally, it translates these concepts, combined with those in my earlier book, into overall implications for offensive and defensive competitive strategy, including the role of uncertainty in influencing strategic choices. This book considers not only competitive strategy in an individual industry but also corporate strategy for the diversified firm. Competitive advantage in one industry can be strongly enhanced by interrelationships with business units competing in related industries, if these interrelationships can actually be achieved. Interrelationships among business units are the principal means by which a diversified firm creates value, and thus provide the underpinnings for corporate strategy. I will describe how interrelationships among business units can be identified and translated into a corporate strategy, as well as how interrelationships can be achieved in practice despite the organizational impediments to doing so that are present in many diversified firms. Another long-term battle among generic strategies has occurred in general merchandising. K Mart and other discounters entered with cost leadership strategies against Sears and conventional department stores, featuring low overhead and nationally branded merchandise. K Mart, however, now faces competition from more differentiated discounters who sell fashion-oriented merchandise, such as Wal-Mart. At the same time, focused discounters have entered and are selling such products as sporting goods (Herman's), health and beauty aids (CVS), and books (Barnes and Noble). Catalog showrooms have also focused on appliances and jewelry, employing low-cost strategies in those segments. Thus the bases for K Mart's competitive advantage have been compromised and it is having difficulty outperforming the industry average. Structural change can shift the relative balance among the generic strategies in an industry, since it can alter the sustainability of a generic strategy or the size of the competitive advantage that results from it. The automobile industry provides a good example. Early in its history, leading automobile firms followed differentiation strategies in the production of expensive touring cars. Technological and market changes created the potential for Henry Ford to change the rules of competition by adopting a classic overall cost leadership strategy, based on low-cost production of a standard model sold at low prices. Ford rapidly dominated the industry worldwide. By the late 1920s, however, economic growth, growing familiarity with the automobile, and technological change had created the potential for General Motors to change the rules once more -- it employed a differentiation strategy based on a wide line, features, and premium prices. Throughout this evolution, focused competitors also continued to succeed. Chapter 9 begins Part III of the book, and is the first of four chapters about corporate strategy for the diversified firm. The central concern of corporate strategy is the way in which interrelationships among business units can be used to create a competitive advantage. Chapter 9 explains the strategic logic of interrelationships. It describes the three types of interrelationships among industries, and why they have grown in importance over time. It then shows how the significance of interrelationships for competitive advantage can be assessed. Augier, M., & Teece, D. J. (Eds.) (2016). Competitive advantage. In The Palgrave encyclopedia of strategic management. The Palgrave encyclopedia of strategic management. London: Palgrave Macmillan.

Now beyond its eleventh printing and translated into twelve languages, Michael Porter’s The Competitive Advantage of Nations has changed completely our conception of how prosperity is created and sustained in the modern global economy. Porter’s groundbreaking study of international competitiveness has shaped national policy in countries around the world. It has also transformed thinking and action in states, cities, companies, and even entire regions such as Central America. Apple might consider their value chain as a process where raw materials are converted to the product and where the product is distributed to the consumer. In terms of improving the value of their product, they might consider that saving on raw materials, decreasing production time, and improving distribution will help add value. The problem with this approach is that it does not identify the real value that consumers gain from the product. This real value is identified when the MP3 player industry is considered on a broader level. One of the major changes is that computer software has become an important tool in the process. Computer software has been developed to identify problems and opportunities for improvement in the value chain. This is largely focused on the manufacturing process, but can also be applied to any process where efficiency is desired. Another significant trend is that the value chain is extended further, both upline and downline. For example, many organizations are considering the internal processes of their suppliers.Access-restricted-item true Addeddate 2010-11-30 17:33:24 Bookplateleaf 0003 Boxid IA129204 Camera Canon 5D City New York Donor Steps in Strategic Cost Analysis...1. Identify the appropriate value chain and assign costs and assets to it. 2. Diagnose the cost drivers of each value activity and how they interact. 3 Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences. 4. Develop a strategy to lower relative cost position through controlling cost drivers or re-configuring the value chain and/ or downstream value. 5. Ensure that cost reduction efforts do not erode differentiation, or make a conscious choice to do so. 6. Test the cost reduction strategy for sustainability." Chapter 8 discusses the determinants of substitution, and how a firm can substitute its product for another or defend against a substitution threat. Substitution, one of the five competitive forces, is driven by the interplay of the relative value of a substitute compared to its cost, switching costs, and the way individual buyers evaluate the economic benefits of substitution. The analysis of substitution is of central importance in finding ways to widen industry boundaries, exposing industry segments that face a lower substitution risk than others, and developing strategies to promote substitution or defend against a substitution threat. Hence understanding substitution is important both to broadening and to narrowing scope. The analysis of substitution draws on Chapters 3 through 7. Neither question is sufficient by itself to guide the choice of competitive strategy. A firm in a very attractive industry may still not earn attractive profits if it has chosen a poor competitive position. Conversely, a firm in an excellent competitive position may be in such a poor industry that it is not very profitable, and further efforts to enhance its position will be of little benefit. Both questions are dynamic; industry attractiveness and competitive position change. Industries become more or less attractive over time, and competitive position reflects an unending battle among competitors. Even long periods of stability can be abruptly ended by competitive moves.

Exploiting linkages usually requires information or information flows that allow optimization or coordination to take place. Thus, information systems are often vital to gaining competitive advantages from linkages." Part IV of the book draws on the concepts in this book and Competitive Strategy to develop broad principles for offensive and defensive strategy. Chapter 13 discusses the problem of formulating competitive strategy in the face of significant uncertainty. It describes the concept of industry scenarios, and shows how scenarios can be constructed to illuminate the range of future industry structures that might occur. The chapter then outlines the alternative ways in which a firm can cope with uncertainty in its choice of strategy. Competitive strategy is more effective if there is explicit consideration of the range of industry scenarios that might occur, and recognition of the extent to which strategies for dealing with different scenarios are consistent or inconsistent. Chapter 2 presents the concept of the value chain, and shows how it can be used as the fundamental tool in diagnosing competitive advantage. The chapter describes how to disaggregate the firm into the activities that underlie competitive advantage, and identify the linkages among activities that are central to competitive advantage. It also shows the role of competitive scope in affecting the value chain, and how coalitions with other firms can substitute for performing activities in the chain internally. The chapter also briefly considers the use of the value chain in designing organizational structure. A firm should always aggressively pursue all cost reduction opportunities that do not sacrifice differentiation. A firm should also pursue all differentiation opportunities that are not costly. Beyond this point, however, a firm should be prepared to choose what its ultimate competitive advantage will be and resolve the tradeoffs accordingly. The ability of firms to shape industry structure places a particular burden on industry leaders. Leaders' actions can have a disproportionate impact on structure, because of their size and influence over buyers, suppliers, and other competitors. At the same time, leaders' large market shares guarantee that anything that changes overall industry structure will affect them as well. A leader, then, must constantly balance its own competitive position against the health of the industry as a whole. Often leaders are better off" taking actions to improve or protect industry structure rather than seeking greater competitive advantage for themselves."Achieving cost leadership and differentiation are also usually inconsistent, because differentiation is usually costly. To be unique and command a price premium, a differentiator deliberately elevates costs, as Caterpillar has done in construction equipment. Conversely, cost leadership often requires a firm to forego some differentiation by standardizing its product, reducing marketing overhead, and the like. Competing with the same generic strategy in many business units is one way in which a diversified firm can add value to those units, a subject I will discuss in Chapter 9 when I examine interrelationships among business units. However, employing a common generic strategy entails some risks that should be highlighted. One obvious risk is that a diversified firm will impose a particular generic strategy on a business unit whose industry (or initial position) will not support it. Another, more subtle risk is that a business unit will be misunderstood because of circumstances in its industry that are not consistent with the prevailing generic strategy. Worse yet, such business units may have their strategies undermined by senior management. Since each generic strategy often implies a different pattern of investments and different types of executives and cultures, there is a risk that a business unit that is "odd man out" will be forced to live with inappropriate corporate policies and targets. For example, an across-the-board cost reduction goal or firmwide personnel policies can be disadvantageous to a business unit attempting to differentiate itself on quality and service, just as policies toward overhead appropriate for differentiation can undermine a business unit attempting to be the low-cost producer. Though the emphases of this book and my earlier book are different, they are strongly complementary. The emphasis of Competitive Strategy is on industry structure and competitor analysis in a variety of industry environments, though it contains many implications for competitive advantage. This book begins by assuming an understanding of industry structure and competitor behavior, and is preoccupied with how to translate that understanding into a competitive advantage. Actions to create competitive advantage often have important consequences for industry structure and competitive reaction, however, and thus I will return to these subjects frequently. Competition is at the core of the success or failure of firms. Competition determines the appropriateness of a firm's activities that can contribute to its performance, such as innovations, a cohesive culture, or good implementation. Competitive strategy is the search for a favorable competitive position in an industry, the fundamental arena in which competition occurs. Competitive strategy aims to establish a profitable and sustainable position against the forces that determine industry competition. The link between generic strategy and organization also has implications for the diversified firm. There is a tendency for diversified firms to pursue the same generic strategy in many of their business units, because skills and confidence are developed for pursuing a particular approach to competitive advantage. Moreover, senior management often gains experience in overseeing a particular type of strategy. Emerson Electric is well known for its pursuit of cost leadership in many of its business units, for example, as is H. J. Heinz.