Chapter 3

sustainable competitive advantage

financial performance that consistently outperforms industry averages

michael porter

• five forces

• value chain

  • claims that firms define themselves according to operational effectiveness rather than strategic positioning

operational effectiveness

a firm’s ability to perform the same tasks better than rivals

• danger: SAMENESS 

  • commodity = price wars

fast follower problem

new firms adopt current firm’s technologies (learning from successes and mistakes) to enter the market quickly with lower cost

• Groupon: “Daily deal service” - copied by 500+ in 2 years

• Mattress Firms (casper, purple, etc)

• facebook/instagram stories - copied by snapchat augmented reality filters

TiVo

• pioneered the DigiVidRecrder category

  • allowed recordings of tv programs to hard drives > tapes/discs

• failed bc reliance of outsourced materials that were all available to rivals!!!

• avoid using op. effect —> improve quality, lower cost, design efficient cust. exp.

strategic positioning

performing tasks differently than rivals, or same tasks in a different way

• using tech to strengthen strategic diff. rather than relying on tech alone to differentiate

How can I recognize whether my firm’s differences are special enough to yield a sustainable competitive advantage?

Use the resource-based view of competitive advantage

RBV of CA

If a firm maintains sustainable competitive advantage, it NEEDS to offer something:

1. Valueable

2. Rare

3. Perfectly imitable

4. Nonsubstitutable

value chain concept

set of activities through which a product or service is created and delivered to customers

value chain primary components

• inbound logistic - getting materials from suppliers

• operations - turning inputs into products or services

• outbound logistics - delivering p/s to customers/distribution centers

• marketing and sales

• support

value chain secondary components

• firm infrastructure - functions supporting whole firm (management/planning/is/finance)

• human resource management - recruiting, hiring, training

• tech/r&d

• procurement - sourcing/purchasing required functions

imitation-resistant value chain

• doing business so competitors struggle to replicate

  • frequently involves tech in a key enabling role

  • Zara, Amazon, and Fresh Direct all have this

Straddling

occupying more than one position while failing to receive full benefits from either or an efficient, singularly focused rival

tech that renders less effective strategic assets

• supply chain management (SCM)

  • links inbound/outbound logistics with operations

• customer relationship management (CRM)

  • sales marketing, r&d

• enterprise resource planning software (EP)

  • software implemented in modules to automate entire value chain

• many firms make their own software (netflix, amazon, inditex, to differentiate themselves through unique operations)

Dell

• Grew to #1 PC maker

  • vertical integrated manufacturing + direct to consumer model (price advantage)

  • rival contract manuf. because efficient —> suppliers clustered near them (faster, cheaper production)

  • PC costs fell, dell’s price advantage shrank

  outcome:

  • Dell lost edge and market leadership

    • strategies must adopt to changes in tech to remain competitive!

brand

• the symbolic embodiment of all the information connected with a product or service

• Consumers use brands to lower search costs

• Customer experience counts!

  • Not just advertising and promotion

• Viral marketing

  • Leveraging consumers to promote a product or service

scale advantages

• advantages related to a firm’s size

economies of scale

• cost of an investment can be spread across increasing units of production

  • buying in bulk

• Growing firms may gain bargaining power with suppliers or buyers

  • ex) Apple dominates 60% of the world’s supply of touch-screen displays

scale of technology

• barrier to entry

• discourages small new competitors

• microsoft controls over 49% of open AI - $13B acquisition

switching costs

• When customers incur an expense to move from one product or service to another

  • Tech companies benefit when customers incur high costs from switching firms

sources of switching costs

Learning costs

• learning a new interface and commands

Information and data

• Users may have to reenter data, convert files or databases, or even lose earlier contributions on incompatible systems.

  • Ex) Films in Netflix, profile in Facebook, grocery list in FreshDirect etc.

Financial commitment

• Can include investments in new equipment, the cost to acquire any new software, + devaluation of any investment in prior technologies no longer used

Contractual commitments

• Breaking contracts can lead to compensatory damages and harm an organization’s reputation as a reliable partner

Search costs/opportunity cost

• Finding and evaluating a new alternative costs time and money

Loyalty programs

• Switching can cause customers to lose out on program benefits.

  • Think frequent purchaser programs that offer “miles” or “points”

Commodity Trap

When products become indistinguishable → firms must cut prices to compete.

Differentiation

Using unique features, services, or technology to stand out and avoid pure price competition

Importance of tech + differentiation

Commodities compete on price, but technology + differentiation (data, ecosystem design, customer experience) create loyalty, switching costs, and profitability

Network effects

• exist when a product or service becomes more valuable as more people use it

  • third-party add-on products, books, magazines, or even skilled labor are all attracted to networks of the largest number of users, making dominant products even more valuable.

• Network effects in two-sided markets often lead to one dominant winner. OpenTable’s dominance shows how efficiency + scale create huge barriers to entry.

Two-Sided Market

A platform that connects two groups (e.g., restaurants & diners), where more users on one side attract more on the other.

• Open Table online restaurant reservations

API (Application Programming Interface)

• Programming hooks allowing outside firms/apps to connect to a company’s service

  • Uber integrated into United Airlines, OpenTable, Tripadvisor

affiliates

• third parties who promote products/services for a share of the sales

  • Amazon Associates (1M+ sites promote Amazon products for commissions).

Patent pros

• Covers tech and, with restrictions, some business methods.

• Protection from copycats.

• Can be valuable assets (e.g., Netflix operations patents, Apple iPod click wheel).

  • Microsoft earns significant revenue from Android-related patent licensing.

patent cons

• Costly for startups: U.S. patent litigation averages $5M/case; can bankrupt early-stage firms.

• Patent greedy trolls: Acquire patents not to innovate, but to sue/settle (e.g., NTP extracted $612M from BlackBerry).

• Large firms form patent pools (e.g., Apple, Microsoft, Sony buying Nortel’s 6,000 patents for $4.5B).

• Patents can be overturned in court if uniqueness is challenged.

• Software patents are hard to defend → competitors can design alternative algorithms (e.g., rivals to Google’s PageRank).
  

First movers

• Winners

• First to move with a profitable model

• Quickly established resources for competitive advantage

• pays off when the time lead is used to create critical resources:

  • valuable, rare, tough to imitate, and lack substitutes

    eBay, Microsoft, Oracle, and Intel:

    Leveraged creating network effects, switching costs, data assets, and built brands

Rivalry Among Existing Competitors

• Brick-and-mortar (Tower, Virgin) now competing both offline & online.

• Investments in e-commerce = costly, uncertain.

• Amazon enters lean, online-only → more efficient → intensifies rivalry.

• Online experience superior (samples, limitless selection, recommendations).

Threat of New Entrants

• Internet lowers entry barriers.

• Amazon & other online players scale quickly without physical store costs.

• Traditional firms stuck in “straddling” problem (both physical & digital).
  

Threat of Substitutes

• CDs face substitutes in digital downloads and, later, streaming.

• Even with lower fidelity, convenience > quality → consumers prefer digital files/iPods.

• Streaming (Spotify, Apple Music) further disrupted downloads/CDs.

Bargaining Power of Suppliers

• More choice = greater buyer power.

• Consumers demand cheaper prices, more convenience, flexible formats (single songs, streaming).
  

Bargaining Power of Suppliers

• Music labels/licensing agreements influence competition.

• Spotify gained advantage outside U.S. due to more favorable licensing terms.

Information asymmetry

• Decision situation where one party had more or better information that its counterparty