Key Concepts in Business Strategy and Competitive Advantage

Sustainable competitive advantage

Making more money than the industry average, and keeping it up over time

Operational effectiveness

Doing the same tasks as your rivals, just better

Commodity

A basic product that's basically interchangeable (milk, coal, orange juice). The more commodity-like, the more competition is just about price

Fast follower problem

Rivals watch the pioneer, learn from its wins and mistakes, then enter quickly with a similar or better product at a lower cost before the pioneer can dominate

Strategic positioning

Doing different tasks than rivals, or doing the same tasks in a different way

Resource-based view of competitive advantage

A firm keeps its advantage only if it controls resources that are valuable, rare, imperfectly imitable, and nonsubstitutable

4 traits of powerful resources (VRIN)

Valuable, Rare, Imperfectly imitable (hard to copy), Nonsubstitutable (no replacement)

Imitation-resistant value chain

A way of doing business that competitors struggle to copy, often with technology playing a key role

Value chain

All the steps used to create a product or service and deliver it to customers

Straddling

Trying to compete in more than one position and failing to match a rival that focuses on just one

Brand

Everything people associate with a product or service

Viral marketing

Getting customers to promote your product for you

Scale advantages

Advantages that come from being big

Economies of scale

Costs get spread across more units or customers, so each one costs less. Firms that do this well (many Internet firms) are called highly scalable

Switching costs

The expense a customer pays to move from one product or service to another

Network effects (also Metcalfe's Law, network externalities)

A product gets more valuable as more people use it

Distribution channels

The path products or services take to reach customers

APIs

Hooks or guidelines a company publishes so other programs can make its service do things, like send or receive data (example: Amazon lets developers send it orders)

Affiliates

Third parties who promote your product in exchange for a cut of the sales

Barriers to entry in tech

Usually low, because technology is easy to copy (a rival can put up a website overnight)

Low barriers to entry: why they matter

They attract more competitors. They're only a serious threat if your firm lacks a sustainable advantage

First-mover advantage

Only works if the early entrant uses its head start to build resources that are rare, valuable, hard to copy, and have no substitutes

Timing and technology alone

Don't create lasting advantage, but both can help enable it. Tech helps when it lines up with business goals

Porter's five forces

1) Rivalry among existing competitors 2) Threat of new entrants 3) Threat of substitutes 4) Bargaining power of buyers 5) Bargaining power of suppliers

Porter's five forces (other name)

Industry and Competitive Analysis

Price transparency

Buyers can see what's offered and at what prices across the whole market

Information asymmetry

One side of a deal has more or better information than the other

Price discrimination

The same seller sells identical goods at different prices

How the Internet affects price transparency

Makes information easy to find, which reduces price discrimination and information asymmetry. Often boosts buyer power and lowers seller power

When can the Internet strengthen supplier bargaining power?

When network effects are strong and/or the seller's goods are highly differentiated

Effect of switching costs on buyer bargaining power

They weaken buyer power

Internet and rare or highly differentiated goods

Strengthens the seller. Example: an antique dealer uses eBay to reach many more buyers and bid up the price

Zara

Fast-fashion brand owned by Inditex, the world's largest pure-play fashion retailer (bigger than Gap, H&M, Topshop)

Contract manufacturing

Outsourcing production to third-party firms. You don't own the plants or employ the workers

Zara's approach (vs. conventional fashion)

Don't guess, gather data: make small batches of what customers want and ship fast

PDA

Personal digital assistant. An early name for handheld mobile computers

Point-of-sale (POS) system

Transaction processing system that captures customer purchases (cash registers, checkout). Usually linked to inventory to subtract sold items

Vertical integration

One firm owns several layers of its value chain

RFID

Small chip tags that wirelessly send a unique ID code for an item. Like a next-generation bar code

How Zara uses RFID

Scanners track items in the distribution center and stores, so staff can find a product when a customer asks

Logistics

Coordinating the flow of goods, people, information, and other resources between locations

Omnichannel

Retail approach with connected shop, sales, and return experiences (store, online, sometimes phone and catalog)

Why is Zara's model counterintuitive?

It doesn't advertise much, rarely runs sales, and uses vertical integration instead of outsourcing to low-labor-cost countries

How Zara beats Gap

Designs fast using real data, uses tech to coordinate suppliers, just-in-time manufacturing, and logistics, shortening design-to-delivery time. Limited runs keep stores stocked with what locals want, so customers buy right away at full price and fewer products flop

Profit margin formula

Profit divided by revenue. Profit = sales revenue minus costs. Sales revenue = price times quantity sold

What Gap focuses on for profit

Higher prices, promotion-driven sales, and lower manufacturing costs from outsourced contract manufacturing

What Zara focuses on for profit

Tech-assisted vertical integration to lower manufacturing and distribution costs, cheaper design (hungry new-grad designers, no celebrity designers), local designs that sell at full price, less advertising, fewer failed products

How Zara captures data in stores

PDAs (staff record customer preferences, the soft data) and POS systems (record purchases, the hard data). Both are linked and uploaded for analysis

What Zara does with store data

Plans styles and issues rebuy orders based on data, not hunches

Zara uses tech to

Plan styles and buy orders from data, coordinate suppliers, JIT manufacturing, and logistics, run inventory models for each twice-weekly shipment, and use robots to dye and cut fabric in 23 highly automated factories

Zara IT spending vs. rivals

Less than one-fourth of the fashion industry average

Advertising spending: industry vs. Zara

Industry averages 3.5% of revenue. Zara (Inditex) spends 0.3%

Failed products: industry vs. Zara

Industry averages 10%. Zara about 1%

Markdowns: industry vs. Zara

Industry markdown ratio is about 50%. Zara sells about 85% of its products at full price