chapter 7 competitive advantage in technology intensive

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202 FRANK T ROTHAERMEL, p olitical e conomic s ocial t echnological Model for assessing a. firm s general external environment the chapter explains Porter s Five. Forces Model The chapter then describes the strategic group model and. illustrates that model by reference to the pharmaceutical industry The. author notes that opportunities and threats to a company differ based. upon the strategic group to which that firm belongs within an industry. Finally the chapter explores the importance of strategy in technology. intensive industries and emphasizes that sustained competitive advantage. can be accomplished only through continued innovation. 1 WHAT IS COMPETITIVE ADVANTAGE, Gaining and sustaining competitive advantage is the de ning question of. strategy Accordingly strategy research is motivated by attempting to. answer fundamental questions like why do some technology start ups. succeed while others fail or what determines overall rm perfor. mance and what can you as an entrepreneur or manager do about it. The unifying element of strategy research is a focus on explaining and. predicting interfirm performance differentials Thus strategy researchers. seek answers to practically relevant questions like why is Sony as a new. entrant into the market for home video games dominating the incumbent. rm Sega who helped create the industry or why is Dell continuously. outperforming Gateway, Strategy researchers believe that the answer to these fundamental questions. lies in the differences in rm strategy A dictum of strategy therefore is that. overall rm performance is explained by a rm s strategy A firm s strategy. is defined as the managers plan about how to gain and sustain competitive. advantage Drucker 1994 This strategic plan re ects the managers. assumptions about the company s strengths and weaknesses as well as the. competitive dynamics in the external industry environment A strategic plan. is therefore expressed in a logical coherent framework based on an internal. analysis of the company s strength and weaknesses S trength W eaknesses. as well as of the external environmental opportunities and threats. O pportunities T hreats it faces making up the so called SWOT Analysis. A rm s strategy details a set of goal directed actions that managers intend. to take to improve or maintain overall rm performance If the managers. assumptions align closely with the competitive realities successful strategies. can be crafted and implemented resulting in superior rm performance. Competitive Advantage in Technology Intensive Industries 203. This de nition of strategy highlights the pivotal role managers play in setting. and implementing a rm s strategy and thus in determining rm per. formance Achieving sustained superior performance over a company s direct. rivals therefore is the ultimate challenge in strategy. Simply put a rm that outperforms its competitors has a competitive. advantage If this rm is able to dominate its competitors for prolonged. periods of time the company is said to have a sustained competitive. advantage For example through the innovative use of IT and other. strategic innovations the world s largest retailer Wal Mart was able to. outperform its competitors Target and Costco throughout the 1990s. and early 2000 in terms of nancial performance Thus we can say that. Wal Mart had a sustained competitive advantage during this time period. A rm that enjoys a competitive advantage not only is more pro table than. its competitors but also grows faster because it is able to capture more. market share either directly from competitors or from overall industry. growth due to the rm s stronger competitiveness, In the simplest terms pro t P is de ned as total revenues TR minus. costs C or P TR C where TR P Q or price times quantity sold. Revenues therefore are a function of the value created for customers. and the volume of goods sold Both volume and pro t margin drive overall. pro t one measure of competitive advantage as depicted in Fig 1. Fig 1 Volume and Margin as Drivers of Pro t,204 FRANK T ROTHAERMEL.
In more abstract terms one can say that a firm has a competitive. advantage when it is able to create more economic value than its rivals. Economic value in turn is simply the difference between the perceived value. of a good to a customer and the total costs per unit including costs of. capital to produce the good Thus the magnitude of a rm s competitive. advantage is the difference between the perceived value created and the costs. to produce the good or service compared to its direct competitors If the. economic value created is greater than that of its competitors the rm has. a competitive advantage if it is equal to the competitors the rms are said. to have competitive parity and if it lower than its rival rms the rm has a. competitive disadvantage, If we take a closer look at the equation P TR C where TR P Q we. realize that rm pro tability depends simply put on three factors. 1 perceived value created for customers 2 the price of the product or. service and 3 the total costs of producing the product or service The. perceived value of a good for example is assigned by customers based. on the product s features performance design quality and so on For. example customers value a BMW M3 sports car more than a Dodge. Intrepid and accordingly are willing to pay more for the BMW M3. and have lots more fun driving it The price of a product or service is. simply the dollar amount the customer pays to purchase the good Indeed. trade happens because both sides sellers and buyers bene t That is because. buyers generally value the goods they buy at a higher dollar amount than. they actually pay for it Sellers on the other hand generally sell their. products or services above cost, Think about the laptop you bought for college How much did you pay. for it Let s assume you paid 1 200 for it But how much do you value it. That is how much is it worth to you This can be determined by thinking. about how productive and enjoyable college would be for you without. a laptop and assuming you do not have convenient access to a close. substitute like a desktop You quickly realize you would have been willing. to pay much more for a laptop than you actually paid for it Indeed if you. were pushed you probably would have paid several thousand dollars for it. given the way it enhances your productivity If you would have been willing. to pay let s say 8 000 for your laptop but paid only 1 200 for it you. actually captured value in the amount of 6 800 This amount is the. difference between the value you place on the laptop and what you paid for. it In economics this is called consumer surplus because it is the value you. as the consumer capture in the transaction of buying the laptop Finally the. total costs C is simply the average unit costs that the manufacturing of a. Competitive Advantage in Technology Intensive Industries 205. product incurred including costs of capital Let s say it costs that company. 500 to make your laptop it will capture a pro t of 700 when it sells the. laptop to you this is called producer surplus in economics Thus trade is. bene cial to both buyers and sellers because transacting parties capture. some of the overall value created, Fig 2 graphically illustrates how these concepts t together V is the value. of the product to the consumer P the price and C the average unit cost. Thus V P is the value the consumer captures or consumer surplus P C is. the pro t margin while V C is the value created by this transaction. Based on these concepts one realizes that a rm has two levers to create. competitive advantage 1 the value created to customers V and or 2 the. costs of production C Often higher value goes along with greater cost. Given the earlier example while the BMW M3 creates more value than the. Dodge Intrepid the BMW M3 also costs more to create than the Dodge. Intrepid Yet some rms were able to overcome the trade off between value. created and costs incurred to produce that value For example Toyota. through its lean manufacturing system was able to produce cars that were. perceived to be of higher value by customers due to superior quality and. features while at the same time the unit cost was lower when compared to. cars manufactured by U S or European car makers in the same class This. situation is depicted in Fig 3 where Firm B is able to capture competitive. V Value to customer,V P C Costs of production,V P Consumer surplus. P C P C Profit margin,V C Value created,Costs of production.
includes cost of capital,Fig 2 Value Price and Costs. 206 FRANK T ROTHAERMEL, Fig 3 The Role of Value Creation and Costs in Competitive Advantage. advantage on both levels with higher perceived value created than Firm A. with at the same time lower costs to produce the good or service Thus. Firm B can charge a higher price than Firm A because Firm B creates more. value than Firm A In addition Firm B is more pro table than Firm A. because Firm B has lower cost than Firm A While competitive advantage. only requires a rm either to achieve higher value created assuming costs. are equal or lower costs assuming value created is equal than its. competitors some rms are able to gain and sustain a competitive. advantage through a twofold superior performance based on higher value. created and lower costs,2 INTERNAL AND EXTERNAL ANALYSIS SWOT. To create and sustain competitive advantage the rm s managers must. understand the rm s internal strengths and weaknesses as well as its. opportunities and threats that present themselves in the rm s external. environment This is done through a SWOT Internal strengths and. weaknesses concern issues such as quantity and quality of the rm s. resources capabilities and competencies The goal here is that a rm s. strategy should leverage a rm s strengths while mitigating its weaknesses. or acquire new resources and build new capabilities and competencies. to turn weaknesses into strengths To understand the external environment. Competitive Advantage in Technology Intensive Industries 207. Competitive Advantage Requires Strategic Fit between a Firm s. Internal Strengths Weaknesses and External Opportunities and Threats. External Environment Internal,Strategic Fit,Industry Strategy. Capabilities,Competencies,Fig 4 Strategic Fit, the managers must analyze the structure of the industry in which they.
compete because overall rm pro tability is determined not only by rm. effects but also by industry effects McGahan Porter 1997 The latter. point implies that not all industries are equally pro table and thus some. industries are more attractive than others For example the average. industry rate of return on invested capital is many times higher in the. pharmaceutical industry than in the grocery industry and this has been so. for decades The ultimate goal of the SWOT analysis is therefore to aid. managers in formulating a strategy that allows a coherent t between the. company s resources capabilities and competencies on the one hand and. its industry structure on the other hand as depicted in Fig 4. 2 1 Internal Analysis Resources Capabilities and Core Competencies. Superior rm pro tability is the result of a rm s gaining and sustaining. competitive advantage through strategy To be able to leverage a strategy. into competitive advantage however a rm must possess core competencies. that allow the managers to manipulate the underlying drives of pro tability. 208 FRANK T ROTHAERMEL, i e perceived value and cost To obtain a competitive advantage a rm. must have competencies that allow it to create higher perceived value than. its competitors or to produce the same or similar products at a lower cost or. to do both simultaneously For example the core competence of Honda. Motor Company is to produce small highly reliable and high powered. engines This allows the company to create superior value in the mind of the. consumer Yet it is important to realize that the nal product e g an. Acura MDX a crossover SUV in Honda s luxury line of vehicles is only the. visible side of competition What is even more important to think about is. the science engineering and managerial competencies needed to create the. Acura MDX and its high performing engine While products and services. are the visible side of competition underneath are a diverse and deep set of. competencies that make this success happen This implies that companies. compete as much in the product and service markets as they do on. developing competencies Superior or core competencies allow managers. to create higher perceived value and or achieve a lower cost structure. Prahalad Hamel 1990, Core competencies are built through the complex interplay between. resources and capabilities Resources are assets on which a company can. draw when executing strategy Resources fall into two categories tangible. such as land buildings plant and equipment and intangible such as brand. name reputation patents and technical and market know how Finally. a rm s capabilities are the managerial skills necessary to coordinate and. orchestrate a diverse set of resources and to deploy them strategically. A rm s capabilities are by their nature intangible and are captured in a. rm s routines procedures and processes Teece Pisano Shuen 1997. CHAPTER 7 COMPETITIVE ADVANTAGE IN TECHNOLOGY INTENSIVE entrant into the market for home video games dominating the incumbent Based on these concepts

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