UNIT - 2

EXTERNAL ENVIRONMENT

• External Environment refers to the environment that has an indirect

influence on the business.

• The factors are uncontrollable by the business.

 EXTERNAL ENVIRONMENT
a) MICRO ENVIRONMENTAL FACTORS
These are external factors close to the company that have a direct
impact on the organizations process.

b) MACRO ENVIRONMENTAL FACTORS

These are external factors close to the company that have a Indirect
impact on the organizations process.
 MACRO ENVIRONMENTAL FACTORS
i) Political Factors
oPolitical factors include Government regulations and legal issues and
define both formal and informal rules under which the firm must operate.
oSome examples include:
• tax policy
• employment laws
• environmental regulations
• trade restrictions and tariffs
• political stability
 MACRO ENVIRONMENTAL FACTORS
ii) Economic
o Factors Economic factors affect the Purchasing power of potential
customers and the Firm's cost of capital.
o The following are examples of factors in the macroeconomy:
• economic growth
• interest rates
• exchange rates
• inflation rate
 MACRO ENVIRONMENTAL FACTORS
iii) Social Factors
oSocial factors include the Demographic and cultural aspects of the external
macro environment. These factors affect customer needs and the size of
potential markets.
o Some social factors include:
• health consciousness
• population growth rate
• age distribution
• career attitudes
• emphasis on safety
 MACRO ENVIRONMENTAL FACTORS
iv) Technological Factors
oTechnological factors can lower barriers to entry, improves
production levels, and influence outsourcing decisions.
oSome technological factors include:
• R&D activity
• automation
• technology incentives
• rate of technological change
 MICRO ENVIRONMENTAL FACTORS
i) Shareholders
• Any person or company that owns at least one share (a percentage
of ownership) in a company is known as shareholder. A shareholder
may also be referred to as a “Stockholder".
• As organization requires greater inward investment for growth they
face increasing pressure in Business conditions.
• However the Shareholder Policy, Obstructs on the Strategy
Formulation of Organizations.
 MICRO ENVIRONMENTAL FACTORS
ii) Suppliers

• Increase in raw material prices will have a knock on affect on the

Marketing mix strategy of an organization. Prices may be forced up as
a result.
• A closer supplier relationship is one way of ensuring competitive and
quality products for an organization.
 MICRO ENVIRONMENTAL FACTORS
iii) Distributors
• Often getting products to the end customers can be a major issue for
firms.
• Distibutors usually provide a range of services (such as product
information, estimates, technical support, after-sales services,
credit) to their customers.
• You can also gain a competitive advantage by using changing
distribution channels.
 MICRO ENVIRONMENTAL FACTORS
iv) Customers
• A person, company, or other entity which buys goods and services
produced by another person, company, or other entity is known as
customer.
• Organizations survive on the basis of meeting the needs, wants and
providing benefits for their customers.
• Failure to do so will result in a Failed business strategy.
 MICRO ENVIRONMENTAL FACTORS
v) Competitors
• A company in the same industry or a similar industry which offers a
similar product or service is known as competitor.
• The presence of one or more competitors can lower the prices of
goods and services as the companies attempt to gain a larger market
share.
• Competition also requires companies to become more efficient in
order to reduce costs.
 MICRO ENVIRONMENTAL FACTORS
vi) Media
• Positive or adverse media attention, in some cases can make or break
an organisation..
• Consumer programmes with more Direct audience can also have a
very powerful and positive impact, forcing organisations to change
their tactics.
PORTERS FIVE FORCE MODEL
 Exhibit 8–5 Five Forces Model

Source: Based on M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and
Competitors (New York: The Free Press, 1980).
Chapter 8, StephenP.Robbins, Mary Coulter, Management, Copyright © 2010 8–15
Pearson Education, Inc. Publishing as Prentice Hall
Threat of New Entrants
• New Entrants to Industry easily raise the level of Competition,
thereby reducing our Product’s Attractiveness
• “Barriers to Entry” are Obstacles to New-Entrants from easily Entering
an Industry or Area of Business
Eg : Extreme Government regulations, Huge Start-up Costs, Strong
Technology, Efficient Access to Suppliers & Distribution Channels
• Ship Building Industries, Energy Industries are difficult to enter
whereas Retailers & Restaurants are easy to Enter.
Threat of Substitutes
• The Presence of Substitute Products lowers our Profitability because
they Limit our Price levels
Eg : Coffee-Tea, Petrol-Diesel

• If the Performance of the Substitute is relatively Good & Switching

Cost is low, then the Substitute is a High Competition of our Product
Bargaining Power of Buyers
• When the Buyer is Strong, the Buyer sets the Price
• Bargaining Power of Buyers is greater
a). When the Suppliers are many & Buyers are few
b). When Alternative Suppliers are available to supply at Lower Price
c). When the Buyer Purchases the Product large in number
• Bargaining Power of Buyers not only Lowers the Price but also
Demands for Discounts, High Quality & better Service.
Bargaining Power of Suppliers
• Fewer Suppliers of our Product means that more Powerful are the
Suppliers
• Suppliers if Powerful exert much Influence on our Industry by selling
Raw-materials at High Price, Low Quality & in extreme Cases they
may don’t provide the Raw-materials stating some Reasons
• Bargaining Power of Suppliers is greater:
a).When the Suppliers are few & the Buyers are many
b). When the Raw-material is Unique & are not commonly available
c). When the Supplier himself has the Power to set-up Retail Outlets
Intensity of Rivalry
The Intensity of Rivalry is high when
1).Large number of Firms compete for same Customers
2). Low levels of Product Differentiation (ie) Low difference in Brand
Identification leads to Rivalry
Eg : Coke vs Pepsi
3). Low Switching Cost : If a Customer of a Product can freely Switch
from one Brand to another
4). High Strategic Stakes : If a Company is about either to Loose or Gain
heavily, defenitely they Try to intensify the Competition Plan.
 Strategic Group
• A strategic group is a concept used in strategic
Management that groups companies within an
industry that have similar business models or
similar combinations of strategies.

For example, the Restaurant industry can be divided into

several strategic groups including Fast-food and Fine-
dining Restaurants based on variables such as
Preparation time, pricing, and Presentation
 Strategic Group Mapping
• Strategic group mapping is a technique for looking at
your position in your sector, field or market.

• It is tool for competition analysis

• Strategic group map help to define the scope of

Firm`s competition.
Step1. Identify Competitors Industry
Step1. Identify Competitors Industry

• The Competitors you choose should be closely linked by the

Products/ Services you Offer.

• The List of Competitors you create will be Strategic Groups

Step2 .IDENTIFY YOUR TWO KEY VARIABLES

• Map the firm on Two variable grid using different strategic

dimensions and these dimensions should not be highly correlated .

• The Variable factors should be expressed in a low to high range of

Measurement

Eg : variable can be Technology, Quality , safety features ,better

Services , Price etc
 Step3. Identify the Third Variable

• Draw the circles around each strategic group.

• The circles should be Proportional to market share, income level or
any other kind of fixed Dimensions.
• Put the Firm that fall in same strategic group in about the same space
• For example, luxury car are put in one group like Audi and BMW.
 Step4.Plot Strategic Groups

• You’ll need to objectively plot the points on the map. First locate X,
then Y, then place the appropriately sized circle or figure.

• Use the Third variable as a key measure of competitive advantage,

and demonstrate how the first Two variables help explain why there
is variance in performance among the competitors in a group.
EXAMPLE OF SGM

H
i
g Audi
h Tata
BMW
Price/Quality jaguar

Ford
Hyund
ai
Nis
Honda
sa
& Maruti
n
toyota

L
o
w Dealer network High
 Step 5. Summarize

• Assess the overall map. Identify the variance . Your map should
reveal a firm`s competitive position.
• In summary, your map should have a “little or a lot of Gap” in it. That
is, when you share your map with the Top Management, the Top
Management should gain True insight into why the firm is in a strong
or weak competitive position in the industry.
Why Strategic Group Mapping ?
• To identify who your Direct and indirect competitors (or possible
Partners are)
• It can illustrate how easy it might be to move from one strategic
group to another
• Moreover, sgm may also help account for difference among firm`s
Profitability with an industry.
• It may help identify Future opportunities or strategic problems
What can we Learn from SGM.

• The mapping process help the firm in identifying its close rivals.
.
• The strategies pursued by firms in our Strategic groups highlight
alternative paths to success. A firm may be able to borrow an idea
from the strategic group and use this idea to improve its situation.
LIMITATIONS

• This model is static and ignore the role of innovation

• This focus is on Industry upon Group structures rather than

individual companies
COMPETITIVE CHANGES DURING INDUSTRY
EVOLUTION
• The effects of industry evolution on competitive forces is the
“Industry life cycle” model.

• Competitive changes (‘risk of entry by potential competitors’ and

‘rivalry among existing firms’ ) as an Industry evolves and Managers
have to anticipate these changes and formulate appropriate
strategies.
Industry Life Cycle
EMBRYONIC STATE:
Industry is just beginning to develop (eg., Personal computers in 1976).
Growth at this stage is slow due to factors such as:
• Buyers’ unfamiliarity with the industry’s products,
• High prices due to Poor Economies of scale, and
• Poorly developed Distribution channels.
• Barriers to entry tend to be based on access to key Technological
know-how. Higher the complexity, higher the barrier for new
entrants.
EMBRYONIC STATE:
Rivalry is based not so much on price as on
• educating customers,
• opening up Distribution channels, and
• perfecting the Design of the product.
• The company that is first to solve Design problems or employ
Innovative efforts is often able to build up a significant market share,
eg. Personal computers (Apple), vacuum cleaners (Hoover) and
photocopiers (Xerox – the ultimate proof of the success of a brand).
• In this Stage, the company has major opportunity to build up a
strong market presence because of Lack of Rivalry
 Growth stage
In this stage, Demand is expanding rapidly and the industry’s products
take off because
• Customers have become familiar with the product,
• Prices fall because Production experience and Economies of scale
have been attained, and
• Distribution channels have developed.
The U.S. cell-phone industry was in the growth stage most of the
1990s. In 1990 there were only 5 million cellular subscribers in the
nation. By 2002, this figure had increased to 88 million and demand
was growing @ more than 25% per year.
 Growth stage
Entry barriers:

Control over Technological knowledge has diminished by this time

 Few companies have achieved significant scale of economies or built
brand loyalty.
Thus, Threat from potential competitors is generally highest at this
point.
 Growth stage
Rivalry:

High growth rate usually means New entrants can be absorbed into
an industry. Thus, Intensity of rivalry tends to relatively low.
A strategically Aware company takes advantage of this relatively
Benign environment to prepare itself for the forthcoming Intense
competition in the shakeout stage.
 Industry Shakeout
• Explosive growth cannot be maintained Indefinitely.
• Sooner or later, Growth of Cash Flows & Revenue start slowing
down
• At this stage, since few potential First-time Buyers are left; most of
the Demand is limited to Replacement demand
• As an industry enters the shakeout stage, rivalry between Companies
become intense.
(eg., U.S. personal computer industry – Dell Computers).
 Industry Shakeout

Rivalry: In an attempt to utilize this capacity, companies often cut

prices. The result can be a Price war, most inefficient companies drive
to Bankruptcy.

New entrants: It is now a case of “survival of the fittest”. So New Entry

is not a significant Factor at this Stage.
 Mature stage

The companies that survive the shakeout enter the mature stage of the
industry:
• the market is totally saturated and growth is low or zero.
• Whatever growth there is comes from Population expansion or from
increase in replacement demand.
 Mature stage

Rivalry: In mature industries, companies tend to avoid price wars and

enter into Cartels/ Market segment Agreements, thereby allowing
greater Profitability.
 Mature stage
Barriers to entry
• Competition for Market-share drives down prices
(eg. Airline and PC industries).
• To survive the Mature stage, Companies begin to focus on cost
minimization and building brand loyalty
(eg, low-cost airlines and ‘frequent flyer’ programs, excellent after-
sales service by PC companies).
• Only those with low-cost operations and brand loyalty will survive.
 Decline Stage
Eventually, most industries enter a decline stage: growth becomes negative
for a variety of reasons, including
• Technological substitution (eg, Air travel for rail travel);
• Social changes (eg, ‘greater Health consciousness’ hitting Sugar Products);
• Demographics (declining Birthrate hurting the Babycare and child products
market); and
• International competition (cheap Chinese imports flooding many world
markets).
RIVALRY: The main problem is once again that of excess Capacity and, in
such a scenario, rivalry among Established companies usually increases.
 Decline Stage
Exit barriers play a part in adjusting excess capacity. The greater the
exit barriers, the harder it is for companies to reduce capacity.
However, there is always the scope for ‘End-game strategy’ at this
stage).
COMPETITIVE CHANGES DURING INDUSTRY
EVOLUTION – Industry Life cycle

In summary, Strategic managers have to tailor their strategies to

changing industry conditions.
 They must Forecast when the shakeout stage might begin or when
the industry might move into decline.
They have to learn to recognize the crucial points in an industry’s
development
Globalisation and Industry Structure
 GLOBALIZATION

Globalisation is the term to describe the way how countries are more
interconnected both economically and culturally. This process is a
combination of economic, technological, socio-cultural and political
forces.
ADVANTAGES OF GLOBALIZATION
• Increased Liquidity of capital - Investors in Developed nations invest
in Developing nations
• Increased free Trade between Nations
• Corporations have greater flexibility to operate across borders
• Global mass media ties the world together.
• Increased flow of communications (about Products & services) to be
shared between individuals and corporations around the world
ADVANTAGES OF GLOBALIZATION
• Greater ease and speed of Transportation for goods and people.
• Reduction of cultural barriers increased the Global-village effect
• Spread of Democratic ideals to Developed nations.
• Greater Interdependence of Nation states.
• Reduction of likelihood of war between Nations
• Increases in Environmental protection in Developing nations.
DISADVANTAGES OF GLOBALIZATION
• Globalization seeking out the cheapest labor.
• Economic disruptions in one nation affecting the
Interdependent nations.
• Globalization may take advantage of weak Regulatory
rules in Developing countries
• Increase the chances of Open war between Developed &
Developing countries, as Developed Countries vie for
resources.
• Control of world media by a Handful of corporations will
limit Globalization Norms.
INDUSTRY STRUCTURE
• Industry structure refers to the number and size distribution of firms
in an industry.
• The number of firms in an industry may run into hundreds or
thousands.
• The size distribution of the Firm is important from both Business
policy and Public policy views.
• The level of competition rises with the number & Size of firms in the
industry.
INDUSTRY STRUCTURE
i) Fragmented Industry - In a fragmented industry, no Firms have
Large market share. Each firm serves only a small piece of total
market share in competition with others. Each Firm has little
Dominance.
ii) Consolidated Industry - If Few number of firms controls a large
marketshare of the industry's output or sales, it is known as a
Consolidated Industry. Few Firms have more Dominance
CHARACTERISTICS OF INDUSTRY STRUCTURE

Four characteristics of industry structure are particularly important to

the performance of New firms in the industry:
• Capital Intensity
• Advertising Intensity
• Concentration
• Average firm size
CHARACTERISTICS OF INDUSTRY STRUCTURE
• Capital Intensity – measures the importance of capital as opposed to
labor in the production process. Some industries, such as Aerospace,
involve a great deal of capital and relatively little labor. Other
industries, such as Textiles, involve relatively little capital and a great
deal of labor.
• Concentration – is a measure of the market share held by the largest
companies in an Industry. For instance, some Pharmaceutical
industries like Merck, Pfizer and Eli Lilly account for almost all of the
market.
CHARACTERISTICS OF INDUSTRY STRUCTURE
• Advertising Intensity
Advertising is a mechanism through which Companies develop the
reputations/ Brand name that help them sell their products and
services.
To build brand name reputation through advertising, two conditions
need to be met.
a).First, the advertising has to be repeated over time.
b).Second, Economies of scale exist in advertising.
CHARACTERISTICS OF INDUSTRY STRUCTURE
• Average firm size
New firms tend to begin small to minimize the risk of
Entrepreneurial miscalculation.
If the average Firm size is large, this may lead to Inabilities to higher
Purchase in volume, higher Average manufacturing and higher
Distribution cost.
 New firms perform better, when the average firm size is small.
 Elements OF INDUSTRY STRUCTURE
• Business Policy and Strategy:
By looking at the Structure of an Industry, one can often learn a lot
about Competitive Dynamics like Rivalry, Entry barriers, and other
aspects of Competition in that industry.

• Public Policy:
Public Policy View is that, reduced Competition in an industry hurts
consumer’s interest and encourages Dominant firms to adopt Anti-
competitive trade practices.
 Elements OF INDUSTRY STRUCTURE
Oligopoly:
A key characteristic of an oligopoly (a highly structured industry) is that
Competitors are mutually interdependent;
A competitive move by one company will almost certainly affect the
Fortunes of other companies in the industry and the other Competitor
generally respond to the move-sooner or later.
Impact of globalization on industry structure
The structure of an industry is affected by globalization. Globalization
gave rise to the following types of industries.

• Multidomestic Industries
• Global Industries
Impact of globalization on industry structure
Multidomestic Industries are specific to each country or group of
countries.
• Multidomestic Industry is a collection of Domestic industries like
Retailing, Banking and Insurance
• It has Manufacturing facility to produce goods for sale within their
country itself.
Impact of globalization on industry structure
Global Industries (MNCs) operate world wide, making only small
adjustments for Country- specific circumstances.
• A global industry is one in which Activities in one country are
significantly affected by its activities in other countries.
• MNCs produce products or services in various locations throughout
the world and sell them with minor adjustments for specific country
requirements.
Ex: Aircrafts, Television sets, Semiconductors, Automobiles, watches
Tyres etc.,
NATIONAL CONTEXT AND COMPETITIVE
ADVANTAGE
Despite the Globalization of production & markets ,certain industries
are successful in a small number of countries.
• Biotechnology & Computer companies – U.S.
• Electronics Company – Japan.
• Chemical & Engineering company – Germany.
This suggests that the Nation within which a company is Based bears
on the competitive position of that company in the Global market
place.
NATIONAL CONTEXT AND COMPETITIVE
ADVANTAGE

For understanding how National factors can affect competitive

advantage, Concerns need to identify.

a. Where they might want to locate certain Productive activities.

b. Where their most significant competitors are likely to come from.

Attributes to identify National Environment

1. Factor Endowments: A nation’s position in factors of production

such as skilled labor or the infrastructure necessary to compete in
a given industry.
2. Relating & Supplier Industries: The presence or absence in a
nation of supporting industries and related industries that is
Internationally competitive.
Attributes to identify National Environment
3. Demand Conditions: The nature of Home demand of the Nation for
the Industry’s product or service.

4. Firm Strategy, Structure - Governance: The Favourable conditions in

the Nation governing how companies are creating, organizing and
managing the Strategy
COMPETITIVE ADVANTAGE
At the most basic level, how Profitable a Company becomes depends
on three factors:

1.The amount of Value customers place on the company’s product.

2.The Price that a company charges for its products.
3.The cost of creating that value.
COMPETITIVE ADVANTAGE

• Value is a Measure that customers assign to a product.

• Value is a function of Product Attributes such as its Performance,
Conformance, Reliability, Durability & After sale-service.
• A company that strengthens the value of its product can raise or
hold Prices levels.
• Value of the Product induces more customers to purchase its product
& hence Sales volume increases
NATIONAL CONTEXT AND COMPETITIVE
ADVANTAGE
A) RESOURCES:
Resources are the capital or financial, physical, social or human,
technological and organizational Factor endowments that allow a
company to create value for its customers.
Types:
I) Tangible resources: -Are Physical entities, such as land, Buildings,
Equipment, Inventory and money.
NATIONAL CONTEXT AND COMPETITIVE
ADVANTAGE

II) Intangible resources: Are non-physical entities that are necessary

for the creation of the company and its employees, such as :
 Reputation of the company,
 the knowledge that Employees have gained through experience
 the Intellectual property of the company including Patents,
copyrights & Trademarks.
 Brand name of the Company
NATIONAL CONTEXT AND COMPETITIVE
ADVANTAGE
B) CAPABILITIES: -Refers to a company’s skills at coordinating its
Resources & putting them to Productive use. The Capabilities success
reside in an organization’s rules, routines and Procedures.

C) COMPETENCIES: Competencies are Firm-specific strengths that

allow a company to differentiate its products from rivals and thus gain
a Competitive advantage.
 Core Competency
• A core competency is a competency of the Business that is essential
to its overall Performance and success.
• A manufacturing company may have a low defect rate as part of its
primary Business strategy. So this low-defect rate is a core
competency.
• Because of this low-defect rate, the Company has the ability to
consistently provide Quality products to its Clients.So it becomes a
Reliable Manufacturer of Quality Products in its Business model
 Distinctive Competency
• A Distinctive competency is any capability that distinguishes a
company from its competitors.

• For example, one of Google's distinctive competencies is its Name

recognition and notable Search-Engine. This competency is difficult
for competitors to imitate and sets Google apart from the rest of the
market.
 DISTINCTIVE COMPETENCIES

Distinctive competence is a unique strength that allows a company to

achieve superior efficiency, innovation, Quality and customer
responsiveness.
It allows the firm to charge Premium price compared to rivals, which
results in a Profit rate above the industry average.
Ex: Toyota with world class manufacturing process.
 DISTINCTIVE COMPETENCIES

In order achieve Distinctive competency it should satisfy 3 conditions,

namely:
• Value – contribution to customer Perceived value;
• Unique – compared to competitors;
• Extendibility – capable of developing New products.
 DISTINCTIVE COMPETENCIES
Distinctive Competencies are built around all functional areas, namely:
• Technology related
• Manufacturing related
• Distribution related
• Skills related
• Organizational capability
• Other types.
DISTINCTIVE COMPETENCIES : Resources
Distinctive Competencies arise from two sources namely,
Resources – A resource is an Asset, Competency, Process, knowledge
etc..
• Resources may be tangible – land, buildings, Machines,…
• intangible – brand names, reputation, patents, know-how,…
• Resources are the Firm-specific Assets useful for creating a
Differentiation advantage that few competitors cannot acquire
easily.
• A resource is a Strength which gives a competitive advantage to do
well compared to its competitors
DISTINCTIVE COMPETENCIES : Resources
Evaluation of key resources
A unique resource is one which is not found in any other company.
Barney has evolved VRIO framework of analysis to evaluate the firm’s
key resource, say

• Value – does it provide competitive advantage?

• Rareness – do other competitors possess it?
• Imitability – is it costly for others to imitate?
• Organization – does the firm exploit the resource?
DISTINCTIVE COMPETENCIES : Resources
The strengths and weaknesses of resources can be measured by :
• Company’s past performance
• Company’s key competitors and
• Industry as a whole.
The extent to which it is different from that of the competitors, it is
considered as a Strategic Asset.
DISTINCTIVE COMPETENCIES : Capabilities
Capabilities – are skills, which put Resources to purposeful use.
• The organizations structure and control system gives rise to
capabilities which are intangible
• A company should have both
a). unique Resources – for creating Differentiation Advantage
b).unique Capability - to exploit the Available resources.
DISTINCTIVE COMPETENCIES : Capabilities

• Capabilities refer to the Firm's ability to utilize its resources

effectively
• An example of a capability is the ability to Market faster than
competitors.
• Such capabilities are not Documented as Procedures and are
embedded in the Routines of the organization, thus are difficult for
competitors to Replicate.
DURABILITY OF COMPETITIVE ADVANTAGE

Durability of competitive advantage refers to the rate at which the

firm’s Capabilities and Resources depreciate or become obsolete
DURABILITY OF COMPETITIVE ADVANTAGE
A) Barriers to Imitation:

• Barriers are factors which make it difficult for a competitor to copy a

company’s distinctive competencies.
• The longer the period to imitate for the Competitor , the greater the
opportunity to build a strong market Positioning with consumers.
DURABILITY OF COMPETITIVE ADVANTAGE

A). Barriers to Imitation:

• Imitability refers to the rate at which others duplicate the Resources

and capabilities of the underlying Firm
• Tangible resources can be easily imitated but Intangible resources
and capabilities cannot be imitated.
DURABILITY OF COMPETITIVE ADVANTAGE
B) Capability of Competitors:
When a firm is committed to a particular course of action in doing
business and develops a specific set of resources and capabilities, make
it difficult to imitate the CA of successful firms.
i) Strategic commitment: A company’s commitment to a particular way
of doing business that is to developing a particular set of resources &
capabilities.
DURABILITY OF COMPETITIVE ADVANTAGE
B) Capability of Competitors:

ii) Absorptive capacity: Refers to the ability of an enterprise to identify,

value, assimilate, and use new knowledge.

A major determinant of the Capability of Competitors depends rapidly

on the nature of the Competitor’s prior Strategic commitments &
Absorptive capacity.
DURABILITY OF COMPETITIVE ADVANTAGE
C) Dynamism of industry:
• Dynamic industries are characterized by high rate of innovation and
fast changes
• Competitive advantage will not last for a long time. The most
Dynamic industries tend to be those with a very high rate of Product
innovation.
Ex: Computer industry.
GENERIC BUILDING BLOCKS OF COMPETITIVE
ADVANTAGE

• The efficiency of an Enterprise depends on the Quick flow of

Information across the complete supply chain i.e. from the customer
to manufacturers to supplier.
• Organizations today confront new markets, new competition and
increasing customer expectations. Thus today's Organizations have to
constantly Re-engineer their business practices and procedures to
sustain Competitive Advantage.
GENERIC BUILDING BLOCKS OF COMPETITIVE
ADVANTAGE
A) EFFICIENCY
• In a business organization, Inputs such as land, capital, raw material
managerial know-how and technological know-how are transformed
into outputs such as products and services.
• Efficiency of operations enables a company to lower the cost of
inputs to produce given output and to attain competitive advantage.
• Employee productivity is measured in terms of output per employee.
For ex: Japan’s Auto giants have Cost-based competitive advantage
over their near rivals in U.S.
GENERIC BUILDING BLOCKS OF COMPETITIVE
ADVANTAGE
B) QUALITY
• Quality of goods and services indicates the Reliability of doing the
job, which the product is intended for.
• High quality products create a Reputation and Brand name, which in
turn permits the company to charge higher price for the products.
• Higher product quality means employee’s time is not wasted on
Rework, Defective work or Substandard work.
For ex: In consumer durable industries such as mixers, grinders, gas
stoves and water heaters, ISO mark is a basic imperative for survival.
GENERIC BUILDING BLOCKS OF COMPETITIVE
ADVANTAGE
C) INNOVATION
• Innovation means new way of doing things.
• Innovation results in new knowledge, new product development,
new structures and strategies in a company.
• It offers something unique, which the competitors may not have, and
allows the company to charge high price.
For ex: Photocopiers developed by Xerox.
GENERIC BUILDING BLOCKS OF COMPETITIVE
ADVANTAGE
D) CUSTOMER RESPONSIVENESS
• Companies are expected to provide customers what they are exactly
in need of by understanding customer needs and desires.
• Customer Responsiveness is determined by Customization of
products, Quick delivery time, Quality, Design and prompt After-
sales service.
For ex: The popularity of courier service over Indian postal service is
due to the fastness of service.
Generic Strategies
Porter called the Generic strategies:

 Cost Leadership (no frills),

 Differentiation (creating Unique Products and services) and
 Focus (offering a specialized service in a niche market).
Generic Strategies
Cost Leadership strategy
Companies that are successful in achieving Cost Leadership usually
have:
• Access to the Capital needed to invest in Technology that will bring
costs down.
• Very efficient Logistics.
• A low-cost base (labor, materials, facilities), and a way of sustainably
cutting costs below those of other competitors.
Differentiation strategy
To make a success of a Differentiation strategy, organizations need:
• Good Research and Development activities
• The ability to deliver high-Quality products or services.
• Effective Sales and Marketing, so that the Client become aware about
the benefits offered by the differentiated offerings.
AVOIDING FAILURE AND SUSTAINING
COMPETITIVE ADVANTAGE

• When a company loses its competitive advantage, its profitability

falls.

• The company does not necessarily fail, it may just have below-
average profitability and can remain in this mode for a considerable
time, because its Resources & Capital base is shrinking.
AVOIDING FAILURE AND SUSTAINING
COMPETITIVE ADVANTAGE
Reasons for failure:
a) Inertia:
The Inertia argument says that companies find it difficult to change
their strategies & structures in order to adapt to changing competitive
conditions.
b) Prior strategic commitments:
A company’s prior Strategic commitment not only limits its ability to
imitate rivals but may also cause competitive Disadvantage.
AVOIDING FAILURE AND SUSTAINING
COMPETITIVE ADVANTAGE
Reasons for failure:
c) The Icarus Paradox:
• According to Miler, many companies become so dazzled by their
early success that they believe more of the same type of effort is the
way to future success.
• As a result, they can become so specialized and inner directed that
they lose sight of market realities and the fundamental
requirements for achieving a competitive advantage.
• Sooner or later, this leads to failure.
AVOIDING FAILURE AND SUSTAINING
COMPETITIVE ADVANTAGE
Steps to Avoid Failure:
a) Focus on the Building Blocks of competitive advantage:
• Maintaining a competitive advantage requires a company to continue
focusing on all four Generic building blocks of competitive advantage
– efficiency, quality, innovation, and responsiveness to customers
• And to develop Distinctive competencies that contribute to superior
performance in all areas.
AVOIDING FAILURE AND SUSTAINING
COMPETITIVE ADVANTAGE
Steps to Avoid Failure:
b) Institute continuous Improvement & Learning:
• In such a dynamic and fast – paced environment, the only way that a
company can maintain a competitive advantage overtime is to
continually improve its Resources, Capabilities & Competencies
• The way to do this is recognize the importance of learning within the
organization.
AVOIDING FAILURE AND SUSTAINING
COMPETITIVE ADVANTAGE
Steps to Avoid Failure:
c) Track Best Industrial Practice and use Benchmarking:
• Benchmarking is the process of measuring the company against the
products, practices and services of some of its most efficient global
competitors.
AVOIDING FAILURE AND SUSTAINING
COMPETITIVE ADVANTAGE
Steps to Avoid Failure:
d) Overcome Inertia:
• Overcoming the Internal forces that are a barrier to change within an
organization is one of the key requirements for maintaining a
competitive advantage.
• Once this step has been taken, implementing Change requires good
Leadership (the judicious use of power) and appropriate changes in
organizational structure & Control systems.