Strategic Frameworks for Sustaining Competitive Advantage and Innovation
Assessing Sustainable Competitive Advantage Sources
We assess the sources of sustainable competitive advantage using:
- VRIO Framework
- SWOT Analysis
Apple’s Sustainable Competitive Advantage
Sources of Apple’s Competitive Advantage (CA)
Why Apple’s CA Has Been Sustainable (VRIO)
Apple’s resources and capabilities are:
- Valuable
- Rare
- Inimitable (Difficult to copy due to factors like:)
- Legal mechanisms (e.g., patents)
- Path dependence / Time compression diseconomies
- Causal ambiguity
- Social complexity / Interdependencies between Resources and Capabilities (R&Cs)
- Organized to capture value
Will Apple’s CA Remain Sustainable?
- Some resources and capabilities may degrade or depreciate over time.
- Examples: Natural resources (oil well), genius CEO, expensive equipment.
- R&Cs may also lose value if they become less useful in creating value because the environment or markets have shifted.
- Examples: The “Fatburger” brand in times of health consciousness; the shift away from “Rustic” or “Minimalist” trends.
- Future Scenarios:
- If Apple juggernaut continues: iPhone will dominate, Mac, etc., will continue to grow.
- If Apple levels off: Will remain the leader, but further market fragmentation will continue. Apple will have to fight hard for a new source of growth.
- If Apple has peaked: End of the fad? End of innovation? Open standards will win eventually.
Strategic Implications of SWOT Analysis
- Identify Opportunities and Threats
- Notice where growth is coming from (e.g., K-pop in China).
- Beware what strengths will become obsolete (e.g., Blackberry).
- Exploit Strengths
- Shift competition to that dimension (e.g., Coke and Pepsi).
- Leverage or exploit the brand (e.g., Disney brand).
- Manage Weaknesses
- Upgrade (e.g., Samsung).
- Outsource (e.g., corporate IT departments).
- “Turn bug into feature” (e.g., Harley-Davidson).
Competitive Positioning in the Product Market
Cost Position Versus Value Position
Firms compete by choosing a position based on cost or value.
Key Economic Metrics:
- Economic Value Created = Consumer Willingness to Pay (CWP) – Cost to Firm
- Consumer Surplus = CWP – Actual Price
- Firm Surplus = Actual Price – Cost to Firm
Value and Cost Leadership Strategies
Value Drivers and Examples
Industries where value leadership is prominent: Hotel Industry, Fashion Industry, Home Appliance Industry, Beauty & Personal Care Products Industry.
- Apple: Intangible value, product features (e.g., Siri), customer service (e.g., Genius Bar), complements (e.g., apps ecosystem).
- Whole Foods: Focuses on high-quality, specialized products and experience.
Cost Strategy Examples
- Walmart:
- Economics of scale/volume, leading to bargaining power (pushing suppliers to cut prices).
- Minimization of operating costs & overhead (e.g., using its own trucking fleet).
- Started with small towns, making it cost-prohibitive for competitors to enter these same regions (barrier to entry).
- Ikea: Combines cost leadership and differentiation.
- Note on marginal differentiation: A desk at Walmart might cost $49.98, while a similar desk with an extra specification might cost $49.99.
Cost Dynamics: Learning and Experience Curves
The Experience Curve represents a shift of the whole cost curve; process innovation leads to this shift (captures both learning effects and process improvements).
Key Cost Drivers
- Cost of input
- Economies of scale
- Learning/Experience curve
Strategic Inferences
- If costs are equal, when a firm has a higher value gap than its competitor, it can be inferred that the firm can charge a premium price for its products and services.
- A firm is able to drive down the cost of complex medical procedures by doing a thousand small things; this approach focuses on driving down costs through process innovation.
- A firm that follows a differentiation strategy is protected from the threat of new entrants primarily due to its reputation for quality.
Observation on Airline Strategy
Spirit Airlines has a reputation for low service, yet JetBlue lags behind it in certain metrics. Spirit’s stock has even been higher than American Airlines, suggesting market valuation is not solely tied to traditional reputation.
Innovation and the Industry Life Cycle
Innovation is defined as invention plus commercialization.
Stages of the Industry Life Cycle
The industry life cycle progresses through five stages: Introduction, Growth, Shakeout, Maturity, and Decline.
- Introduction: Uncertainty in technological standards and market potential; efforts focused on product R&D.
- Growth: Early adopters are buying products; emergence of technological standards; start of large-scale manufacturing, process innovation, and marketing; fragmented market but fast growth; differentiation matters (e.g., Fitbit, phones).
- Shakeout, Maturity, and Decline: Standards are fixed; no more major product innovation; process innovation prevails; shifting from non-price to price competition.
The Chasm
The Chasm is the critical gap that exists between early adopters and the early majority.
Crossing the Chasm: Palm Pilots vs. iPads
The iPad successfully crossed the chasm, while Palm Pilots did not, illustrating the first-mover disadvantage when failing to capture the early majority:
- Palm Pilots did not have enough value for the early majority.
- Failure to educate the market.
- Overpromised and under-delivered (e.g., handwriting recognition, weight).
- Lack of an “ecosystem” (no complements, no network effect).
Key Difficulties in Innovation
Challenges for Entrants
It is often hard for entrants to overcome the chasm because:
- Innovation is often a technology-push without sufficient market-pull.
- It is costly to educate and create the market.
- There are high uncertainties about technologies and demand.
- They often lack complementary assets.
Challenges for Incumbents (Disruption)
It is hard for incumbents to be disruptive due to:
- Cannibalization of existing products or revenue streams.
- Being entrenched in existing organizational routines and processes.