Sustainable Competitive Advantage: VRIO, SWOT, and Business Models

Posted on Feb 12, 2025 in Business Administration and Management (BAM)

Assessing Sources of Sustainable Competitive Advantage

  • VRIO, SWOT

Is Apple Maintaining a Sustainable Competitive Advantage?

  • Sources of Apple’s Competitive Advantage
  • Why It Has Been Sustainable:
    1. Valuable
    2. Rare
    3. Inimitable
      • Legal mechanisms (patents), path dependence/time compression diseconomies, casual ambiguity, social complexity/interdependencies between resources and capabilities.
    4. Organized to capture value
  • Will It Remain Sustainable?
    1. Some resources and capabilities may degrade or depreciate over time.
      • Natural resources (oil well), a genius CEO, expensive equipment.
    2. Resources and capabilities may also lose value if they become less useful in creating value because the environment/markets have shifted.
      • “Fatburger” brand in times of health consciousness, “Rustic” + “Minimalist” trend as the new thing.
    3. If the Apple juggernaut continues: iPhone will dominate, Mac, etc. will continue to grow.
    4. If Apple levels off: It will remain the leader, but further market fragmentation will continue. Apple will have to fight hard for a new source of growth.
    5. If Apple has peaked: End of the fad? End of innovation? Open standards will win eventually.

SWOT Implications

  • Identify opportunities and threats.
    1. Notice where growth is coming from (K-pop in China), beware of what strengths will become obsolete (Blackberry).
  • Exploit strengths.
    1. Shift competition to that dimension (Coke & Pepsi), leverage/exploit (Disney brand).
  • Manage weaknesses.
    1. Upgrade (Samsung), outsource (corporate IT departments), “turn bug into feature” (Harley).

How to Compete (Position) in a Product Market

  • Cost Position vs. Value Position
  • Economic Value Created = Customer Willingness to Pay – Cost to Firm
  • Consumer Surplus = Customer Willingness to Pay – Actual Price
  • Firm Surplus = Actual Price – Cost to Firm

Value vs. Cost Leaders

Hotel Industry, Fashion Industry, Home Appliance Industry, Beauty & Personal Care Products Industry

Value Drivers

  • Apple: intangible, product feature (Siri), customer service (Genius Bar), complements (apps)
  • Whole Foods

Cost Strategy

  • Walmart
    1. Economics of scale/volume → Bargaining power (pushing suppliers to cut prices).
    2. Minimization of operating costs & overhead (use own trucking fleet).
    3. They started with small towns, so it was cost-prohibitive for competitors to enter these same regions (barrier to entry).
  • Ikea – combines cost and differentiation
    1. A desk at Walmart – 49.98 → a same desk with an extra spec = 49.99

Learning Curve/Experience Curve

  • Experience = shift of whole curve… process innovation leads to it (captures both learning effects and process improvements)

Cost Drivers

  • Cost of input, economies of scale (spread fixed costs over large input, employ specialized systems and equipment (Tesla Model 3 has strong demand so they employed cutting-edge robotics to produce cars of the highest quality at large scale, thus driving down costs), taking advantage of certain physical properties), learning/experience curve.
  • 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.
  • 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.

Spirit – has a bad reputation, but JetBlue lags behind it. Spirit stock is even higher than American.

Innovation

Invention + Commercialization

Industry Life Cycle

Introduction, Growth, Shakeout, Maturity, Decline

Chasm is between early adopters and early majority

Introduction

Uncertainty in tech standards and market potential; efforts focused on product R&D.

Growth

Early adopters buying the products, emergence of tech standards, start of large-scale manufacturing, process innovation and marketing; fragmented market, but fast growth; differentiation matters (Fitbit, phones).

Shakeout, Maturity, and Decline

Standards are fixed, no more major product innovation, process innovation prevails, shifting from non-price to price competition.

Palm Pilots vs iPads that crossed the chasm; Palms didn’t have enough value for the early majority, failure to educate the market, overpromised, under-delivered (handwriting, weight), lack of “ecosystem” (no complements, no network effect) = first-mover disadvantage.

Key Difficulties in Innovation: Entrants

  • Often hard for entrants to overcome the chasm; often a tech-push without market-pull; costly to educate and create the market; high uncertainties about technologies/demand; lack of complementary assets.

Key Difficulties in Innovation

Hard for incumbents to be disruptive – cannibalization; entrenched in existing organizational routines.

Key Aspects of a Business Model

A vague proposition of what is offered to the market; the segment of clients addressed by the value proposition; the communication and distribution channels to reach clients; key resources needed & key activities necessary; key partners and their motivations to participate; revenue streams generated.

Examples of Business Model Innovations that Focus On:

  • New revenue model
    1. How revenue is generated
      • Razor-razor blade: Initial product sold at a loss to drive demand for complementary goods/replacements (Gillette, HP laser jet printers).
      • Subscription: Users pay for access to a product or service whether they use the product during the payment term or not (Netflix, TV, cellular, health clubs).
      • Pay-as-you-go: Only pay for the services you consume (power and water).
      • Freemium: Provides basic features of a product free of charge but charges for premium services (Dropbox).
      • Wholesale: Book publishers sell their books at a fixed price, usually 50% below the recommended retail price; the retailers are free to set their own price and profit off the difference.
      • Agency: Producer relies on an agent to sell the product at a predetermined percentage commission.
      • Bundling: Sells products for which demand is negatively correlated at a discount (Microsoft bundles Word, Excel, PowerPoint, etc. and controls the operating system, so easily regained competitive advantage).
  • New communication/distribution channels
    1. Online
    2. Offline
  • New buyers and suppliers
  • New partners (Closed innovation vs Open innovation)

Platform Business Models

A platform is a business that enables value-creating interactions between external producers and consumers (Airbnb, Uber). The purpose is to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants.

The platform provides an infrastructure for these interactions and sets governance conditions for them.

Demand-Side Economies of Scale: Network Effect

  • Direct network effects (users directly connected, fax/phone/Facebook)
  • Indirect (via complements, especially for systems-based products, hardware/software)
  • Two-sided network effects (increases in usage by one set of users increases the value for another set of users)
  • Positive feedback
    1. Supply-side factors = economies of scale, including fixed cost spreading (R&D), economies of learning (top of Amazon loop)
    2. Positive feedback loop
    3. Demand-side factors = network effects, switching costs (bottom of Amazon loop)

IT businesses give away their stuff for free to:

  • Create lock-in
    1. Sometimes you end up locked into an inferior equilibrium because of the switching cost.
  • Become a standard → allows interoperability (Blu-ray and DVD, Android vs. Apple)
  • Use razor strategy

Winner-take-all dynamics often occur in industries with strong network effects (even more powerful when supply-side and demand-side economies of scale co-exist).

Strategic actions are required in order to jump-start the network externalities (penetrate pricing, freemium, bundling, subsidizing).

Types of Innovation

Radical = implications for competition; which companies create radical innovation; do radical innovators end up being the leader?

Incremental = better tech for existing market (Kodak → Canon; Fitbit → Fitbit HR)

Architectural = existing technology recombined for a new market (combine, camera, phone, iTunes into an iPhone)

Disruptive = new tech, often from a lower-end, attack existing market (iPhone camera vs Canon)

Tesla’s Innovation for the EV Industry

  • Radical innovation (the concept of a battery-powered EV is not entirely radical, but Tesla did open up a new market with superior/different battery technology and super-charging stations, creating a new technology; there was a pre-existing market for EVs for within-city trips, but Tesla created a new market for longer trips and luxury cars.
  • Model 3 is an example of incremental innovation because it’s taking the same technology and creating it better for an existing market. Improves price/performance trade-off but will compete more directly with other EV competitors (Leaf).
  • Tesla uses high-end technology disruption because they use technology to improve performance over time and use technology to lower costs per unit of performance over time.

The EV Industry is in the Growth Stage

Features are more important than price, most consumers are enthusiasts and early adopters; still focused on product innovation, but process innovation will become important (Tesla’s main issue has been to ramp up production); still competing on technological standards); new players entering & market fragmentation.
What strategic decisions will be important in the growth stage? Implications for strategist?

  • Crossing the chasm: how to reach out to the majority – how to improve the price-performance trade-off.
  • Carving out a strong market position is important, but building the overall market pie matters too.
  • Invest in process innovation.
  • Collaborate with competitors for a consensus in tech standards (Tesla and Panasonic producing battery cells where Tesla comes in and assembles them into packs).
  • Building the infrastructure is key.

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