Creating Competitive Advantage

Contents [hide] 1 Basic Information of Creating Competitive Advantage 2 Case Summary of Creating Competitive Advantage 3 Case Analysis of Creating Competitive Advantage 4 External Link of Creating Competitive Advantage 5 Relevent File Cabinet of Creating Competitive Advantage 6 Article Purchase Link of Creating Competitive Advantage

Basic Information of Creating Competitive Advantage

Author: Pankaj Ghemawat, Jan W. Rivkin
Publisher: HBR
Case Number: 798062
Publication Date: Jan 25, 1998
Course Category: Strategy

Case Summary of Creating Competitive Advantage

If a man…make a better mousetrap than his neighbor, tho’ he build his house in the woods, the world will make a path to his door.
-Ralph Waldo Emerson
• Strive for an edge over the competition
o Importance of a competitive edge relates to the economics of what might be called the competitive wedge.
o A firm creates a competitive advantage over its rivals if it has driven a wider wedge between buyers’ willingness to pay for a product and costs incurred to provide the product than its competitors have achieved.
o While industry-or population-level effects have a large impact on business performance, large differences in performance also appear within industries.
 Pharmaceutical industry: biotech§ groups have underperformed conventional pharm firms, but within the group of biotech companies, Amgen has historically outperformed its peers.)
 Steel industry: minimills that make steel from scrap have§ outperformed integrated steel mills. Nucor has been stand-out performer.
o Research suggests that within industry differences in profitability may be larger than differences in the averages across industries
 NOT an argument for ignoring industry level effects.§
(Chapter divided into two parts: 1. reviews the historical development of the core concepts in analyzing competitive position: competitive cost analysis, the analysis of differentiation, cost-benefit trade-offs, and added value. 2. draws on these concepts to lay out a process for analyzing competitive positioning)
• Development of concepts for competitive positioning
o Cost Analysis- disaggregated businesses into components. Split costs into costs of purchased materials and cost added (value added minus profit margins). Next step was to disaggregate a business’s entire cost structure into parts – functions, processes, or activities (activity based analysis. Ie. Technology, manufacturing, distribution, marketing, service)
 Circumvented the idea of strategic business units because sbu’s often shared their cost structure with one another.§
§ Strategists began to consider more cost drivers (advertising cost driven by national scale, distribution cost driven by regional scale)
o Differentiation Analysis- focused more closely on differentiated ways of competing that might let a business command a price premium by improving customers’ performance or reducing their (other) costs.
o Costs vs. Differentiation- successful companies usually had to choose to compete either on the basis of low costs or by differentiating products through quality and performance characteristics.
 This§ generic strategy was appealing because captured the basic idea that a firm often had to pay higher costs to deliver a better product. Also, provided internal consistency for firm. (firm had single-minded purpose)
§ Great debate over generic strategy. Many disagree with two basic premises above. Dell has a dual competitive advantage. Although companies choose to focus on cost or differentiation, external factors may pull the firm toward the center.
 Despite this, strategists§ embrace the idea that any analysis of competitive position must consider both relative cost and differentiation and recognize the tension between the two.
o Added Value- the max value that can be created by all the participants in the vertical chain (suppliers ->competitors->buyers) minus the max value that would be created without that particular player. (if the firm were to disappear, would someone in its network miss it?)
• A process for analysis- linking the concepts we discussed above to strategic planning and action. Break a firm down into discrete activities or processes and then examine how each contributes to the firm’s relative cost position or comparative willingness to pay. (primary activities and support activities)
o Starting point: catalog a business’s activities
o 3 steps for the rest of the analysis:
§ Examine costs associated with each activity – determine the set of cost drivers associated with each activity. Cost drivers aid in estimating competitors’ cost positions
 Analyze how each activity generates§ customer willingness to pay – differences in activities account for differences in willingness to pay and subsequently for differences in added value and profitability
• Who is the buyer?
• What do the buyers want?
• How successful is the firm and its competitors at fulfilling the customer’s needs
• Managers relate differences in success in meeting customer needs back to company activities
• Managers should have an idea of how activities translate, through customer’s needs, into willingness to pay
§ Consider changes in the firm’s activities with the objective of identifying changes that will widen the wedge between costs and willingness to pay – a firm should scour its business system for, and eliminate, activities that generate costs without creating commensurate willingness to pay. Also search for inexpensive ways to generate additional willingness to pay, at least among a segment of customers.
• Whole vs the parts
o Final step of exploring options – management must work to build a vision of the whole. Competitive advantage comes from an integrated set of choices about activities. A firm whose choices do not fit together well is unlikely to succeed.