business strat chapter 3

competitive advantage

what are two routes to superior profitability

1. operate in an attractive industry

2. establish a CA over rivals

strategic objective

• build a position that allows firm to create more economic value than competitors & capture part of that value

what is CA

firm has CA when it earns or has potensh to each a persistently higher rate of profit than its rivals

economic profitability

• industry attractiveness + competitive position

• value created: perceived customer benefit - costs of providing it

• value captured: prices, margins, bargaining power

how does CA emerge?

• external sources of change

• diff responses: some firms respond better than others

• internal sources of change

external change & entrepreneurial response

• same shock can have diff effects depending on firm’s start position

1. magnitude of change: larger = more potensh opportunity

2. initial diffs

3. ability to respond

internal change: innovation & creative destruction

• innovation can create advantage for innovator & destroy incumbents’ advantage

1. strategic innovation: new products, experiences, delivery models, or ways of organising activities

2. creative destruction: innovations erode existing competitive positions

3. implication: CA is dynamic & must be renewed before rivals imitate or surpass it

consumer surplus

• perceived benefits (B): customer’s max willingness to pay

  • includes functional utility, convenience, brand, perceived risk, & experience

• price (P): firm chooses P within competitive constraints

• consumer surplus = B - P

  • consumers buy when surplus is +ve & choose alternative with highest surplus

components of value creation

• economic value created = consumer surplus + producer surplus

• value created = willingness to pay - cost

• CS = willingness to pay - market price

• PS = market price - cost

value creation & competition

• +ve value: product can have B-C > 0 & still fail to generate above-normal profits

• competition: if many firms can offer something similar, competitive pressure lowers prices & transfers value to customers

• CA: to earn superior profits, a firm must create more value than rivals or capture a larger share of it

diagnosing value creation

1. why does the firm exist?

2. what drives B & C?

3. how will they evolve?

ways to create more economic value than rivals

• configure the value chain differently

• perform similar activities better

cost advantage

• type of CA

• product or service similar to rivals’ but produced or delivered at lower cost

• can support lower prices, higher margins, or both

differentiation advantage

• type of CA

• product or service perceived as unique & valuable

• supports a price premium that must exceed cost of differentiation

porter’s generic strategies

• internal analysis of competitive position

• cost vs differentiation, industry-wide vs niche

1. cost leadership: industry-wide low costs

2. differentiation: industry-wide unique products

3. cost focus: low costs for a niche market

4. differentiation focus: unique products for a niche market

• stuck in the middle: no coherence

cost leadership

• key elements: efficient scale, design for manufacture, cost control, process innovation, selective outsourcing

• organisational requirements: capital, process engineering, frequent reporting, tight cost control, quantitative incentives

differentiation

• key elements: brand, design, quality, production innovation, customer experience

• organisational requirements: marketing, creativity, cross-functional coordination, research, qualitative incentives

parts of achieving strategic coherence

• risk: can produce high costs without enough willingness to pay

• nuance: some firms combine efficiency & differentiation when activities reinforce one another

cost advantage

• lower cost is not indiscriminate cutting → it is redesigning activities for efficiency

• tradition: for decades, price was a central competitive weapon & EOS dominated analysis

• new approaches: outsourcing, offshoring, re-engineering, lean production, & flatter structures

• criterion: cost reduction should preserve perceived customer value & the firm’s future ability to compete

drivers of cost advantage (7)

1. scale: input-output relations, indivisibilities, specialisation

2. learning: individual & organisational

3. process

4. design

5. inputs

6. capacity

7. residual efficiency: culture, motivation, mgmt

using the value chain to analyse costs

1. separate activities

2. measure relevant weight / share of TC

3. identify cost drivers

4. detect linkages: how one activity affects costs elsewhere

5. choose the boundary: what to do internally vs outsource

6. redesign

automobile manufacturing value chain

1. activities: design, purchasing, manufacturing, assembly, logistics, marketing, distribution, after-sales

2. plant scale, automation, defects, capacity utilisation, suppliers, shared platforms

3. decisions: standardise components, reduce variety, outsource selectively, redesign processes, adjust capacity

differentiation advantage

• offer something unique & valuable to buyers beyond simply offering a low price

• what it is: a firm can charge a higher price when customers perceive greater value

• condition: price premium must exceed cost of providing the differentiation

• nuance: even standardisation products can differentiate through service, logistics, trust, or customer experience

supply side of profitable differentiation

• resources & capabilities that create uniqueness

• design, tech, input quality, employees, location, integration

• consistency across differentiation attributes

demand side of profitable differentiation

• understand needs & wants

• identify what increases willingness to pay

• ensure that perceived value > cost of differentiation

drivers of uniqueness for differentiation (8)

• product

• services

• marketing

• tech

• inputs (quality)

• people

• location

• integration (extent of control)

signaling, reputation, & types of goods

• consistency: complementary package of attributes reinforces the value proposition

• search goods: customers can access characteristics before buying: size materials, specifications

• experience goods: quality is known after consumption (restaurants, education, software)

brand as a guarantee

• brands reduce uncertainty & communicate expected quality

• identification: brand identifies the producer & makes responsibility easier to attribute

• investment: creates incentives to preserve quality & customer satisfaction

• digital settings: in e-commerce & platforms, rep, reviews, & trust become part of differentiation

costs of differentiation

• direct: higher quality inputs, more skilled employees, advertising, design, service, after-sales

• indirect: more variety, complexity, coordination, delivery time, less standardisation

• strategic design: one option is to postpone differentiation → customisation, service, or experience

tangible differentiation

• observable characteristics

• performance, durability, design, features, technical qualities

• relatively easy to compare

intangible differentiation

• social, emotional, psychological, or aesthetic value

• brand, identity, trust, status, experience

• potentially harder to imitate

differentiation vs segmentation

• differentiation: how the firm competes → what makes its product or service unique & valuable

  • eg. consistency, reliability, status, quality, innovation

• segmentation: where the firm competes → customer groups, locations, usage occasions, or product types

  • a firm can specialise in a segment without differentiating in it

sustainability of differentiation advantage

• cost advantages are vulnerable: low-cost entrants, exchange rate shifts, or innovation can erode a cost position

• sustainable differentiation: more defensible when based on resources, reputation, relationships, data, routines, or capabilities that are hard to imitate

using the value chain to differentiate

1. build the value chain: map the firm’s & customer’s chain

2. locate linkages: how an activity lowers customer cost or increases value in customer’s chain

3. identify uniqueness: which differentiation drivers exist in each activity

customer value chain

1. search

2. order

3. financing

4. use

5. service

6. resale / renewal

VRIO analysis

• valuable: does it exploit opportunities or neutralise threats?

• rare: is it controlled by few current or potensh competitors?

• imitate: costly or difficult to imitate, substitute, or acquire?

• organised: is the firm organised to exploit it?

what is VRIO for?

• assess if resources & capabilities can sustain CA

• helps identify source of advantage

• determine if firm faces disadvantage, parity, temporary or unexploited or sustained advantage

types of resources to analyse

• human: skills, knowledge, experience, leadership, culture

• financial: internal funds, access to financing & investment capacity

• physical: equipment, facilities, physical tech, tools

• intangible: IP, brand, rep, data, routines, relationships

possible VRIO outcomes

• comp disadvantage: no value

• comp parity: no rarity

• temporary CA: not costly to imitate

• unexploited CA: not organised

• sustained CA: all yes

how to conduct VRIO analysis

1. identify resources & capabilities

2. assess VRIO

3. interpret outcomes

4. design actions: protect, develop, or exploit valuable resources

5. close caps: adapt processes, incentives, & structure

6. review