IIM Calcutta

Strategic Management

Creating Competitive Advantage

P. Ghemawat J. W. Rivkin
December 22nd, 2009

Submitted By: Group A5 Section A

Ajay Bansal Alpesh Chaddha Aman Deep Amit Gupta Amol Deherkar Ankit Jain Amit Nagdewani Avinash Pandit Gautam Adukia Ankit Kumar Singh 023/46 026/46 027/46 032/46 040/46 048/46 036/46 085/46 022/46 404/16

INTRODUCTION

It is evident that some companies create greater profits than others. For companies belonging to different industries, sectors or fields this may be due to differences in rivalry/competitors, growth of industry, customer switch probability or labour union issues. What strategists need to systematically analyze is the reason for the stark differences in profit making for different companies in the same industry. What becomes visible in this analysis is that certain companies generate more profits than its competitors because it enjoys certain Competitive Advantage. Competitive advantage is when a company has an edge over its competitors in earning higher profits from its customers.

Research shows that there are 2 possible ways of generating competitive advantage: (i) By creating, nurturing and sustaining irreplaceable, unique and valuable selling points which set the company and its products apart from its competitors. (ii) By analyzing holistically the integration of different activities of the firm to figure out reasons and scope of generating competitive advantages.

VALUE CREATION & DISTRIBUTION

The primary source of generating profits lies in the fundamental aspect of value creation. What creates this value? How is it determined? These answers are found by analyzing the division of value: Customer's Willingness to Pay
Maximum amount that a customer is willing to part in order to obtain the product or service.

Supplier Opportunity Cost

Smallest amount supplier will accept for the resources or services provided to develop the product

Total Value Created

Difference between customer's willingness to pay and supplier's opportunity cost

Added Value
Max value create by all participants in the transaction minus the max value that would be created without the firm

Competitive Advantage
Firm can boost added value by widening the added value it attains as compared to competitors

CREATING COMPETITIVE ADVANTAGE Creating competitive advantage, or widening the wedge between customer willingness and supplier costs, depends on how well the company manages its added value. This competitive advantage can be increased in 2 ways: Competive Advantage

Differentiation Strategy

Low Cost Strategy

Dual Competitive Advantage

Differentiation Strategy: Raise customers willingness to pay without a rise in corresponding suppliers opportunity costs. Low Cost Strategy: Devise a method of reducing suppliers opportunity cost without a corresponding reduction in customers willingness to pay. Dual Competitive Advantage: This is achieved when the company manages to cut supplier opportunity cost through better supply-chain and inventory management and yet manages to increase customers willingness to pay by providing unmatched valueadded services.

ACTIVITY ANALYSIS

To determine the source of competitive advantage, strategists typically break down a firm into discrete activities and then analyze each process to determine how each aspect impacts the suppliers cost and customers willingness to pay. By such an analysis, strategists help managers in: (a) Determining the source of competitive advantage or the reasons for its absence. (b) Determine opportunities to exploit sources to gain competitive advantage. (c) Determine the changes in the competitive advantages of the company and competitors in the future.

To identify sources of widening the gap between customer willingness and supplier costs, a 4-step analysis is undertaken.

STEP 1: Catalog Activities The first step is to break down activities into 2 parts to form the value chain: (i) Primary activities that generate goods or services include inbound logistics, operations, outbound logistics, marketing and sales, and after-sales service. (ii) Support activities that help/assist in making primary activities achieve their goal include procurement of inputs, development of technology and human resource, and general firm infrastructure. Once such catalogue of activities is formed, they are analyzed w.r.t. competitive advantage against competitors i.e. in terms of willingness to pay minus costs.

STEP 2: Use Activities to Analyze Relative Costs Relative costs between competitors are a major source of deriving competitive advantage. For commoditized goods, it is the MOST important factor as a low-cost strategy is employed when consumers are unwilling to pay a premium for the finished goods. But, even in non-pure commoditized goods, relative costs yield significant influence in profitability of firms. Cost analyses of each of the activities catalogued in the first step helps in determining the sources of competitive advantage or the reasons for its absence. The next step is to determine the cost drivers, factors that swing the cost, of all the activities. Finally, managers derive numerical relationship between activity costs and drivers. Cost drivers help managers in estimating and analyzing competitors cost positions. For this, it is important to focus on discrete activities and not just difference in total cost. Thus, good cost analysis focuses on a subset of all of the firms activities. Activities taking a larger chunk of total costs need to be analyzed and treated more seriously. If it is felt that a cost driver is constant across different firms in the industry, then it need not be considered for deep analysis. Final step is to provide sensitivity analysis keeping in mind key elastic assumptions.

STEP3: Use Activities to Analyze Relative Willingness to Pay Difference in activities determine the willingness of consumers to pay for a good or service. There are various factors which can affect a consumers willingness to pay: 1. Product Design and Manufacturing Activities quality, performance, features, aesthetics, durability. 2. Sales and Delivery ease of purchase, speed of delivery, availability and terms of credit, convenience of seller, quality of presale advice. 3. Post sale activities customer training, consulting services, spare parts, produce warranties, repair services, compatible products 4. Marketing advertising, packaging, branding 5. Support activities indirectly affect hiring, training and compensation practices To analyze the relative willingness of the customer to pay, the firm needs to ask itself a set of question and follow the following path of responses: 1. Determine who the real buyer is. 2. What the buyer wants? 3. How successful are its products in fulfilling consumer needs?

Managers must then relate differences in success in meeting aspirations and needs of customers to individual discrete activities. They can then analyze the different strategic options towards obtaining competitive advantage.

Step 4: Explore Options and Make Choices The final step is now to widen the gap between customer willingness to pay and supplier opportunity costs. With the data available using the first 3 steps, managers must now evaluate alternatives to make the correct choice of enhancing competitive advantage. To assist in this step, the following points should be taken into consideration: (a) Determine the key driver of the competitive advantage of each competitor. (b) We should always consider changes in competitors reactions to our changing strategies. (c) Consider a holistic view of the benefits customers derive from the product to widen the wedge of advantage. (d) Need to target customers whose needs are not being met by the competitors. (e) Change the scope by increasing range and diversity of customers or by diversifying the product line.

CONCLUSION To determine key strategies we have broken the firms activities into different parts but when a final strategy si chosen it is vital to develop a holistic view of complete operations end-to-end. After all, it is the integrated set of choices which determines the competitive edge of the firm.