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IIM Calcutta

Strategic Management

Creating Competitive Advantage


P. Ghemawat
J. W. Rivkin

December 22nd, 2009

Submitted By:

Group A5 – Section A

Ajay Bansal 023/46


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

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:

Differentiation Strategy:
Raise customer’s willingness to pay without a rise in corresponding supplier’s opportunity
costs.
Low Cost Strategy:
Devise a method of reducing supplier’s opportunity cost without a corresponding reduction in
customer’s 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 customer’s willingness
to pay by providing unmatched value-added 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 supplier’s cost and customer’s 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 firm’s 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 consumer’s 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 competitor’s 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 firm’s 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.