Creating Competitive Advantage

Competitive Advantage
When a firm sustains profits that exceed the average

for its industry, the firm is said to possess a

competitive advantage over its rivals.

Cost Advantage
Differentiation Advantage

Porters Generic Strategy

 Value created by the transaction

Added Value
Willingness to
pay

Maximum amount of money that the

customer will pay for product and service

Suppliers
opportunity cost

Smallest amount that supplier will accept

for the services or goods he provides

Key terms

Cost Advantage

Deliver a GOOD product or service at the lowest possible cost.

E. g. Karbonn mobiles
Open a significant and sustainable cost gap over all
competitors
Create advantage through superior management of key cost
drivers
Translates into above-average profits with below industryaverage prices

Drawbacks
Cost leaders must maintain parity or proximity in satisfying buyer

needs
Cost leadership often requires trade-offs with differentiation

Division of Value

Differentiation Advantage

Select one or more needs that are valued by buyer

Achieve and sustain superior performance by meeting these
needs uniquely
Selectively add costs if necessary to do so
Successful differentiation leads to premium prices
May have upper limits on volume growth

Avoid

Creating differentiation that buyers do not value. E. g. Body Shop

in non-Europe markets, local b-schools
Charging an excessive price premium. E. g. Reebok
Creating differentiation that competitors can emulate quickly or
cheaply. E. g. Firefox tabs

Interplay between Cost and

Differentiation

Creating Advantage
Firms Activity Analysis
Understand why the firm does or does not

have a competitive advantage

Spot the opportunities to increase the
firms advantage
Foresee future shift in competitive
advantage

Four Step Analysis

Step 1: Catalog Activities
Identify list of activities that drives your business
Primary activities
Inbound logistics, Operations, Outbound logistics,
Marketing & Sales, After-sales service
Support activities
Procurement of inputs, Development of technology
and human resources, general infrastructure

1. Catalog Activities (The Value Chain)

Support
Activities

Firm
Infrastructure

Frugal culture (sharing hotel rooms,

calling collect

Human
Resource
Management

Associates, not employees Manager compensation tied to Promotion from within

Not unionized
store
Associate compensation tied
Store manager autonomy Stock ownership plan
to company
Decentralized training in DC
Shrink incentive plan

Technology
Development
Procurement

POS
Satellite system

No regional offices
Lots of management visits

Store performance tracking

UPC

Hard-nosed negotiating
Centralized buying

Real-time market research

No-frills meeting rooms

Partnerships with some vendors

Frequent
replenishment
Automated DCs,
cross docking,
pick-to-light
EDI
Hub and spoke
system

Big stores in small towns

=> local monopolies, low
rental costs
Pricing that reflects local
monopoly
Concentric expansion
Brand-name merchandise
Private labels
Little space for inventory
Suggestion program
Store within a store

Inbound
Logistics

Operations

Outbound
Logistics

Saturday meetings
Fun working environment

EFT, electronic invoicing

Planning packets

Traiting: tailoring
Easy returns
merchandise to locale
EDLP
Low prices
Store manager
latitude on pricing
Little advertising
Merchandise meeting

Marketing
& Sales

Primary Activities

After-Sales
Service

a
r
g
i
n

Hostesss Cost Components

80

70

Cents per unit

60

Profit

Marketing: Promotions
Marketing: Advertising

50

Outbound logistics
40

Operations: Manufacturing

30

Operations: Packaging

20

Operations: Ingredients

10

Step 2: Use activities to

analyze relative costs
Pitfalls of standard costing need to be realized
Determine costs associated with each activity
Identify cost drivers associated with each activity
Use cost drivers to analyze competitors position
Analyze multiple cost drivers for complex activities
Only relevant cost drivers need to be analyzed

2. Use Activities to Analyze Relative

Costs

Step 3: Use activities to analyze relative

willingness to pay
Activities that affect willingness to pay
Product design & physical characteristics
Sales or delivery
Post-sales service or complementary goods
Advertising, packaging, branding efforts
Subjectivity to the willingness factor
Framework for analysis
Identify who your real customer is
Identify customer needs and their trade-offs
How successful are you at this?
Tie customer needs back to activities

3. Use Activities to Analyze

Relative WTP
4

Hostess
Little Debbie
Ontario Baking
Savory Pastries

Rating

Price
(****)

Brand Freshness Variety

(***)
(**)
Image

Size

(****)

Customer Need (and Importance ****)

(*)

Step 4: Explore options and

make choices
Study competitors strategies
Consider competitors responses to your strategies
Scan entire value chain to identify opportunities
Consider adjustment to scope of operations
Take decisions with a holistic business view

Case Study
Zara: A Spanish retail store owned by Inditex group
Revenue of 6.24 billion
Started as a low priced look alike product store
Shortest lead time from design table to store

Daniel Piette (Fashion director Louis Vuitton)

possibly the most innovative and devastating retailer
in the world

Competitive Advantage
Fast Production: 2 weeks from design table to store

compared to 6 months industry average

Zero advertisement budget and focus on customer
experience
Use of IT for fast design. Zara produces approx
10000 designs every year
Fast product variation. 60%-70% designs are
launched mid season to suit customer taste

Competitive Advantage
Comparable quality to UCB and GAP clothing but

cheaper
High Turnover and low inventory
Efficient distribution system
Kept production within Spain to aid their fast
turnaround time