Creating competitive advantage
A firm is said to have created competitive advantage over its rival if it has drawn a wider wedge
between willingness to pay and cost as compared to what its competitors has achieved.
Structure within the industries known as strategic group helps to describe the differences in
performance.
Industry level effects on profitability performance within industries:
1. Industry level effects do account for a significant portion of the performance.
2. Industry level effects have more influence on business level profitability than within industry
differences.
3. Industry characteristics have more effect on profitability than their average effects
4. Market leaders often confront important tensions between managing industry structure and
improving their own competitive position with that structure.
Strategy that the company makes to increase investment during downturn to improve their long
term competitive position:
1. Animal spirit: manic depressive behavior of the sort evoked by Keynes.
2. Herd behavior by competitors that can cause cut backs across them.
3. Managerial behavior to be biased by internally funding even though external funding is
available within favorable terms , implying an internally capital constrain
4. Manager focus on firm survival rather than maximization of shareholders value
Cost Analysis: for assessing competitive positions.
Differentiation Analysis:
Market segmentation: segmentation of markets in such a manner that it shows a position link
between segment share and cost advantage.
Initially the view was to reduce cost and then lowering customer prices to gain market. But now the
focus is on differentiated view of improving customer performance and reducing their other costs.
Porter’s value chain emphasized the importance of regrouping functions into activities actually
performed to produce market, delivery and support products, thinking about linkages between
activities and connecting the value chains to the determinants of competitive position in a specific
way.
Cost analysis and differentiation of business to activities also led to differentiation of customers as
per cost to serve as well customer needs. Some analysis showed that 20% of customers actually
accounted for 80% of the profit. This new customer segmentation criteria led to customer retention
as capturing new customers cost more than retaining old ones.
COST vs Differentiation:
, Initial days companies had to choose either of two to compete 1. Lowering the cost 2. Differentiate
products through quality and performance characteristics. This is generic strategy.
Other focus strategy refers to striking a line between these two.
Generic strategies were more appealing to strategists for 2 reasons:
1. They captured the common tension between cost and differentiation. So a firm should incur
higher cost for delivery of the products or services for which customer is willing to pay more.
2. Concepts of capabilities, reward system, corporate culture, leadership style and
organisational structure which were needed for low cost strategy were actually regarded as
contrary to those needed for differentiation.
In case where there is internal consistency with extreme low on cost and differentiation still external
conditions should be taken into account as it may pull back firms backward to the centre.
Analysis of competitive positioning:
1. Recognise both cost and differentiation
2. Tension between two.
Positioning thus would be the largest wedge between the two. But it cannot be by lowering cost
or price premia but optimal position would a choice from the spectrum of trade-offs between
cost and differentiation rather than a choice between mutually exclusive generic strategies.
Added value:
Largest possible wedge between cost and differentiation through their characterisation of added
value.
Suppliers →competitors→buyers
Demand side→ differentiation of willingness to pay for the products or services.
Supplier side→ supplier side opportunity cost(the smallest amount the supplier would accept for
their services and resources required to produce specific cost)
Value created → customer’s willingness to pay – suppliers opportunity cost
Added value → maximum value that can be created by all the participants in the vertical chain –
maximum value that can be created without a particular participant.
The amount a firm claims cannot exceed its added value under unrestricted bargaining:
1. Firm earns more than added value
2. The value left for other participants is less than the value they could earn by making an
arrangement among themselves.
3. The remaining customers may break off and form a different pact which would improve
their collective lot.
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