CREATING COMPETITIVE ADVANTAGE GHEMAWAT RIVKIN PDF

It is evident that some companies create greater profits than others. What strategists need to systematically analyze is the reason for the stark differences in profit making for different companies in the same industry. 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.

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It is evident that some companies create greater profits than others. What strategists need to systematically analyze is the reason for the stark differences in profit making for different companies in the same industry. 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.

What creates this value? How is it determined? These answers are found by analyzing the division of value: Creating competitive advantage, or widening the wedge between customer willingness and supplier costs, depends on how well the company manages its added value. By such an analysis, strategists help managers in: a Determining the source of competitive advantage or the reasons for its absence. 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. Once such catalogue of activities is formed, they are analyzed w. 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.

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. Product Design and Manufacturing Activities — quality, performance, features, aesthetics, durability. Sales and Delivery — ease of purchase, speed of delivery, availability and terms of credit, convenience of seller, quality of presale advice.

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. What the buyer wants? 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. After all, it is the integrated set of choices which determines the competitive edge of the firm.

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Differentiation strategy is about the provision of a service or a product with distinctive attributes that are of added value to the patient. Cost leadership strategy on the other hand means to be the lowest cost producer in the industry. The competitive advantage is derived from widening the gap between the cost of production and what the patient is willing to pay. This entails minimization of cost in various operational fields, business restructuring and revamping of the overall cost structure.

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That is, the accounting profit it generated exceeded its cost of equity capital by that amount. Over the same period, U. Such large differences in economic performance are commonplace. Understanding their roots is crucial for strategists.

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