Creating Competitive Advantage - Ghemawat and Collis

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  1. competitive advantage is defined as increasing the difference between cost of producing the good and the willingness of a consumer to pay for the good.
  2. despite industry related variances in profitability, there is more inter industry variance.
  3. What are ways to determine the competitive advantage of a company within an industry?
    1. Cost analysis
      1. Attention paid to disaggregating business into components
        1. first disaggregate the raw material from the experience curve
        2. next disaggregate the functions, processes, and activities (where costs behave in different ways)
        3. This led to activity analysis
      2. Analysis on how costs can be shared across business
      3. In addition to experience, there are are many other cost drivers
        1. scale
        2. capacity utilization
    2. Differentiation Analysis
      1. how can one company differentiate itself from another that would allow it to create a price premium by either:
        1. reducing other costs
        2. improving customer performance
      2. think about cost and value as two different concepts
      3. value chain - regroup functions over who is producing, marketing, delivering, and supporting the products
        1. rationale - any of these can lead to cost savings
    3. Cost v. Differentiation
      1. often a tension between these two
      2. often the industry, buyers, product will determine whether to push on cost or differentiation
      3. Porter - pick cost or differentiation
        1. generic strategies - for low cost and differentiation
        2. focus strategies - links generic strategies
      4. Japanese - can get both to make dual competitive advantage
      5. Zara - can take the intermediate position on cost and differentiation
    4. Added value
      1. difference between:
        1. opportunity cost - smallest amount suppliers would accept for the labor and resources
        2. customer's willingness to pay
      2. value a firm can create cannot be more than added value under unrestricted bargaining b/c of break off effect
  4. How to analyze the competitive advantage
    1. Break down firm by activity to determine the willingness to pay and cost of each activity
    2. purpose?:
      1. determine if there is added value
      2. find places to add value
      3. see shifts in added value
    3. steps for position analysis:
      1. group activities
      2. analyze cost of each activity
        1. often measure actual costs rather than opportunity costs b/c these are easier to measure
        2. focus on a subset of firm's activities
        3. costs that account for a large portion should be studied more in depth
        4. only analyze cost driver if it changes across competitors
        5. sensitivity analysis is important for given assumptions
      3. how does the activity generate willingness to pay?
        1. good product quality
        2. good delivery
        3. good post-sale service or complementary goods
        4. good signals via advertising
        5. good customer service
        6. procedure to determine willingness to pay
          1. who is the real buyer
          2. what do the buyers want (often use market research)
          3. it must be determined how the firm and its competitors are at fulfilling customer needs
          4. relate the success in fulfilling customer needs back to the customer activities
        7. this becomes trickier with horizontal and vertical differentiation
      4. suggest changes to determine the willingness to pay
        1. patterns
          1. find what drives each competitor
          2. how would a competitor react to changes
          3. don't only think about benefits to buyers - think about benefits to everyone interacting with your product
          4. pay attention to leading edge customers
          5. change scope of operations to take advantage of economies of scale, learning
          6. sometimes start with options for change and determine how they will add value
  5. Looking at the whole system
    1. Changes in one activity can affect other activities
    2. incremental analysis may not help - many things might need to change whithin different activities
    3. within one industry there might be multiple good ways of doing things
    4. there is a choice as to which way to do things - taking an alternative approach can muffle the retaliation of competitors.