Creating Competitive Advantage

Advanced Competitive Strategy

IIMS PGP Term IV (2021-22)

Instructor: Prarthan B. Desai

Slide# 1
Creating Competitive Advantage

Slide# 2
Reducing Value Chain Costs: Drivers of Cost Advantage

• Lower costs of inputs (Location advantage, Ownership of low-cost

inputs, Non-union labour, Bargaining power)
• Economies of Scale
• Learning or Experience Curve Effect
• Production techniques (Process innovation, Business Process
Reengineering)
• Product design (Standardized parts, Design to manufacture)
• High capacity utilization (Including low setup times and Mean time
between failures)
• Efficient and effective management, low administrative overheads

Slide# 3
Measuring Cost Advantage: Cost Profile

Source: Eric Van Den Steen, “Creating and Sustaining Competitive Advantage”, HBS. Slide# 4
Enhancing Customer Value Proposition: Drivers of Willingness To
Pay (WTP) or Premium Advantage
• Product design and manufacturing activities that influence physical
product characteristics – quality, performance, features, aesthetics,
durability

• Agility or flexibility in manufacturing, time-to-market or JIT delivery

• Sales or delivery: Speed of delivery, availability and terms of credit,

convenience of the buyer, quality of presale advice

• Signals conveyed through advertising, packaging, branding

• Post-sale service or complementary goods – customer training,

consulting services, spare parts, product warranties, repair services,
compatible products
Slide# 5
Measuring WTP Advantage: Value Proposition Map

Source: Eric Van Den Steen, “Creating and Sustaining Competitive Advantage”, HBS. Slide# 6
Creating Competitive Advantage: Drivers of Value Creation

Source: Eric Van Den Steen, “Creating and Sustaining Competitive Advantage”, HBS. Slide# 7
1. Assets or Resources
• Assets or Resources can be
– Physical: for example, prime location, oil well
– Intangible: for example, a strong brand, a patent

• Key Assets:
– Knowledge capital and capabilities: Human capital, product and process
designs, organizational knowhow, and recorded knowledge
– Reputation, relationships, and brand
– Culture and leadership
– Locked-in customers, suppliers, and complementors (through switching costs
or network effect)
– IP ownerships (such as copyrights, patents, trademarks) and licenses

Slide# 8
2. Designs: Mutually Reinforcing Value Chain Activities

• Product design, Process design, Organization design, and Financial

design (PPOF)
• A useful framework is Firm Value Chain:

Infrastructure activities: Planning, finance, MIS, legal services

Support
Technology: Research, development, design
Activities

Human resource management and development

Inbound logistics, Production Warehousing Sales and Dealer support

Purchasing, and distribution marketing and
Primary
Inventory holding, customer
Activities
Materials service
handling

Margin

Source: Michael Porter, “Competitive Advantage”. Slide# 9

3. Scale
• How is scale beneficial
– Lowers average cost by spreading fixed costs over more units
– Enables the firm to adopt new technologies with lower variable cost or higher
variable benefits (at higher fixed costs, but spread over more units)
– Gives the more bargaining power (with suppliers, channel partners, and
complementors)

• Important to note:
– Scale is a trailing lever. Other aspects need to be in place in order to achieve
and get benefited by larger scale
– Designs need to change (sometimes radically) with increase in Scale
– It is important to understand the proper dimension of the scale (for example,
total production quantity, production quantity per plant or product, number of
stores, etc.)
– There can be diseconomies of scale. Sometimes focus may allow firms
achieve better fit or consistency (refer to Scope). Slide# 10
4. Scope
• Scope choice dimensions
– Target customer segments
– Portfolio of products / services (and which needs of the target customer
segment they satisfy)
– Target markets/geographies

• Important to note:
– Trade-off management: Broader scope may allow a firm to achieve larger
scale. However, narrower scope (i.e., focus) may allow it to achieve better fit or
consistency.
– Scope is a leading level. It affects creation of competitive advantage through
the other three levers.

Slide# 11
Analyzing External and Internal Consistency
• A firm’s choices regarding the four levers need to be analyzed for
external and internal consistency:
– External consistency: Would these choice allow the firm to manage the industry
structure (five forces) well?
– Internal consistency: Are these choices consistent with or reinforcing one
another?

Slide# 12
The four levers: Questions to ask

Lever Questions to Ask

Scope • Who is really your customer and what is your ‘real product’ (i.e., what
customer need your products or services are satisfying)?
• Did you carefully trade off scale versus fit-through-focus?
Assets • What are the core assets at the heart of your advantage (that make it
(or sustainable)?
Resources) • How durable (i.e., difficult to imitate and substitute) are the core
assets?
Design • Which distinct PPOF (Products, Processes, Organization, and
(Value Chain Finance) choices set you apart from the competition?
Activities) • Do design choices have strong internal and external fit?
Scale • What is your target scale (relative to competitors) on key scale
dimensions?
• Are you closer to critical scale on the key scale dimensions?

• And the final question: Are these choices internally and externally consistent?
Slide# 13
Three Intermediate Outcomes
Outcome Questions to ask
Customer Value Proposition • How well are we satisfying the needs of the target customers?
(Value Creation) • Would target customers prefer buying from us rather than from our
competitors?
• What would they be wiling to pay for buying our products and
services? Would it be more/same/less than our competitors’
products or services?
Cost Structure • What is our cost structure (sourcing cost, value chain activity cost,
(Value Creation) and efficiencies)?
• Is our cost structure superior to/ same as / inferior to our
competitors?
Bargaining Power • Outside options, price sensitivity, and balance of information (To
be discussed separately)

Final Outcome:
Superior value creation and capture compared to competitors; resulting into
sustainable superior economic performance of the firm. Slide# 14
Using the Framework: Diagnosis Vs. Decisions

Source: Eric Van Den Steen, “Creating and Sustaining Competitive Advantage”, HBS. Slide# 15