Competitive Advantage: Strategies for Business Success

Chapter 10: Competitive Advantage

A firm is said to have a competitive advantage in a market if it earns a higher rate of economic profit compared to the average economic profit in the industry. It is a strategic positioning, the ability to create value and enjoy it over other firms.

Determinants of Profitability

Benefit position relative to competitors and the cost position relative to competitors influence the value created relative to competitors and join with the general industry condition influence the economic profitability. The comparative position of a firm is an important determinant of profit.

Components of Value Creation

Value Created = Firm Profit (or Producer Surplus) + Consumer Surplus = Consumer Benefit - Cost = B - C = CS + PS

Measures to increase consumer surplus:

• Increase benefits for the consumer.
• Lower the product price for the consumer.
• Reduce transaction and product costs for the consumer.

The Strategy of Cost Leadership

Impact on value: The cost leader can create more value than its competitors in three ways by providing:

1. The same benefits as competitors do at a lower cost (benefit parity).
2. A slightly lower benefit at a lower cost (benefit proximity).
3. A product qualitatively different from competing products.

A cost driver is related to firm size or scope and experience.

The cost position of a firm may be improved by internal moves, such as cost-cutting strategies, or external moves, such as changing the value chain.

The Strategy of Benefit Leadership

Impact on value: The benefit leader can create more value than its competitors in three ways, providing:

• Cost parity
• Cost proximity
• Substantially higher benefit and higher cost

The benefit drivers are:

• Product functionality, quality, design.
• Services or complements provided for the product.
• Sale and delivery process.
• Features shaping consumer perception and product image.

The benefit position of a firm may be improved by changes in product quality and changes in product definition (differentiation).

The Strategy of Focus

Superior economic value is created within a narrow set of industry segments. Within this focus, advantages of cost leadership or benefit leadership can be realized.

Industry segments are derived from a matrix of customer groups and product varieties. Three common focus strategies:

1. Customer specialization: Focusing on private consumers.
2. Product specialization: Focusing on color printers.
3. Geographic specialization: Focusing on the US, Europe, or Asia.