Creating Competitive Advantage

Creating Competitive Advantage

  • Total value created in any transaction is difference between customers willingness to pay and suppliers opportunity cost.
  • Added Value is Maximal value created by all participants in a transaction minus the maximal value that could be created without the firm
  • Unrestricted bargaining is the amount of value a firm can claim cannot exceed its added value.
  • The larger the added value higher the potential profit of the firm
  • Competitive advantage derives fundamentally from Scarcity
  • In practice managers use actual cost instead of opportunity cost because it is easier to track and calculate
  • A firm can achieve a competitive advantage by devising a way to
    • Differentiation Strategy – Raise willingness to pay a great deal with only slight increase in costs
    • Low cost strategy – Reap large cost savings with only slight decreases in customer willingness to pay
  • By Analyzing a firm activity by activity we can
    • Understand why the firm does or does not have added value
    • Spot opportunities to improve a firm’s added value
    • Foresee future shifts in added value
  • Steps to Analyze firms activities
    • Catalog Activities(Value chain)
    • Use Activities to analyze relative costs
    • Use Activities to analyze Relative willingness to pay
      • Willingness to pay calculator should be used for this
    • Explorer options and make choices
      • Competitive advantage comes from an integrated set of choices about activities



  • Successful firms chooses right industry and also right position in the industry
  • Competitive advantage derives from added value
  • Firm can’t claim any value unless it adds some value
  • To have added value firm must drive a wedge between customer willingness to pay and supplier opportunity cost
    • Wider wedge than rivals achieve
  • To attain wider wedge firm has to do different things than rivals
  • Analysis of activities can be used to assess options for creating competitive advantages. To do this management team must decompose the firm into parts-activities-but also craft a vision of an integrated whole


    Attaining Competitive advantage is just the first half of strategic struggle. Sustaining advantage in the face of relentless rivals and turbulent change is the more demanding half.



Porter – Competition shapes strategy

Competition Shapes strategy

  1. Threat of Entry

    Six major barriers for entry

    1. Economies of Scale
    2. Product Differentiation
    3. Capital Requirement
    4. Cost Disadvantage independent of size
      1. Learning curve
      2. Proprietary technology
      3. Access to best raw material sources
      4. Assets purchased at preinflation prices
      5. Government subsidies
      6. Favorable Location
    5. Access to distribution channel
    6. Government Policy


  2. Bargaining power of supplier
    1. IT is dominated by few suppliers
    2. Product is unique
    3. Not obliged to content with other products for sale to the industry
    4. Credible threat of integrating forward into industry’s business
    5. Industry is not important customer of the supplier
  3. Bargaining power of Customers
    1. Concentrated or purchase in volume
    2. Standard or Undifferentiated products
    3. If product is significant portion of the cost for customers
    4. If customers earn low profits forcing lower purchase prices
    5. Industries product is unimportant to buyers products or services
    6. Industries product does not save buyer money
    7. Self manufacture or backward integration
  4. Substitute products

    Most attention should be paid to

    1. Subject to trends improving their price -performance trade off with industry’s products
    2. Produced by industries earning high profits.


  5. The Industry – Jockeying for Position

    Intense competition causes price competition, product introduction, ad slugfests

    Intense rivalries are caused because

    1. Many competitors or of same size
    2. Industry growth is slow
    3. Lack of differentiation
    4. Fixed costs are high or products are perishible
    5. Capacity is augmented in large incrments
    6. Exit barriers are high
    7. Rivals are diverse in strategies, origins and personalities



Formulation of Strategy

  • Positioning the Company
  • Influencing the balance
  • Exploiting industry change






Swati’s Birthday Surprise

Last Friday was Swati’s Birthday. So I wanted to give her a surprise. In last few years I have cooked for her, have brought cake and decorated the house after she slept a night before and surprised her…. So big question was what to do this year. I thought I should do something totally different. So I asked her to prepare for going out for dinner. Once she was ready I started driving and drove for 2.5 hours and we were in Wilmington. She had no clue where we were going… I had already booked hotel in Wilmington.

We enjoyed our weekend walking in historic district of Wilmington. It was great fun and lot of relaxation for both of us. We returned back on Sunday. You can watch the photos at