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.



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