SSD

F-408: Chapter 3
Let’s move in backward, how the topics of this chapter is interconnected, to understand the relationship.
We will later get into the details into each and every topic.
First, let’s start by answering a simple question.

Why do we do business?
➢ To achieve sustainable profitability

Profitability Drivers: Margin, ROI, Dupont Decomposition etc

➢ Value Creation is necessary to achieve sustainable profitability.

➢ Having Competitive Advantage is required to ensure value creation.

Types of Competitive Advantage:
▪ Differentiation
▪ Cost Leadership
There are companies too, which have their competitive advantage by a combination of both
➢ We can achieve these Competitive Advantage by:
Building Blocks of Competitive Advantage:
1) Superior Efficiency:
a) Meaning/Definition: Output per unit of input.
b) Measurement:
i) Employee Productivity: The output produced per employee.
ii) Capital Productivity: The sales produced by a dollar of capital invested in the
business.
Keep one thing in mind, efficiency is not an absolute term. It’s a relative term. So,
let’s say, only by seeing the increase in cost structure of a company, we can’t say the
company losing its competitive advantage. If value increases at a higher rate than the
cost, then efficiency has not been reduced.
2) Superior Quality:
a) Meaning/Definition: Definition of quality is subjective.
A product is said to have superior quality when customers perceive that its attributes provide
them with higher utility than the attributes of products sold by rivals.
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For example, a Rolex watch has attributes such as design, styling, performance, and
reliability that customers perceive as being superior to the same attributes in many other
watches. Thus, we can refer to a Rolex as a high-quality product: Rolex has differentiated its
watches by these attributes.
b) Types: 2 types
➢ Quality as Reliability: Quality as reliability means consistent product performance or
consistent service experience.
o Examples: Suppose even if you use the same product 50 times, the variability of
performance in each time is very low
➢ Quality as Excellence: From a quality-as-excellence perspective, the important
attributes are a product’s design and styling, its aesthetic appeal, its features and
functions, the level of service associated with delivery of the product, and so on.

3) Superior Innovation
a) Types: 2 types
➢ Product Innovation: The development of products that are new to the world or have
superior attributes to existing products
o Examples: Intel’s invention of the micro processor in the early 1970s, Apple’s
development of the iPod, iPhone, and iPad in the 2000s.
o Product innovation generates value by creating new products, or enhanced
versions of existing products, that customers perceive as having more value, thus
increasing the company’s pricing options.
o Helps to achieve: Differentiation Strategy

➢ Process Innovation: The development of a new process for producing and delivering
products to customers.
o Examples:
o Process innovation often allows a company to create more value by lowering
production costs.
o Helps to achieve: Cost Leadership Strategy

4) Superior Customer Responsiveness

a) Achieved by: To achieve superior responsiveness to customers, a company must be able
to do a better job than competitors of identifying and satisfying its customers’ needs.
b) Examples: Let’s say, in a supermarket, customers have to wait in long lines for check out.
So, customer responsiveness is not here achieved.
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Resources:
These are the factors of productions that that a company uses to transform inputs into outputs that
it can sell in the marketplace.
The advances resources are generally required for the company to create any competitive
advantage. However, Labor can sometimes also be used as a tool for competitive advantage.
Resources are of two types:

Basic Advanced

•Land •Intellectual Property

•Labor •Process Knowledge
•Capital •Organizational Architecture

Advanced Resources:
1. Intellectual Property:
Companies establish ownership rights over their intellectual property through patents,
copyright, and trademarks. For example, Apple has built a powerful brand based on its
reputation for high-quality, elegantly designed computing devices. The Apple logo displayed
on its hardware products symbolizes that brand.

Intellectual property gives the company a powerful right. Such as you might have heard that
AI firm Midjourney was sued by Disney & Universal for using their copyrighted iconic
characters.

2. Process Knowledge:
An ideal example can be here of Apple. Apple over 20-30 years have developed a process &
been able to make it perfect, which makes it extremely difficult for any other company to
imitate. This is how process knowledge can act as a resource.

Every successful organisation has its own internal process knowledge that is not immediately
copyable by the companies competitors

3. Organizational Architecture:
How the entire organisation is configured, so that it can use the resource to achieve some
combination of the building blocks to achieve competitive advantage, leading to creation of
value for customers and achieving profitability in a sustainable manner.
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Value Chain Functions (core & supportive)

What is a function?
✓ A set of activities
✓ Has to have a specific objective
✓ There are specific skillsets that is specific to that function. Such as marketing or finance
department person doesn’t directly interferes in the manufacturing function. The
manufacturing job is done by the specific people who are assigned for this.

The idea of value chain has two different parts:

1. Core Function
2. Supporting Function
This doesn’t mean that core function is more important, than the supporting function. There is no
lesser or higher important function here. What important is to run this all functions in a
synchronized way.
Core Functions

R&D Inbound Manufacturing Outbound

Logistics Operations Logistics

Supporting Functions
Marketing & Sales
➢ HR
➢ Finance
➢ IT etc
Customers Service
How the value chain function works:
Say you R&D team comes up with a new product, features, design or new process. R&D can
lower costs or raise a product’s value. By increasing product’s value, they can help to achieve the
building blocks: superior innovation, superior quality & superior customer responsiveness.
Whereas, introducing new process, can help to achieve the building blocks: superior efficiency.

The inbound logistics team, they procure the necessary raw materials & transport it to operations.
The Manufacturing operation produces the final goods, outbound logistics distributes it to the
dealers.
Marketing & Sales team try to promote the product/service, to make more people aware of it.
There are several ways in which the marketing and sales functions of a company can create value.
Through brand positioning and advertising, the marketing function can increase the value that
customers perceive to be contained in a company’s product (and thus the utility they attribute to
the product). Value creation refers to what customers perceive about the company.
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Customer service function: The role of the service function of an enterprise is to provide after
sales service and support. This function can create superior utility by solving customer problems
and supporting customers after they have purchased the product.
Supporting Functions:
HRM Function: The human resource function hires the right combination of skilled people and
ensures that people are adequately trained, motivated, and compensated to perform their value
creation tasks.
HRM can contribute to rise in
=> Employee Productivity
=> Improvement in customer service (creating more value for customers)
Information System: Information systems are, primarily, the digital systems for managing
inventory, tracking sales, pricing products, selling products, dealing with customer service
inquiries, and so on.
There are other supporting functions such as Finance, Company infrastructure etc.
*Each function of value chain shall contribute to at least one building block

Class Assignment
Q: Pick one company which shut down in your lifetime. Identify for failure in which value chain
functions they lose their competitive advantage. Which building blocks they failed to utilize
properly
Answer:

Company: A Canadian company “Research in Motion” (RIM) shutdown in 2013, later

rebranded as Black Berry.

Background: Apple Inc. (AAPL) had introduced its iPhone, the first prominent touchscreen
phone, in 2007. RIM initially ignored it, perceiving it to be an enhanced mobile phone with
playful features targeted at younger consumers. The iPhone was a huge hit, however, and this
was the start of RIM’s demise.
The iPhone wasn't just aimed at individuals. It managed to penetrate RIM’s core market and
attract business leaders. BlackBerry's market was soon flooded with many similar email-enabled
smartphones from other manufacturers
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Competitive Advantage (they had): Differentiation

Building Blocks (they failed to maintain):
1. Lack of innovation
(Initially they ignored iphone as a competitor. However, later in 2008, they came up with
new product as “Blackberry Storm” to compete iphone. Then where did they go wrong?)

2. Lack of customer responsiveness

(They failed to adapt to the customer’s expectation. While users were shifting toward
intuitive touchscreens, sleek designs, and robust app ecosystems — as offered by the
iPhone and later Android phones — RIM stuck too closely to its enterprise roots. RIM
focused on preserving its older business model and physical keyboard legacy.

Problems in Value Chain Function:

1. R & D
2. Marketing (They could not come up with effective promotion)

Value Creation:

A company can create value in several ways. Let’s understand how value creation can effect
company’s profitability.
V in the image, refers to value created by the company to the customers. It is basically the
perceived value of the customers, how much they value your product/service.
The other two terms given in the value stick is P and C. P refers to price set by the company & C
is the cost of the company. A combination of these three things creates the ultimate value.
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The V-P, is the excess value received by customers above the price set by the company. So, this is
known as consumer surplus. Whereas producer surplus, P-C, is the profit margin of the company.

So, to increase the profit margin a company can raise the value (V) or reduce the cost (C), or any
combination of these two.
Say, a company has shifted is focus to differentiation strategy. So, this will raise the cost of the
company. However, through the differentiation they have been able to raise its value (V). Let V
has increased by $9. However, they increased the price by $7 only. So, $2 extra is transferred to
customer. So, the company is sharing a portion of the addition value created to the customers. This
is also a strategy of how a company can create value.
Let’s see another example:

Apple has been able to create value in such a way that apple iphone are producing at a lower cost
than Samsung smartphones, but however they have been able to charge a price even higher than
Samsung smartphones. They have been able to do so because Apple creates more value to
customers than Samsung.
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VRIO Framework

•Your resources needs to be valuable. Such as you're a top IT company, but you're hiring low quality coders for the company.
Your resources are not valuable.
Valuable

•Are the resources rare?

•If they are not rare and rivals also have access to them, by definition they cannot be a source of competitive advantage.
Rare

•Suppose your resources are rare. Your rivals in the market currently doesn't have that resources. But it wasn't very hard to
copy. Gradually they started to copy your product.
Inimitability •Example: Facebook copied snapchat's story feature & applied it to instragram. Snapchat's this was not inimitable

•So, You need to have the right organizational architecture to organise your valuable, rare inimitable resources in such a way
Organization that ensures profitability
Architecture

Without having the right organizational architecture, having other characteristics of VRIO
framework won’t be useful.
Let's say, your R&D function has come up with a titanium light substance using which
manufacturing airplane would reduce the airplane weight by 50%. But your organisation doesn't
have the capability to produce such high-end goods efficiently at low cost without eroding their
competitive advantage.
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Case 1
Trouble at McDonald’s
For most of its history McDonald’s has been an extraordinarily successful enterprise. It began
in 1955, when the legendary Ray Kroc decided to franchise the McDonald brothers’ fast-food
concept. Since its inception, McDonald’s has grown into the largest restaurant chain in the
world, with almost 32,000 stores in 120 countries.

For decades, McDonald’s success was grounded in a simple formula: give consumers value for
money, good quick service, and consistent quality in a clean environment, and they will return
time and time again. To deliver value for money and consistent quality, McDonalds standardized
the process of order taking, making food, and providing service. Standardized processes raised
employee productivity while ensuring that customers had the same experience in all branches
of the restaurant. McDonald’s also developed close ties with wholesalers and food producers,
managing its supply chain to reduce costs. As it became larger, buying power enabled
McDonald’s to realize economies of scale in purchasing and pass on cost savings to customers
in the form of low-priced meals, which drove increased demand. There was also the ubiquity of
McDonald’s; their restaurants could be found everywhere. This accessibility, coupled with the
consistent experience and low prices, built brand loyalty.

The formula worked well until the early 2000s. By then, McDonald’s was under attack for
contributing to obesity. Its low-priced, high-fat foods were dangerous, claimed critics. By 2002,
sales were stagnating and profits were falling. It seemed that McDonald’s had lost its edge. The
company responded with a number of steps. It scrapped its supersize menu and added healthier
options such as salads and apple slices. Executives mined data to discover that people were
eating more chicken and less beef. So, McDonald’s added grilled chicken sandwiches, chicken
wraps, Southern-style chicken sandwiches, and most recently, chicken for breakfast to their
menu. Chicken sales doubled at McDonald’s between 2002 and 2008, and the company now
buys more chicken than beef.

McDonald’s also shifted its emphasis on beverages. For decades, drinks were an afterthought,
but executives couldn’t help but note the rapid growth of Starbucks. In 2006, McDonald’s
decided to offer better coffee, including lattes. McDonald’s improved the quality of its coffee
by purchasing high-quality beans, using better equipment, and filtering its water. The company
did not lose sight of the need to keep costs low and service quick, however, and continues to
add coffee-making machines that produce lattes and cappuccinos in 45 seconds, at the push of
a button. Starbucks it is not, but for many people a latte from the McDonald’s drive-through
window is comparable. Today, the latte machines have been installed in almost half of the stores
in the United States.

All of these strategies seemed to work. Revenues, net profits and profitability all improved
between 2002 and 2013. By 2014, however, McDonald’s was once more running into
headwinds. Same-store sales declined in 2014, impacting profitability. Among the problems that
analysts identified at McDonald’s was an inability to attract customers in the 19- to 30-year-old
age group. Rivals offering healthier alternatives, such as Chipotle Mexican Grill, and “better
burger” chains that appeal to this demographic, such as Smashburger, are gaining ground at the
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expense of McDonald’s. A recent Consumer Reports survey ranked McDonald’s burgers the
worst among its peers. Another problem is that the quality of customer service at McDonald’s
seems to have slipped. Many customers say that employees at McDonalds are rude and
unprofessional. One reason why McDonald’s employees might be feeling stressed out is that the
menu has grown quite large in recent years, and many restaurants are not longer staffed given
the diversity of the menu. Management at McDonalds has promised to fix these problems, but
how they will do this remains to be seen.

Case Analysis:
1955:
Company started its operation

Before Early 2000s:

Strategy (Given in passage) Building Blocks
Good Quick Service Superior Efficiency
(By developing standardized process knowledge)
Consistent Quality Superior Quality
(Quality as Reliability)
Developed close ties with suppliers Superior Efficiency

(To reduce cost, by:

1. Bargaining power of buyer
2. Economies of Scale)

At early 2000s the simple formula they used to follow was offering good quality service &
consistent quality.
1. To provide good quick service, the building blocks they would be required:
i. Superior Efficiency
ii. Customer Responsiveness
To ensure superior efficiency, you need to manage your resources well. We have already learned,
there are two types of resources: basic & advanced resources.
The relevant advanced resource required for superior efficiency to provide good quick service is:
Process Knowledge: If Mac Donald’s have a well-defined standardized process, then lesser time
would be required for the entire value chain which will enable them to provide good quick service.
What does standardized process means?
 In simple words, it means having a well-defined steps of action. Such as in the context of
this case, it can mean the employee who is performing the task (say, making Mac Donald’s
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burger) knows exactly where are his ingredients, and they are with easy range/access of
him. Also, they must have a clearly defined steps. Let’s say on how to make a Mac
Donald’s burger. There are clearly defined 20 step procedure of making a burger. In this
way, the procurement of the required ingredients can also be standardized.
As given in the passage, Mac Donald’s standardized:
 Order taking process
 Making food
 Providing service
To achieve these functional level strategies needs to work together.
McDonald’s standardized Functional level strategies required
Order taking process ➢ Inbound logistics
➢ Operations
➢ IT
Making food ➢ Operations
Providing service ➢ Outbound logistics
➢ IT

So, by now, you have understood the interconnectedness of how to offer good quick service.

2. Next, to provide consistent quality, the building block required: Superior Quality
Superior quality can be achieved in two ways: Quality as Excellence, Quality as Reliability. Since
McDonald’s focused on consistent quality, their target was quality as reliability which means
customers can experience almost the same
3. Developed close ties with suppliers for building block: Superior Efficiency
To reduce cost, by:
1. Bargaining power of buyer
2. Economies of Scale
Since they have been able to reduce their costs by this, they can decide to how to create value from
this through Value Creation Strategies.
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Early 2000s:
Problem: Started losing its competitive advantage. And started facing critism for high fat foods.
#Because of which building block problem & value chain problem, the company started to lose
it’s competitive advantage?
Answer:
Concerned Building Block:
1. Lack of Superior Customer Responsiveness

(Customers are no longer preferring beef products. Also, the change in customers taste &
preferences resulted in shifting their preference to healthier food options, than junk fast
foods. Mc Donald could not adapt with the changing customer preferences in time, that’s
why they started to lose the competitive edge)

2. Lack of Superior Innovation

(Such as lacking of adding new food types in the menu)

External factors:
1. PESTEL: The S in PESTEL stands for Society. Customer’s taste/preference change falls
under this.

Their Responses Impact on building block Value Chain Functional

level contribution required
Scrapped Menu size Superior Efficiency

(By reducing cost. A larger

menu would have required
larger staff, or greater
workload)
Added healthier option Superior Customer IT
Responsiveness (Research, collecting data on
what customers are
preferring)
Newer additions: Superior Innovation R&D, Marketing function, IT
Salad, Apple slices, Chicken
items

Besides these, Operations & HR’s contribution is also required to integrate these. Since new menu
has been added, the employees are not well efficient with the new process. From where to procure
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these new additions such as salads, chickens, how to procure them at low cost. After procurement,
how to produce the new dishes with it, making an efficient standardized process for it.
So, HR & Operations needs to work together to train employees to develop the process knowledge
required.

2002 to 2013s:
➢ shifted its emphasis on beverages
➢ improved the quality of its coffee by purchasing high-quality beans, using better
equipment, and filtering its water
Building Blocks: Superior Quality, Superior Innovation

2014:
Issue Building block Failure of Value Chain
Functional level
Inability to attract customers Responsiveness, Innovation  Marketing function
age between 18 to 29  Organizational
Leadership function
(Change in customer  R&D
preferences)  IT
Also, the external factor “Society” of PESTEL is responsible

Case 2

Find out the competitive advantage, building blocks, resource and what value chain functions can
help to achieve these.