Chapter 4

Building Competitive Advantage

The Generic Building Blocks of Competitive
Advantage
• Four factors build competitive advantage:
efficiency, quality, innovation, and customer
responsiveness.
• Efficiency- The quantity of inputs that it takes
to produce a given output (that is, efficiency =
outputs/inputs).
• more efficient a company is, the fewer the
inputs required to produce a given output.
• For example, if it takes General Motors thirty
hours of employee time to assemble a car and
it takes Ford twenty-five hours,
• Ford is more efficient, lower cost structure
than GM
• Two of the most important components of
efficiency- employee productivity and capital
productivity
• Employee productivity is usually measured by
output per employee and capital productivity
by output per unit of invested capital.
• Pharmaceutical companies, the productivity of
R&D spending, by which they mean how many
new drugs they develop from their investment
in R&D.
• sales force productivity, which means how
many sales they generate from every sales call
Quality as Excellence and Reliability
• A product -a bundle of attributes.
• The attributes of many physical products - form,
features, performance, durability, reliability, style, and
design of the product.
• superior quality when customers perceive that the
attributes of the product provide them with higher
value than attributes of products sold by rivals.
• 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.
• Rolex has differentiated its watches by these attributes.
• When customers are evaluating the quality of a
product,
• two kinds of attributes; attributes that are related
to quality as excellence and attributes that are
related to quality as reliability
• quality as excellence- leather boots for $20 from
Wal-Mart, a handmade pair of genuine leather
boots from Nordstrom for $500
• The boots from Nordstrom will have far superior
styling, feel more comfortable and more value
• consumers have to pay more to own or consume
it.
• quality as reliability- it was designed for, does
it well, and rarely (if ever) breaks down.
• reliability increases the value a consumer gets
from a product, and thus the price the
company can charge for that product.
• Toyota’s cars, for example, have the highest
reliability ratings in the automobile industry,
• A Quality Map for Automobiles
• Lexus has attributes—such as design, styling,
performance, and safety features, an excellent
product.
• Toyota also produces another very reliable
vehicle, the Toyota Corolla, but this model is
aimed at less wealthy customers
• the Proton, which is built by the Malaysian car
The design of the car is over a decade old, and
the car has a dismal reputation for styling and
safety
• Innovation- the act of creating new products or processes
• two main types of innovation: product innovation and
process innovation
• Product innovation is the development of products that
are new to the world
• Process innovation is the development of a new process
for producing products and delivering them to customers.
• Toyota lean production system, which includes just-in-
time inventory systems, self-managing teams, and
reduced setup times for complex equipment.
• helped to boost employee productivity, thus giving Toyota
a cost-based competitive advantage
Customer Responsiveness
• the need to customize goods and services to
the unique demands of individual customers
or customer groups.
• Improving the quality of a company’s product
offering is consistent with achieving
responsiveness, as is developing new products
with features that existing products lack.
• E.g. automobile companies have become
more adept at customizing cars to the
demands of individual customers.
• customer response time: the time that it takes
for a good to be delivered or a service to be
performed.
• response time is the time that it takes to fill
customer orders. For a bank, it is the time that
it takes to process a loan or that a customer
must stand in line to wait for a free teller.
• For a supermarket, it is the time that
customers must stand in checkout lines
• slow response time to be a major source of
customer dissatisfaction
• superior design, superior service, and superior
after-sales service and support- enhance
customer responsiveness and allow a
company to differentiate itself from its
competitors.
• to build brand loyalty and charge a premium
price for its products
• pay for next-day delivery of Express Mail cost
about $14, compared with 41 cents for regular
mail.
 The Value Chain
• production, marketing and sales, R&D,
customer service, information systems,
materials management, and human resources
—in the value creation process
• value chain refers to the idea that a company
is a chain of activities for transforming inputs
into outputs customers value
• primary activities and support activities. Each
activity adds value to the product.
• RESEARCH AND DEVELOPMENT- Research and
development (R&D) is concerned with the
design of products and production processes.
• E.g., banks compete with each other by
developing new financial products and new
ways; Online banking and smart debit cards
• PRODUCTION- the creation of a good or service
• banking or retail operations, “production” typically takes
place when the service is delivered to the customer
• Ford had made cars using an expensive hand-built craft
production method.
• By introducing mass-production techniques, the
company achieved greater division of labor and
specialization, which boosted employee productivity.
• Learning effects are cost savings that come from
learning by doing. Labor, for example, learns by
repetition how best to carry out a task.
• unit costs fall as individuals learn the most efficient way
to perform a particular task
• MARKETING AND SALES- can increase the value that customers
perceive to be contained in a company’s product, increase perceived
value
• by discovering customer needs and communicating them back to the
R&D function of the company, which can then design products that
better match those needs.
• Marketing strategy refers to the position that a company takes
with regard to pricing, promotion, advertising, product
design, and distribution.
• attaining economies of scale, one important strategy involves
reducing customer defection rates
• Customer defection rates reflect the percentage of a
company’s customers who defect every year to competitors.
• To reduce customer defection rates, marketing managers take
steps to build brand loyalty
• CUSTOMER SERVICE- provide after-sales
service and support.
• Caterpillar, the U.S.-based manufacturer of
heavy earthmoving equipment, can get spare
parts to any point in the world within twenty-
four hours,
• minimizing the amount of downtime
• support activities- provide inputs that allow the primary
activities to take place
• MATERIALS MANAGEMENT (LOGISTICS)- The materials
management (or logistics) function controls the
transmission of physical materials through the value chain,
from procurement through production and into distribution.
• The efficiency - can significantly lower cost, thereby creating
more value
• WalMart, has a very efficient materials management setup.
• By tightly controlling the flow of goods from its suppliers
through its stores and into the hands of customers,
• Wal-Mart has eliminated to hold large inventories of goods.
• Lower inventories mean lower costs and hence greater
value creation.
• materials and transportation costs account for
50 to 70% of its revenues, so even a small
reduction in these costs can have a substantial
impact on profitability
• HUMAN RESOURCES- the right mix of skilled
people to perform its value creation activities
effectively
• adequately trained, motivated, and compensated
to perform their value creation tasks
• INFORMATION SYSTEMS- the largely electronic
systems for managing inventory, tracking sales,
pricing products, selling products, dealing with
customer service inquiries, and so on,
communications features of the Internet
• Wal-Mart uses information systems to alter the
way it does business
• By tracking the sales of individual items very
closely, its materials management function
has enabled it to optimize its product mix and
pricing strategy.
• Wal-Mart is rarely left with unwanted
merchandise on its hands, which saves on
costs
• COMPANY INFRASTRUCTURE- the organization
structure, control systems, and company
culture.
• top management should also be viewed as
part of the infrastructure of a company
• through strong leadership, top management
can shape the infrastructure of a company