Competitive Advantage: How do you develop a competitive edge

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Competitive Advantage How do you develop a
competitive edge?
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Competitive Edge Depends on Environment. e.g.
airlines

• When regulated. Service schedule
• When deregulated Various strategies.
• American Hub and spoke Travel agents (sabre)
  Loyalty
• US Airways Regional High R High C
• Continental Discount
• Southwest No Frills Lowest AC Fig. 12.1

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Profitability depends to some extent on the
industry, but also on the strategy followed by
the firmTable 12.1
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Competitive Advantage When a firm operating in
some market has a higher rate of return than
another firm operating in the same market
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Sources of competitive advantage Fig. 12.3

• Obviously nothing much can be done about the
  industry or parentage, but we can investigate the
  business unit effect in more detail.
• This leads to the important concept of consumer
  surplus.
• Why do we buy anything? Because the benefit
  exceeds the price. B-P is called consumer surplus

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To compete successfully you must generate CS
(Profit)

• CS is not one dimensional Service Quality
• etc. all contribute to CS
• This can be illustrated by the concept of a Value
  Map (Indifference Curve) Fig 12.5
• Value map can be steep or flat. Firms can make
  mistakes about the value map. e.g.Vegas

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CS and Value Created

• As raw materials are converted into finished
  goods value is created. What is value?
• Value Benefit Costs B-C
• CS Benefit Price B-P
• CS is maximized when CP so that all value goes
  to consumers, but in general there is a struggle
  between producers and consumers for who takes the
  lions share of value.see Table 12.2

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Key to Business Success is to Generate a Higher
B-C

• When given a choice, customers will choose the
  firm with the highest B-P. (CS)
• Given this you must arrange for the highest B-C
  (Profit)
• Competitive Advantage comes from either resources
  or capabilities.
• This leads to either a Cost advantage or a
  Benefit advantage

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Examples

• Cost EdgeYamaha Pianos Almost as high quality
  but Much lower cost Fig. 12.10
• Benefit Edge Nordstroms Lexus v Camry
• Fig 12.11

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Importance of Elasticity Table 12.3

• Go for costs if
• Economies of scale are important
• Product cannot be differentiated
• Elasticity is high. Consumers price sensitive
• Product is a search good. features known to
  consumers
• Go for benefits if opposite.
• Can go for both.

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Holding on to Competitive Advantage Not easy

• Muellers Results
• Start with 600 firms and calculate the ROA
  1950-1972
• Look at high group (100 above average) and low
  group (100 below average)
• H12 L0 Average 6
• Within 3 years H8.6 Within 7 years H7.8
• Within 3 years L4.4 Within 7 years L4.9

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First Mover Advantage Is It Real?
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Conclusion

• You must find a competitive advantage
• If you find it holding on to it will not be easy
• Good Luck!