Week 5 Flashcards
Define Competitive Advantage and Value Creation
A firm is said to have a competitive advantage in a market if it earns a higher rate of economic profit compared to the average economic profit in the industry.
Value-Cost-Price Framework
Customer Value (V): customer’s share (a.k.a. customer value proposition) ↔︎ Product Price (P): firm’s share (profit formula) ↔︎ Per-Unit Cost (C)
Let P denote the price, and V the willingness to pay. Consumer surplus is the difference = V - P
Requirements:
1. A consumer will purchase a product only if surplus is positive.
2. Consumers are happier when V - P (surplus) is larger.
3. A firm can increase consumer surplus by: Increasing the perceived benefit (quality) or Selling at a lower price.
Value Created
= Consumer surplus + Producer surplus
= (V - P) + (P - C) = V - C
*To achieve this competitive advantage, a firm must produce more value than its rivals.
Why some firms perform much better than others of the same industry?
- A firm has a competitive advantage over its competitors (of the same industry) if it consistently produces higher profits.
1. A larger wedge between customer willingness to pay and cost.
2. Sustaining that wedge for a large number of customers (“scalability”)
A competitive advantage is acquired through:
1. Value creation
Added Value = all economic values created - all resource cost in a transaction
2. Value capture - VRIO
Share of added value that goes to the firm facilitating the transaction
How does a firm create added value?
- A sustainable competitive advantage requires significantly higher value add than competitors, which boils down to price/cost and differentiation advantages over competitors in specific activities.
- A company’s value chain sequences its main potential value-adding activities: Primary Activities are processes through which inputs are transformed into outputs (goods and/or services) and sold to buyers in transactions. Supporting Activities make primary activities possible.
Value Creations: Resources and Capabilities
There are two ways a firm can create more economic value than its competitors:
1) Configure its value chain differently (and focus on different part of the market) - Value Chain Analysis
2) Perform the value chain activities more effectively.
If the firm’s value chain is similar to its rivals’, the firm needs resources and capabilities that the rivals do not have to create superior value.
- Resources and Capabilities determine competitiveness and the ability to suceed in the marketplace.
- A firm’s strategy depends on these to develop sustainable competitive advantage over its rivals.
Definition of Resources:
- Are productive inputs or competitive assets that are owned or controlled by a firm (e.g., a fleet of oil tankers).
- Resources are firm-specific assets (i.e. assets that cannot easily be duplicated or acquired by other firms)
- E.g., brand name reputation, workers with firm specific expertise.
- They affect the ability of a firm to create value (usually by increasing V from V - C).
Definition of Capability:
- The capacity of a firm to perform some activity proficiently (e.g., superior skills in marketing) - think Coca cola, Apple, Tesla.
- Capabilities are activities that a firm does better especially when compared to other firms.
- E.g., manage sourcing more effectively, skills to deal with a specific technology.
- They are typically valuable across multiple markets and products.
Types of Company Resources
Tangible resources:
- Physical resources (land, manufacturing plant. location of stores)
- Financial resources (cash, marketable securities, company’s credit rating and borrowing capacity).
- Technological assets (patents, copyrights, production technology)
- Organizational resources: (IT and communication systems (satellites, servers, workstations, etc.), the company’s organizational design and reporting structure).
Intangible resources:
- Human assets and intellectual capital: the education, experience, knowledge, and talent of the workforce.
- Brands, company image, and reputational assets: brand names, trademarks, product or company image, buyer loyalty and goodwill.
Relationships: alliances, joint ventures, or partnerships that provide access to technologies, specialized know-how, or geographic markets.
Company culture and incentive system: the norms of behaviour, business principles, and ingrained beliefs within the company.
Identify organizational capability
An organizational capability:
- Is the intangible but observable capacity of a firm to perform a critical activity proficiently using a related combination (cross-functional bundle) of its resources.
- Is knowledge-based, residing in people and in a firm’s intellectual capital or in its organizational processes and systems, embodying tacit knowledge.
- Also called core competency of the firm.
- Organizational capabilities are more complex entities than resources; indeed, they are built up through the use of resources and draw on some combination of the firm’s resources as they are exercised.
A resource bundle:
Is a linked and closely integrated set of competitive assets centered around one or more cross-functional capabilities.
The Total Value
The Total Value produced by a firm is equal to = V - C.
*It is the difference between the buyers perceived value (V) regarding a product or service and what it costs (C) the firm to produce it.^
*Competitively superior resources and capabilities are strategic assets capable of producing a sustainable competitive advantage with far greater profit potential.
*A competitive advantage means that you can produce more value (V) for the customer than rivals can, or the same value at lower cost (C). (i.e. yur V - C is greater than than the V - C of competitors.
VRIO/N Framework
The VRIO/N Test for sustainable competitive advantage asks if a resource or capability is Valuable, Rare, Inimitable, and Non-substitutable.
V: Is the resource (or capability) competitiely valuable?
R: Is it rare - is it something rivals lack?
I: Is it hard to copy (inimitable)?
N: Is it invulnerable to the threat of substitution of different types of resources and capabilities (non substitutable)?
O: Is the firm organized to capture the potential value created? Some firms are better organized.
*The first two tests determine whether a resource or capability can support a competitive advantage. The last two determine whether the competitive advantage can be sustained. Resources can contribute to a sustainable competitive advantage only when resource substitutes aren’t on the horizon.
Other RBV CConsiderations
Two factors inhibit the ability of rivals to imitate a firm’s most valuable resources and capabilities:
1) Social complexity: refers to factors in a firm’s culture, the interpersonal relationships among managers or R&D teams, its trust-based relations with customers or suppliers that contribute to its competitive advantage.
2) Casual ambiguity: is about how the firm uses its resources and relationships puts competitors at a loss in understanding how to imitate these complex resources. Causal ambiguity makes it very hard to figure out how a complex resource contributes to competitive advantage and, therefore, exactly what to imitate.
Managing Resources + Capabilities
Threats to resources and capabilities:
- Rivals develop better substitutes over time.
- Current capabilities decay from benign neglect.
- Disruptive changes in the competitive environment.
Manage capabilities dynamically:
- Attend to the ongoing modification of existing competitive assets.
- Take advantage of opportunities to develop totally new kinds of capabilities.
