Creating Competitive Advantage

Positioned to earn superior profits within its industry

1. To create an advantage a firm must configure itself to do something unique and valuable
   1. If the firm were to disappear someone in its network of suppliers, customers, and complementors would miss it and no one could replace it perfectly (the concept of added value is used to make this point)
2. Competitive advantage usually comes from the full range of a firms activities- from production to finance, from marketing to logistics-acting in harmony. The essence of creating advantage is finding an integrated set of choices that distinguishes a firm from its rivals.

Married to each other, one doesn't preclude the other. One wouldn't attempt to create a competitive advantage if it wasn't sustainable (doesn't make sense)

Its true within industry differences in performance are larger than differences across industries, nevertheless they are quite important in creating competitive advantage for several reasons:

1. Devising strategies that neutralize the unappealing aspects and exploit appealing aspects of an industry are important
2. Industry conditions have a large influence on whether competitive advantages are even possible.
   1. Prepackaged software-potential for large spread
   2. Computer leasing - little to no spread
3. A firm has to take industry conditions into consideration when devising a strategy, it would do little good if the overall industry climate could not support the strategy (firms have the wherewithall to match price etc.)

Fuels the greatest competitive advantage strategies, more so than empirical analysis and book knowledge

• The customers of Harnischfeger willingness to pay is 7.5 mil
• The suppliers of Harnischfeger opportunity cost is apparently 2.5mil, the amount Harnischfeger incurred to deliver a crane (we don't know how much more Harnischfeger could have squeezed out of its suppliers, perhaps as low as 2.0 mil)
• The negotiated price between Harnishfeger and International Paper is somewhere between 2.5 mil and 7.5 mil
• The total value created by a transaction is the difference between the customers willingness to pay and the supplier's opportunity cost (7.5 mil and 2.0 mil)
• Each entity has a value created proposition

Added value developed by Harnischfeger is the value lost to the world if Harnischfeger disappeared.

The larger is a firms added value, the greater is its potential for profits. A firm with a wider wedge has a competitive advantage in the industry.

Highlights the fact that competitive advantage derives fundamentally from scarcity. A firm establishes added value by making sure that it is unique in some valuable way-that the network of suppliers, customers and complementors within which it operates is more productive with it than without it and that it is not readily replaced.

1. The firm can raise customers willingness to pay for its products without incurring a commensurate increase in supplier opportunity cost.
2. The firm can devise a way to reduce supplier opportunity cost without sacrificing commensurate willingness to pay.

(Either of the above establishes the wider wedge that defines competitive advantage)

Competitive advantage can come from better management of supplier relations, and not just a focus on downstream customers.

Widening the wedge is difficult because often a firm must incur higher costs in order to deliver a product or service for which customers are willing to pay more.

A firm can achieve a competitive advantage by devising a way to raise willingness to pay a great deal with only slight increases in costs

A firm can achieve a competitive advantage by devising a way to reap large cost savings with only slight decreases in customer willingness to pay.

1. Industry average competitor
2. Successful differentiated competitor
3. Successful low cost competitor
4. Competitor with dual advantage