Module 5 – Article Notes

Paper#1
Creating competitive advantage (Ghemawat & Rivkin)

 A firm is said to have a competitive advantage over its rivals if it has driven a wide wedge
between the willing to pay it generates among buyers and the cost it incurs. Competitive
advantage comes from an integrated set of choices about activities: a firm whose choices
are internally inconsistent is unlikely to succeed. Hence, a firm with a competitive
advantage is positioned to earn superior profits within its industry

1) To create a competitive advantage, a firm must configure itself to do something unique and
valuable (added value)
a) The firm must ensure that, were it to disappear, someone in its network of suppliers,
customers, and complementors would miss it and no one could replace it perfectly

2) Competitive advantage usually comes from the full range of a firm’s activities, from
production to finance, marketing to logistics, all acting in harmony.
b) The essence of creating advantage is finding an integrated set of choices that
distinguishes a firm from its rivals

Common misconceptions:
● Creating vs sustaining competitive advantage: the choices that establish a firm’s
advantage also influence whether the advantage can be sustained. Creating and sustaining
competitive advantage is so complicated that it would be unwieldy to deal with both at once

● Links to industry analysis: Within-industry differences in performance are often larger

than differences across industries, but it would be wrong to conclude that industry analysis
(IA) is unimportant. IA is crucial to creating competitive advantage for several reasons.
a) Companies that generate competitive advantages typically do so by devising
strategies that neutralize the unattractive features of their industries, and exploit the
attractive features
b) Industry conditions appear to have a large influence on whether competitive
advantages are even possible. In some industries (computer leasing), conditions
constraint firms and leave them little room to establish a superior wedge between
willingness to pay and costs. In other industries (e.g., prepackaged software),
conditions allow the most effective firms to enjoy large advantages over the least
c) Market leaders often face a tension between managing industry structure and
pursuing an advantage within that structure. Firms must consider the impact of their
new capacity on industry supply-demand conditions, not just its effect on their
competitive advantage

● Analysis and creativity (e.g., trial and error, insights): Many of the greatest advantages
come not from analysis, but from entrepreneurial insights and trial-and-error. It aims to
guide entrepreneurial creativity and to set a battery of tests for new business ideas

The total value created by a transaction is the difference between the customer’s
willingness to pay and the supplier’s opportunity cost
 Module 5 – Article Notes

a) A customer’s willingness to pay (CWP) for a product or service is the maximum

amount of money that a customer would be willing to part with in order to obtain the
product or service. Firms can establish a competitive advantage by raising customers’
willingness to pay for its products without incurring a commensurate increase in SOC

b) Supplier opportunity cost (SOC) is precisely symmetrical to willingness to pay  it is

the smallest amount that a supplier will accept for the services and resources required
to produce a good or service. It is also called an ‘opportunity cost’ because it is dictated
by the best opportunities that the suppliers have to sell their services and resources
elsewhere. To establish an advantage, firms can devise a way to reduce SOC without
sacrificing commensurate willingness to pay (either option establishes the wider
wedge that defines competitive advantage)

Added Value
 A firm’s added value plays a large role in determining how much value it actually captures.
The notion of added value highlights the fact that competitive advantage derives
fundamentally from scarcity.
 The added value of a firm is the maximal value created by all participants in a transaction
minus the maximal value that could be created without the firm. In essence, it is the value
that would be lost to the world if the firm disappeared.
 Under a condition known as ‘unrestricted bargaining’, the amount of value a firm can claim
cannot exceed its added value. Then, the value left over the remaining participants could
break off and form a separate pact that improves their collective lot. Any deal which grants
a firm more than its added value is fragile because of such separate pacts.
 By widening the gap/wedge (beyond what rivals attain) between willingness to pay and
supplier opportunity cost, firms can increase the amount of value it can potentially claim
(they can boost their added value). Widening the wedge is difficult because, often, a firm
must incur higher cost in order to deliver a product or service for which customers are
willing to pay more.
 The larger is a firm’s added value, the greater is its potential for profit
 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
 Symmetry of SOC & CWP is useful: it reminds us that competitive advantage can come
from better management of supplier relations, not just from a focus on downstream
customers. Recent efforts to streamline supply chains reflect the importance of driving
down supplier opportunity cost.
 In practice, managers often examine actual costs (AC) instead of opportunity costs (OC)
because data on AC are concrete and available. Therefore, a firm’s quest for competitive
advantage then becomes a search for ways to widen the wedge between actual costs and
willingness to pay
 The tension between cost and willingness to pay is not absolute: firms can discover ways to
produce superior products at lower cost
 Module 5 – Article Notes

a) Some scholars argued that dual advantages are rare and are typically based on
operational differences across firms that are easily copies
b) Others suggest that breaking the trade-offs between cost and willingness to pay
and replacing trade-offs with ‘trade-ons’ is a fundamental way to transfer
competition in an industry (ex: Accenture, Southwest, Cirque du Soleil)

Toyota’s higher profit margins derive from the fact that the difference in willingness
to pay is greater than the incremental costs associated with its product.

A firm can achieve a competitive advantage by devising a way to:

1) raise willingness to pay a great deal with only slight increases in costs (differentiation
strategy)
2) reap large cost savings with only slight decrease to willingness to pay (low-cost strategy)

Differentiation is often misused

○ A firm who has differentiated itself means it has boosted the willingness of
customers to pay for its output that it can command a price premium. It does mean
that the firm is different from competitors
○ A common error is to say that a company has differentiated itself by charging a
lower price than its rivals. A firm’s choice of price does not usually affect how much
customers are intrinsically willing to pay for a good

Types of competitive advantage:

1) Industry average competitor (3rd highest willing to pay + 2nd highest supplier opportunity
cost)
2) Successful differentiated competitor (highest willing to pay + highest supplier opportunity
cost)
3) Successful low-cost competitor (lowest willing to pay + lowest supplier opportunity cost)
4) Competitor with dual-advantage (2nd highest willing to pay + 2nd lowest supplier
opportunity cost)

Activity Analysis: how can one identify opportunities to raise willingness to pay by more than
costs? Or to drive down costs without sacrificing too much willingness to pay?
 To analyze competitive advantage, strategist typically break a firm down into discrete
activities or processes and then examine how each contributes to the firm’s relative cost
position or comparative willingness to pay
 The activities undertaken to design, produce, sell, deliver, and service goods are what
ultimately incur costs and generate customer willingness to pay
 Differences across firms in activities, differences in what firms actually do day-to-day
produce disparities in cost and willingness to pay and hence dictate competitive advantage

Analyzing a firm activity by activity managers can help:

1. Understand why the firm does or doesn’t have a competitive advantage
2. Sport opportunities to increase a firm’s competitive advantage
3. Foresee future shifts in competitive advantage
 Module 5 – Article Notes

An analysis of activities usually proceeds in four steps:

1. Managers should catalog the firm’s activities (The Value Chain can guide managers in
dividing the activities into two classes)
a. Primary activities: that directly generate a good or service. Can be broken down
into inbound logistics, operations, outbound logistics, marketing and sales, after
sales
b. Support activities: that make the primary activities possible. They include
procurement of inputs, development of technology and human resources, and
general infrastructure. Support activities can have a surprisingly large, if indirect,
impact on willingness to pay
 Once activities have been cataloged, they must be analyzed in terms of cost and
willingness to pay relative to the competition

2. Managers should examine the costs associated with each activity, and use differences in
activities to analyze relative costs by understanding how and why their costs differ from
those of competitors (Analyze Relative Costs)

a. Establish cost drivers associated with each activity

b. Numerical relationships between activity costs and drivers
c. Allow managers to estimate competitors cost position

 Competitive cost analysis is the usual starting point for the strategic analysis of
competitive advantage
 Differences in cost often wield a large influence on differences in profitability.
 Differences in the resources possessed by a firm may also drive differences in activity
costs
 Cost drivers are the factors that make the cost of an activity rise or fall. They are critical
because they allow managers to estimate competitors’ cost positions. One usually cannot
observe a competitor’s costs directly, but one can often observe the drivers. Using its own
costs and the numerical relationships to cost drivers, a management team can estimate a
competitor’s cost position
 Some analysts confuse differences in firms’ costs with differences in their product mixes.
One can avoid this problem by comparing the cost positions of comparable products
 Since the analysis of relative costs inevitably involves a large number of assumptions,
sensitivity analysis is crucial. Sensitivity analysis identifies the assumptions that really
matter and therefore need to be honed. It also tells the analyst how confident he or she
can be in the results

3. Analyze how each activity generates customer willingness to pay, and use differences in
activities to examine how and why customers are willing to pay more or less for the goods
or services of rivals (Use activities to analyze relative willingness to pay)
 Module 5 – Article Notes

a. Activities of a firm do not just generate costs. They also (one hopes) make
customers willing to pay for the firm’s product or service. In general, it appears that
differences in willingness to pay account for more of the variation in profitability
observed among competitors than do disparities in cost levels
b. Difference in activities account for differences in willingness to pay, and hence for
competitive advantage and differences in profitability. Managers should have a
refined idea of how activities translate, through customer needs, into willingness to
pay
c. A major challenge in analyzing willingness to pay is narrowing the long list of
customer needs down to a manageable roster
d. Any activity in the value chain can affect WTP
e. Simple manner that managers use to analyze WTP:
i. Think carefully about who the real buyer is (child, super market or
convenience store executive)
ii. Understand what the buyer wants and are willing to pay, how they make
trade-offs among different needs
iii. Assess how successful they and competitors are at fulfilling customer needs
iv. Relate differences in success in meeting customer needs back to activities

4. Managers should consider changes in the firm’s activities. The objective is to identify
changes that will widen the wedge between costs and willingness to pay (Explore options
and make choices)
a. Search for ways to widen the wedge between cost & WTP
b. It is often useful to distill the essence of what drives each competitor
c. When considering changes in activities, it is crucial to consider competitor reactions
d. Consider the full range of ways in which all activities can create a wedge between
willingness to pay and costs
e. In rapidly changing markets, it is often valuable to seek options by paying special
attention to “bleeding edge” customers, whose demands presage the needs of the
larger marketplace. Similarly, undeserved customer segments often point the way to
creative alternatives
f. One of the most potent ways that a firm can alter its wedge between willingness to
pay and costs is by adjusting the scope of its operations. That is changing the range
of customers it serves or products it offers within an industry
g. By reverse-engineering the analyses they do from the options they have, managers
can focus on the analyses that truly matter. This alternative process works best
when managers start with a good grasp of the options available to them
h. A firm should scour its value chain for, and eliminate, activities that generate costs
without creating commensurate willingness to pay. It should also search for
inexpensive ways to generate additional WTP at least among a segment of
customers

Take note of:

● Horizontal differentiation: different customer rank products differently

 Module 5 – Article Notes

● Vertical differentiation: customers agree on which product is better, but they differ in how
much they will pay for the better product

● The analysis of willingness to pay is trickier, but more interesting, when customers differ in
their preferences. The usual response is segmentation: one first finds clumps of customers
who share preferences and then analyzes willingness to pay segment by segment
● The more diverse are customer needs and the cheaper it is to customize the firm’s product
or service, the more segments a firm typically considers
● Some observers have even argued that companies should move beyond segmentation to
embrace mass customization
● Landscape metaphor emphasizes the importance of internal consistency: peaks are
coherent bundles of mutually reinforcing choices
● The ruggedness of the landscape has a coupe of vital implications. It suggests that
incremental analysis and incremental change are unlikely to lead a firm to a new,
fundamentally higher position. Rather, a firm must usually consider changing many of its
activities in unison in order to attain a higher peak
○ It also highlights the role of competition as it is often more valuable to inhabit one’s
own, separate peak than to crowd onto a summit that is already heavily populated
○ It reminds us that the creation of competitive advantage involves choice. In
occupying one peak, a firm foregoes an alternative position
○ To improve its long run prospects, a firm may have to step down and tread through
a valley.

Conclusion (summary p19 of the article)

Paper #2
 Module 5 – Article Notes

Blue Ocean Strategy (Kim & Mauborgne, 2004)

● To sustain themselves in the marketplace, practitioners of strategy focus on building

advantages over the competition, usually by assessing what competitors do and striving to
do it better. Structuralist view is the traditional approach where grabbing a bigger share of
the market is seen as a zero-sum game in which one company’s gain is achieved at
another company’s loss.
● Red Oceans represent all the industries in existence today. This is known as the market
space where industry boundaries are defined and accepted, and the competitive rules of
the game are known. Here, companies try to outperform their rivals to grab a greater share
of existing demand. As the market space of red oceans gets crowded, prospects for profits
and growth are reduced. Products become commodities, and cutthroat competition turns
the red ocean bloody. In RO, differentiation costs because firms compete with the same
best-practice rule. Companies can either create greater value to customers at a higher cost
or create reasonable value at a lower cost. Hence, strategy is essentially a choice between
differentiation and low cost
● Red oceans will always matter and will always be a fact of business life. However, with
supply exceeding demand in more industries, competing for a share of contracting markets,
while necessary, will not be sufficient to sustain high performance. Companies need to go
beyond competing in established industries.
● To seize new profit and growth opportunities, they also need to create blue oceans
● Competition matters. However, firms should focus on not competing, but making the
competition irrelevant by creating a new market space where there are no competitors (it is
called Blue Ocean)
● Blue Ocean denote all the industries not in existence today. This is the unknown market
space. It is defined by untapped market space, demand creation, and the opportunity for
highly profitable growth. Although some blue oceans are created well beyond existing
industry boundaries, most are created from within red oceans by expanding existing
industry boundaries
● Competition is irrelevant in BO because the rules of the game are waiting to be set. The
term is an analogy to describe the wider potential of market space that is vast, deep, and
not yet explored. Creators of blue oceans never used the competition as their benchmark.
They made it irrelevant by creating a leap in value for both buyers and the company itself

● There are several driving forces behind a rising imperative to create blue oceans:
a) Accelerated technological advances have substantially improved industrial
productivity and have allowed suppliers to produce an unprecedented array of
products and services
b) The trend toward globalization compounds the situation
c) As trade barriers between nations and regions are dismantled and as
information on products and prices becomes instantly and globally available,
niche markets and monopoly havens continue to disappear
d) As red oceans become increasingly bloody, management will need to be more
concerned with blue oceans than the current cohort of managers is
accustomed to
 Module 5 – Article Notes

● Blue Ocean strategy is based on reconstructionist view. While competition-based red

ocean strategy assumes that an industry’s structural conditions are given and that firms are
forced to compete within them, BO is based on the view that market boundaries and
industry structure are not given and can be reconstructed by the actions and beliefs of
industry players
○ The strategic aim is to create new rules of the game by breaking the existing
value/cost trade-off and thereby creating a blue ocean
○ It requires a shift of attention from supply to demand, from a focus on competing to
leaving the competition behind
○ It involves looking systematically across established boundaries of competition and
reordering existing elements in different markets to reconstruct them into a new
market space where a new level of demand is generated
○ There is scarcely any attractive or unattractive industry per se because the level of
industry attractiveness can be altered through companies’ conscientious efforts of
reconstruction
○ BO expands existing markets and creates new ones
○ The creation of blue oceans is about driving costs down while simultaneously
driving value up for buyers

Because buyer value comes from the utility and price that the company offers to buyers and
because the value to the company is generated from price and its cost structure, blue ocean
strategy is achieved only when the whole system of the company’s utility, price, and cost activities
is properly aligned. It is this whole-system approach that makes the creation of blue oceans a
sustainable strategy. Blue ocean strategy integrates the range of a firm’s functional and
operational activities. In this sense, blue ocean strategy is more than innovation. It is about
strategy that embraces the entire system of a company’s activities

Analytical frameworks and tools:

● The strategy canvas: it is both a diagnostic and an action framework for building a
compelling blue ocean strategy. It serves two purposes:
a) It captures the current state of play in the known market space. This allows firms
to understand where the competition is currently investing, the factors the
industries currently compete on in products, service and delivery, and what
customers receive from the existing competitive offerings on the market
b) It captures all the information in graphic form. The horizontal axis captures the
range of factors the industry competes on and invests in

○ To fundamentally shift the strategy canvas of an industry, a firm must begin by

reorienting its strategic focus from competitors to alternatives, and from customers
to noncustomers of the industry
○ To pursue both value and cost, companies should resist the old logic of
benchmarking competitors in the existing field and choosing between differentiation
and cost leadership.
○ As a company shifts its strategic focus from competitors to alternatives, and from
customers to noncustomers of the industry, it gains insight into how to redefine the
 Module 5 – Article Notes

problem the industry focuses on and thereby how to reconstruct buyer value
elements that reside across industry boundaries.

○ The value curve, the basic component of the strategy canvas is a graphic depiction
of a company’s relative performance across its industry’s factors of competition

● The four actions framework: is used to reconstruct buyer value in crafting a new value
curve. It asks four key question to challenge an industry’s strategic logic and business
model. When a company applies the four actions framework to the strategy canvas of an
industry, it gets a revealing new look at old perceived truths.

1. [Eliminate] First, forces a company to consider eliminating factors that companies

have often competed on. Often those factors are taken for granted even though
they no longer have value or may even detract from value. Sometimes there is a
fundamental change in what buyer’s value, but companies that are focused on
benchmarking one another do not act on, or even perceive the change
2. [Reduce] It forces a company to determine whether products or services have been
over-designed in the race to match and beat the competition. Here companies over-
serve customers increasing the cost structure for no gain
3. [Raise] it pushes a company to uncover and eliminate the compromises an industry
forces customer to make
4. [Create] it helps a company to discover entirely new sources of value for buyers
and to create new demand and shift the strategic pricing of the industry.

 It is by pursuing the first two that a company gains insight into how to drop its cost structure
vis-à-vis competitors. The remaining 2 factors, by contrast, provide a company with insights
into how to lift buyer value and create new demand. Collectively, they allow a company to
systematically explore how it can reconstruct buyer value elements across alternative
industries to offer buyers an entirely new experience, while simultaneously keeping its cost
structure low.

● The Eliminating and Creating action: these actions push companies to go beyond value
maximization exercises with existing factors of competitors. It prompts companies to
change the factors themselves, and make the existing basis of competition irrelevant

● The Eliminate-Reduce-Raise-Create Grid: this is a supplementary analytic tool to the four

actions framework. The grid pushes company not only to ask all four questions in the four
actions framework, but also to act on all four to create a new value curve. By driving
companies to fill in the grid with the actions of eliminating and reducing as well as raising
and creating, the grid gives companies for immediate benefits:

○ It pushes them to simultaneously pursue differentiation and low cost to break the
value/cost trade-off
○ It immediately flags companies that are focused on only raising and creating, and
thereby lifting their cost structure and often over-engineering products and services,
a common plight in many companies
 Module 5 – Article Notes

○ It is easily understood by managers at any level, creating a high level of

engagement in its application
○ Because completing the grid is a challenging task, it drives companies to robustly
scrutinize every factor the industry competes on, making them discover the range of
implicit assumptions they make unconsciously in competing.

Three characteristics of a good strategy: when expressed through a value curve, an effective
blue ocean has 3 complementary qualities: focus, divergence and compelling tagline. Without
these qualities, a company’s strategy will likely be mudded, undifferentiated, hard to communicate
and will have a high-cost structure. They serve an initial litmus test of the commercial viability of
blue ocean ideas. These three criteria guide companies in carrying out the process of
reconstruction to arrive at a breakthrough in value both for buyers and for themselves

● Focus: the value curve has focus since the company does not diffuse its efforts across all
key factors of competition
● Divergence: the shape of its value curve diverges from the other players, a result of not
benchmarking competitors but instead looking across alternatives
● Tagline: the tagline of their strategic profile is clear (ex: a fun and simple wine to be
enjoyed every day)

Reading the value curves: strategy canvas enables companies to see the future in present. To
achieve this, companies must understand how to read value curves. Embedded in the value
curves of an industry is a wealth of strategic knowledge on the current status and future of a
business

● A blue ocean strategy: when a company’s value curve or its competitors meets the 3
criteria that define a good blue ocean strategy, focus, divergence, compelling tagline that
speaks to the market, the company is on the right track. These 3 criteria serve as an initial
litmus test of the commercial viability of blue ocean ideas

● On the other hand, when a company’s value curve lacks focus, its cost structure will tend
to be high and its business model complex in implementation and execution. When it lacks
divergence, a company’s strategy is a ‘me-too’ with no reason to stand apart in the
marketplace. When it lacks a compelling tagline that speaks to buyers, it is likely to be
internally driven or a classic example of innovation for innovation’s sake with no great
commercial potential and no natural take-off capability.

● A company caught in red ocean: when a company’s value curve converges with its
competitors, it signals that a company is likely caught within the red ocean of bloody
competition. A company’s explicit or implicit strategy tends to be trying to outdo its
competition on the basic of cost or quality.

● Over-delivery without payback: when a company’s value curve on the strategy canvas is
shown to deliver high levels across all factors, the question is: Does the company’s market
share and profitability reflect their investments? If not, the strategy canvas signals that the
company may be oversupplying its customers, offering too much of those elements that
 Module 5 – Article Notes

add incremental value to buyers. The company must decide which factors to eliminate,
reduce, raise and create to construct a divergent value curve.

● An incoherent strategy: when a company’s value curve zigzags, it signals that the
company does not have a coherent strategy. Its strategy is likely based on independent sub
strategies. These may individually make sense to keep the business running and everyone
busy. But collectively, they do little to distinguish the company from the best competitor or
to provide a clear strategic vision. This is often a reflection of an organization with divisional
or functional silos

● Strategic contradictions: areas where a company is offering a high level on one

competing factor while ignoring others that support that factor (e.g investing heavily in
making a company’s website easy to use that failing to correct the site’s slow speed of
operation). Strategic inconsistencies can also be found between the level of offering and
price. For example, a petroleum station company found that it offered ‘less for more’: fewer
services than the best competitor at a higher price and realized why it was losing market
share fast.

● An internally driven company: the kind of language used in the strategy canvas gives
insight as to whether a company’s strategic vision is built on an outside-in perspective,
driven by the demand side, or an inside-out perspective that is operationally driven.
Analyzing the language of the strategy canvas helps a company understand how far it is
from creating industry demand. Firm should avoid excessive use of jargon

Conclusion (article p.18)