Chapter 3!COMPETITIVE ADVANTAGE : !THE VALUE CHAIN AND YOUR P&L

Operate at lower relative cost

Competitive Advantage

Commanded premium relative price

Competitive Advantage

Pharmacia & UpjohnAverage in industry

NucorAverage in Industry

• Porter’s framework • Five forces • Value chain

• The analysis focuses on • Drivers of industry profitability • Differences in activities

• The analysis explains • Industry average price and cost • Relative price and cost

INDUSTRY STRUCTURE RELATIVE POSITION

Why are some companies more profitable than others?

RELATIVE PRICE

Offer unique & Valuable to customers

Create more buyer value raise “WTP”

RELATIVE COST

Resulting from operating cost or capital cost or both

Cost come from create, produce, deliver, sell and support product/service

The Value Chain

• The sequence of activities that firm perform to design, produce, sell and support product/ service !

• Each of activities can contribute to a firm relative cost and relative price

Key Step In Value Chain Analysis

1.Start by laying out the industry value chain.

R&D Supply chain management Operation Marketing &

salesPost-sales

service

Key Step In Value Chain Analysis

2.Compare firm value chain to the industry.

Chair design DistributionOperation Provision/

fittingAfter-sales

repairsDonated wheelchairs : A value chain example

Key Step In Value Chain Analysis

3.Zero in on price drivers, those activities that have a high current.

4.Zero in on cost drivers, paying special attention to activities that represent a large or growing percentage of cost

Competitive advantage arises from the activities in a company’s value chain

• Activities • Perform SAME activities as rivals, execute better • Perform DIFFERENT activities from rivals

• Value created • Meet same needs at lower cost• Meet DIFFERENT needs and/or same

needs at lower cost

• advantage • Cost advantage, but hard to sustain • Sustain higher prices and/or lower costs

• competition • Be the BEST, compete on EXECUTE • Be UNIQUE, compete on STRATEGY

Thank you