Generic Building Blocks of Competitve Advantage [PDF]

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THE GENERIC BUILDING BLOCKS OF COMPETITIVE ADVANTAGE Four factors build Competitive Advantage: efficiency, quality, innovation, and customer responsiveness. They are the generic building blocks of competitive advantage that any company can adopt, regardless of its industry or the products or the services it produces. Although we can discuss them separately, they are interrelated. For example, superior quality can lead to superior efficiency, while innovation can enhance efficiency, quality, and customer responsiveness. Efficiency In one sense, a business is simply a device for transforming inputs into outputs. Inputs are basic factors of production such as labor, land, capital, management, and technological know-how. Outputs are the goods and services that the business produces. The simplest measure of efficiency is the quantity of inputs that it takes to produce a given output, that is, efficiency = outputs/inputs. The more efficient a company is, the fewer the inputs required to produce a given output. Efficiency helps a company attain a competitive advantage through a lower cost structure. Two of the most important components of efficiency for many companies are employee productivity and capital productivity. Employee productivity is usually measured by output per employee and capital productivity by output per unit of invested capital. Holding all else constant, the company with the highest labor and capital productivity in an industry will typically have the lowest cost structure and therefore a cost- based competitive advantage. The concept of productivity is not limited to employee and capital productivity. Pharmaceutical companies, for example, often talk about the productivity of their R&D spending, by which they mean how many new drugs they develop from their investment in R&D. Other companies talk about their sales force productivity, which means how many sales they generate from every sales call, and so on. The important point to remember is that high productivity leads to greater efficiency and lower costs. Quality as Excellence and Reliability A product can be thought of as a bundle of attributes. The attributes of many physical products include the form, features, performance, durability, reliability, style, and design of the product. A product is said to have superior quality when customers perceive that the attributes of a product provide them with higher value than attributes of products sold by rivals. When customers are evaluating the quality of a product they commonly measure it against two kinds of attributes; attributes that are related to quality as excellence, and attributes that are related to quality as reliability. From a quality as excellence perspective, the important attributes are things such as a product’s design and styling, its aesthetic appeal, its features and functions, the level of service associated with the delivery of the product, and so on. When excellence is built into a product offering, consumers have to pay more to own or consume them. With regard to quality as reliability, a product can be said to be reliable when it consistently does the job it was designed for, does it well, and rarely, if ever, breaks down. As with excellence, reliability increases the



value a consumer gets from a product, and thus the price the company can charge for that product. At the other end of the spectrum, we can find poor- quality products that have both low reliability and inferior attributes, such as poor design, performance, and styling. The impact of high product quality on competitive advantage is twofold. First, providing high quality products increase the value those products provide to customers which gives the company the option of charging a higher price for them. The second impact of high quality on competitive advantage comes from the greater efficiency and the lower unit costs associated with reliable products. When products are reliable, less employee time is wasted making defective products or providing substandard services and less time has to be spent fixing mistakes, which translates into higher employee productivity and lower unit costs. Thus, high product quality not only enables a company to differentiate its product from that of rivals, but if the product is reliable, it also lowers costs. Innovation Innovation refers to the act of creating new products or processes. There are two main types of innovation: product innovation and process innovation. Product innovation is the development of products that are new to the world or have superior attributes to existing products. Process innovation is the development of a new process for producing products and delivering them to customers. Product innovation creates value by creating new products, or enhanced versions of existing products, that customers perceive as having more value, thus giving the company the option to charge a higher price. Process innovation often allows a company to create more value by lowering production costs. In the long run, innovation of products and processes is perhaps the most important building block of competitive advantage. Competition can be viewed as a process driven by innovations. Although not all innovations succeed, those that do can be a major source of competitive advantage because, by definition, they give a company something unique— something its competitors lack (at least until they imitate the innovation). Uniqueness can allow a company to differentiate itself from its rivals and charge a premium price for its product or, in the case of many process innovations, reduce its unit costs far below those of competitors. Customer Responsiveness To achieve superior customer responsiveness, a company must be able to do a better job than competitors of identifying and satisfying its customers’ needs. Customers will then attribute more value to its products, creating a differentiation based on competitive advantage. Improving the quality of a company’s product offering is consistent with achieving responsiveness, as is developing new products with features that existing products lack. In other words, achieving superior quality and innovation is integral to achieving superior responsiveness to customers. Another factor that stands out in any discussion of customer responsiveness is the need to customize goods and services to the unique demands of individual customers or customer groups. For



example, the proliferation of soft drinks and beers can be viewed partly as a response to this trend. Similarly, automobile companies have become more adept at customizing cars to the demands of individual customers, often allowing a wide range of colors and options to choose from. An aspect of customer responsiveness that has drawn increasing attention is customer response time: the time that it takes for a good to be delivered or a service to be performed. For a manufacturer of machinery, response time is the time it takes to fill customer orders. For a bank, it is the time it takes to process a loan or that a customer must stand in line to wait for a free teller. For a supermarket, it is the time that customers must stand in checkout lines. Survey after survey have shown slow response time to be a major source of customer dissatisfaction. Other sources of enhanced customer responsiveness include superior design, service, and after- sales service and support. All of these factors enhance customer responsiveness and allow a company to differentiate itself from its competitors. In turn, differentiation enables a company to build brand loyalty and charge a premium price for its products.



THE VALUE CHAIN The term value chain refers to the idea that a company is a chain of activities for transforming inputs into outputs valued by customers’ value. The process of transforming inputs into outputs is composed of a number of primary activities and support activities. Each activity adds value to the product. PRIMARY ACTIVITIES Primary activities have to do with the design, creation, and delivery of the product, its marketing, and its support and after- sales service. The primary activities are broken down into four functions: research and development, production, marketing and sales, and customer service. Research and Development Research and development (R&D) is concerned with the design of products and production processes. By superior product design, R&D can increase the functionality of products, which makes them more attractive to customers, thereby adding value. Alternatively, the work of R&D may result in more efficient production processes, thereby lowering production costs. Either way, the R&D function can help to lower costs or raise the value of a product and permit a company to charge higher prices. Production Production is concerned with the creation of a good or service. For physical products, when we talk about production, we generally mean manufacturing. For services such as banking or retail operations, “production” typically takes place when the service is delivered to the customer, as when a bank makes a loan to a customer. By performing its activities efficiently, the production function of a company helps to lower its cost



structure. The production function can also perform its activities in a way that is consistent with high product quality, which leads to differentiation (and higher value) and lower costs. Marketing and Sales There are several ways in which the marketing and sales functions of a company can help to create value. Through brand positioning and advertising, the marketing function can increase the value that customers perceive to be contained in a company’s product (and thus the utility they attribute to the product). Insofar as these help to create a favorable impression of the company’s product in the minds of customers, they increase perceived value. Marketing and sales can also create value by discovering customer needs and communicating them back to the R&D function of the company, which can then design products that better match those needs. Customer Service The role of the service function of an enterprise is to provide after- sales service and support. This function can create superior utility by solving customer problems and supporting customers after they have purchased the product. For example, Caterpillar, the U.S.- based manufacturer of heavy earthmoving equipment, can get spare parts to any point in the world within 24 hours, thereby minimizing the amount of downtime its customers have to face if their Caterpillar equipment malfunctions. This is an extremely valuable support capability in an industry where downtime is expensive. It has helped to increase the utility that customers associate with Caterpillar products, and thus the price that Caterpillar can charge for its products.



SUPPORT ACTIVITIES The support activities of the value chain provide inputs that allow the primary activities to take place. These activities are broken down into four functions: materials management (or logistics), human resources, information systems, and company infrastructure. Materials Management (Logistics) The materials management (or logistics) function controls the transmission of physical materials through the value chain, from procurement through production and into distribution. The efficiency with which this is carried out can significantly lower cost, thereby creating more value. Lower inventories mean lower costs, and hence greater value creation. Human Resources There are a number of ways in which the human resource function can help an enterprise to create more value. This function ensures that the company has the right mix of skilled people to perform its value- creation activities effectively. It is also the job of the



human resource function to ensure that people are adequately trained, motivated, and compensated to perform their value- creation tasks. If the human resources are functioning well, employee productivity rises (which lowers costs) and customer service improves (which raises utility), thereby enabling the company to create more value. Information Systems Information systems refer largely to the electronic systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries, and so on. Information systems, when coupled with the communications features of the Internet, are holding out the promise of being able to improve the efficiency and effectiveness with which a company manages its other value-creation activities. Company Infrastructure Company infrastructure is the company wide context within which all the other value creation activities take place: the organizational structure, control systems, and company culture. Because top management can exert considerable influence in shaping these aspects of a company, top management should also be viewed as part of the infrastructure of a company. Indeed, through strong leadership, top management can shape the infrastructure of a company and, through that, the performance of all other value- creation activities that take place within it.