Gaining Competitive Advantage in Business

Gaining Competitive Advantage

• A business can gain a competitive advantage in one of two areas: cost leadership or differentiation.

Cost Leadership

• The goal of a cost leadership strategy is to become the lowest-cost provider in the industry or market.
• Companies that excel with a low-cost strategy have extreme operational efficiency and use low-cost materials and resources to reduce the overall price of their product or service.

Differentiation

• The competitive advantage is gained by offering a unique or highly specialized product or service.
• A successful differentiation strategy allows the business to set a premium price for its product or service.
• The business needs to dedicate time and resources to innovation, research, and development.

Value Chain Analysis

• The value chain framework helps organizations understand and evaluate sources of positive and negative cost efficiency.
• Conducting a value chain analysis can help businesses:
  • Support decisions for various business activities.
  • Diagnose points of ineffectiveness for corrective action.
  • Understand linkages and dependencies between different activities and areas in the business.
  • Optimize activities to maximize output and minimize organizational expenses.
  • Potentially create a cost advantage over competitors.
  • Understand core competencies and areas of improvement.
• A value chain analysis is a process that helps organizations understand points in their value chain and relationships between these different points.
• Conducting a value chain analysis helps a company identify factors that create or hinder cost efficiency in its business model.

Steps to Understand Value Chain

• Break each primary and secondary activity down into subactivities.
• Analyze each function on a more granular level to compare the financial return of each function to the time, effort, and cost required.
• Look for connections between subactivities, as inefficiencies in one activity or subactivity can be linked to another.
• Diagnose areas of improvement by considering trends and patterns in the different sub-activities and connections between sub-activities.
• Evaluate for potential improvement opportunities in those particular points in the value chain.