Organizational Strategy

Lecture 2
Agenda
• Reading 1: Creating Competitive Advantage,
“Activity Analysis of Cost and Willingness to Pay”

• Cost Drivers and Value Drivers

• Reading 2: Blue Ocean Strategy

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Creating Competitive Advantage
• Seeking competitive advantage involves searching for ways to
widen the wedge between customers’ perceived value (V) and
cost (C)

V-P

V-C P

P-C

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Business-Level Strategy
• Value and cost are the two major competitive levers
organizations can use to address the business-level strategy
question of how to compete
– Higher value tends to involve higher costs

• Differentiation strategy
– Raise perceived value significantly with slight cost increases

• Low-cost strategy
– Decrease costs significantly with slight decreases in perceived value

• Dual advantage
– Hybrid strategy that integrates differentiation and low-cost

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Activity Analysis
• Activity analysis involves breaking a firm down into discrete activities or
processes, and examining how each contributes to the firm’s relative cost
position or willingness to pay
– Understand why the firm does or does not have a competitive advantage
– Find opportunities to increase a firm’s competitive advantage
– Foresee future shifts in competitive advantage

• Four steps
– Catalog activities
– Use activities to analyze relative costs
– Use activities to analyze relative willingness to pay
– Explore options and make choices

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Catalog Activities
• The value chain is a template that helps break down a firm into activities
– Divides activities into two broad types: primary and support

• Primary activities directly generate a good or service

– Inbound logistics, operations, outbound logistics, marketing and sales, service

• Support activities enable the primary activities

– Procurement, technology development, human resource management, firm
infrastructure

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Use Activities to Analyze Relative Costs
• Relative cost analysis involves calculating costs and determining cost
drivers associated with each activity
– Determining cost drivers allows for estimation of competitors’ cost position

• Key take-aways about relative cost analysis

– Important to focus on differences in individual activities, not just differences in
total costs
– Good cost analyses focus on cost categories that: 1) pick up on significant
differences across competitors or strategic options, 2) correspond to
technically separable activities, or 3) are large enough to influence the overall
cost position significantly
– Activities accounting for a thicker slice of costs deserve deeper treatment in
terms of cost drivers
– A driver should be modeled only if it is likely to vary across competitors or
strategic options
– Sensitivity analysis is crucial

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Use Activities to Analyze Relative WTP
• Virtually any activity can influence willingness to pay

• Typical steps in analyzing relative willingness to pay

– Determine who the real buyer is
– Ascertain what the buyer or buyers want
– Assess the firm’s and competitors’ success in meeting customer needs
– Relate differences in success in meeting customer needs back to activities

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Explore Options and Make Choices
• Guidelines in generating options to widen the wedge between willingness
to pay and cost
– Distill the essence of what drives each competitor
– Consider competitor reactions
– Avoid thinking too narrowly about possible benefits to buyers
– In rapidly changing markets, pay special attention to customers whose
demands presage the needs of the larger market
– Consider adjusting scope of operations
– Try starting with options, assessing what each option implies for activities,
then analyzing impact each alternative configuration of activities has on
wedge between willingness to pay and cost

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Cost Drivers
• Economies of scale
• Learning and experience
• Capacity utilization
• Supply chain efficiencies
• Input costs
• Production technology and design
• Communication systems and information technology
• Bargaining power
• Outsourcing or vertical integration
• Incentive systems and culture

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Value Drivers
• Product features and performance
• Customer service
• Production R&D
• Technology and innovation
• Input quality
• Employee skill, training, experience
• Sales and marketing
• Quality control processes

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Blue Ocean Strategy
• Blue ocean strategy involves creating a new, untapped market rather than
competing in an existing market

• Innovators can break the value/cost tradeoff and establish dual advantage

• Four questions can help to develop a blue ocean strategy that enables a
firm to lower costs and differentiate simultaneously
– Eliminate: What attributes or characteristics of a typical industry strategy can
be eliminated completely?
– Reduce: What product/service attributes can be reduced below the usual
industry standard?
– Raise: What product/service attributes can be raised above the usual industry
standard?
– Create: What can we offer that has typically never been provided by
companies in this industry?

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