Strategy
Ramon Casadesus-Masanell, Series Editor
Competitive
Advantage
PANKAJ GHEMAWAT
IESE BUSINESS SCHOOL
JAN W. RIVKIN
HARVARD BUSINESS SCHOOL
8105 | Published: January 31, 2014
+ INTERACTIVE ILLUSTRATIONS
For the exclusive use of A. GUPTA, 2020.
This document is authorized for use only by ATUL GUPTA in 2020.
Table of Contents
1 Introduction .................................................................................. XXXXXXXXXX3
2 Essential Reading ........................................................................ XXXXXXXXXX6
2.1 The Logic of Value Creation and Distribution ................. XXXXXXXXXX6
Willingness to Pay and Supplier Opportunity Cost ....... XXXXXXXXXX6
Added Value .......................................................................... XXXXXXXXXX8
Added Value and Competitive Advantage ..................... XXXXXXXXXX9
2.2 The Tension Between Cost and Willingness to Pay ...... XXXXXXXXXX9
2.3 Activity Analysis ................................................................. XXXXXXXXXX12
Step 1: Catalog Activities (The Value Chain) ................ XXXXXXXXXX12
Step 2: Use Activities to Analyze Relative Costs ......... XXXXXXXXXX13
Step 3: Use Activities to Analyze Relative Willingness to Pay XXXXXXXXXX
Step 4: Explore Options and Make Choices .................. XXXXXXXXXX19
The Whole Versus the Parts ............................................. XXXXXXXXXX21
2.4 Concluding Thoughts ......................................................... XXXXXXXXXX22
3 Supplemental Reading ............................................................. XXXXXXXXXX23
3.1 Analyzing Value Propositions ........................................... XXXXXXXXXX23
4 Key Terms.................................................................................... XXXXXXXXXX26
5 For Further Reading .................................................................. XXXXXXXXXX26
6 Endnotes ...................................................................................... XXXXXXXXXX27
7 Index ............................................................................................. XXXXXXXXXX29
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Pankaj Ghemawat, Professor of Strategic Management, IESE Business School, and
Jan W. Rivkin, Bruce V. Rauner Professor of Business Administration, Harvard
Business School, developed this Core Reading.
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8105 | Core Reading: COMPETITIVE ADVANTAGE 2
For the exclusive use of A. GUPTA, 2020.
This document is authorized for use only by ATUL GUPTA in 2020.
1 INTRODUCTION1
ome companies generate far greater profits than others. The
pharmaceutical company Merck produced an economic profit of
more than $11.3 billion from 1994 to 2012.
a
Over the same period,
U.S. Steel produced an economic loss of more than $330 million; its cost
of capital exceeded its accounting profit by a wide margin. Large differ-
ences in economic performance across industries are commonplace, but
profitability can vary even more among companies in the same industry.
To understand those intra-industry differences, we turn to the concept
of competitive advantage, our focus in this reading.
Strategists must understand the roots of performance differences both across and within
industries. Differences in industry structure shed light on the former.2 To a certain extent,
Merck has generated more economic profit than U.S. Steel because the pharmaceutical
industry is structurally more attractive than the steel industry. Rivalry in pharmaceuticals is
muted by factors such as patent protection, product differentiation, and expanding demand.
In contrast, rivalry in the steel industry is fierce—fueled by excess capacity, limited differences
among products, and slow growth. Many pharmaceutical users hesitate to switch products or
ands, while steel customers are usually willing to switch producers in order to get a better
price. Many pharmaceuticals are made from commodities with little labor input, while unions
exercise such power in the steel industry that labor costs often account for one-quarter of total
evenue. Such contrasts in industry-level competitive forces are one reason for the variation in
profit levels of firms in different industries. (For more on the forces that influence industry
profitability, see Core Reading: Industry Analysis