Individual Assignment #2 (50 points) Understanding Sources of Competitive Advantage DUE: September 23 (submit via the assignment dropbox) Question: In your own words and using several companies to illustrate differences and similarities, you must compare and contrast the sources for competitive advantage: cost, differentiation and marketing. Compare and contrast requires that you discuss both similarities and differences among these three sources of competitive advantage. You must find companies to illustrate each of the three major types of competitive advantage (cost, differentiation and marketing). You must provide information about the companies that explain why you chose these companies for your examples. You may NOT use companies that are discussed in Chapter 6 of the textbook. NOTE: The sources for competitive advantage sound simple but students often think they understand the difference when they do not. Please review my video on sources of competitive advantage as well as reading Chapter 6 of the textbook in preparing your answer to this essay question. Format Instructions: This is a formal essay that requires that you divide your answer into sections which are clearly labeled (titles). Use MLA or APA for citations for your company examples or other sources that you consulted in writing this paper. Maximum Length: 2 pages, single-spaced (font size similar to these instructions) Minimum Length: 1 page, single-spaced (font size similar to these instructions) Place your name at the top of the first page and give your essay a title. Your file name should be as follows: LastName_FirstName_Assignment2. Save as a pdf file and submit via the assignment dropbox. Competitive Position & Sources of Advantage Chapter 6 Understanding Competitive Advantage, Customer Value, and Profitability Discovering Sources of Competitive Advantage Assessing Industry Attractiveness and Forces Value, rather than cost, must be used in analyzing competitive position. Copyright Roger J. Best, 2012 MBM6 Chapter 6 Competitive Position & Sources of Advantage MBM6 Chapter 6 Understanding Competitive Advantage, Customer Value, and Profitability In this section we will look at how a competitive advantage results in some level of superior customer value based on a customer's preference for performance benefits, the cost of the purchase, and the ease of the purchase. Copyright Roger J. Best, 2012 Competitive Advantage, Customer Value, & Profitability MBM6 Chapter 6 A competitive advantage results in some level of superior customer value based on a customer's preference for performance benefits, the cost of the purchase, and the ease of the purchase. Copyright Roger J. Best, 2012 Competitive Advantage, Customer Value, & Profitability MBM6 Chapter 6 Superior customer value results in superior profits To achieve aboveaverage profits, a business has to develop some source of competitive advantage that provides target customers with positive customer value. Copyright Roger J. Best, 2012 Sources of Advantage & Performance MBM6 Chapter 6 Compare and contrast the three companies above in terms of their sources of competitive advantage and the relative impact on their financial performance Copyright Roger J. Best, 2012 Sources of Competitive Advantage Copyright Roger J. Best, 2012 MBM6 Chapter 6 Cost Advantage and Profitability MBM6 Chapter 6 Each type of cost advantage can be achieved in several ways. A cost advantage relative to competition contributes to higher levels of profitability. Copyright Roger J. Best, 2012 Unit Cost & Experience Curve As volume increases, the cost per unit generally decreases. Scale Effect: larger unit volume allows for production and purchasing economies that lower the perunit manufacturing cost of a product. Scope Effect: a business can lower the average unit cost of all products by adding products that have similar manufacturing processes and that are made of the same materials as its other products. Learning Effects: each unit produced provides additional learning and the opportunity to build the next unit more efficiently. Copyright Roger J. Best, 2012 Marketing MBM6 Performance Tool 6.1 Chapter 6 Scale and Scope Cost Advantages MBM6 Chapter 6 For Honda, the cost of ignition switches is lower than for some other manufacturers because the same ignition switch components are used in cars, motorcycles, lawn mowers, allterrain vehicles, snow blowers, snowmobiles, jet skis, and generators. Copyright Roger J. Best, 2012 Product Scope and Marketing Cost Advantage Procter & Gamble's sales force expense per pound of detergent sold should decrease as it adds more brands of detergent to its product line. MBM6 Chapter 6 Each time a soup is advertised, the ad reinforces topofthemind awareness of Campbell's Soup brand and other soups in the product line. Copyright Roger J. Best, 2012 Product Differentiation Advantage Marketing MBM6 Performance Tool 6.2 Chapter 6 A product's durability, reliability, performance, features, appearance, and conformance to a specific application each have potential to be a differentiation advantage. Copyright Roger J. Best, 2012 Service Differentiation Advantage MBM6 Chapter 6 By tracking its service performance each day, FedEx is able to create greater overall customer satisfaction with fewer errors, lower costs, and greater profits for shareholders. Copyright Roger J. Best, 2012 Brand Advantage & Profitability MBM6 Chapter 6 The stature of brand names adds a dimension of appeal that is an important customer benefit for many less pricesensitive, more imageconscious consumers. Copyright Roger J. Best, 2012 Market Share Advantage & Profits Marketing MBM6 Performance Tool 6.3 Chapter 6 The more dominant the share leader is with regard to market share compared with its top three competitors, the greater are the share leader's profits. Copyright Roger J. Best, 2012 Product Line Advantage Marketing MBM6 Performance Tool 6.3 Chapter 6 Microbrew Segment A broad product line gives a business more prospective customers and the potential to sell more to each customertranslating into more sales and higher levels of profitability. Copyright Roger J. Best, 2012 Import Position LowCal, LowCarb Channel Advantage Marketing MBM6 Performance Tool 6.3 Chapter 6 A business that has exclusive access to distributors can control channels in a given market and, to some degree, can control market access. Copyright Roger J. Best, 2012 Competitive Strategy Based on Knowledge Advantage MBM6 Chapter 6 A business with excellent customer knowledge but limited competitor knowledge will likely overreact to customer demands. Copyright Roger J. Best, 2012 Customer Perceptions of Interbrand Differentiation A business can use a variety of multidimensional scaling programs to create a perceptual map, such as the one shown above. In this example, interbrand differentiation is graphed in two dimensions. Copyright Roger J. Best, 2012 MBM6 Chapter 6 Competitive Position & Sources of Advantage MBM6 Chapter 6 Discovering Sources of Competitive Advantage In this section we will look at how a competitive advantage requires that (1) the area of relative advantage be meaningful to target customers, and (2) the relative advantage be sustainable (not easily copied by competitors). Copyright Roger J. Best, 2012 Knowing When a Competitor is in Trouble Copyright Roger J. Best, 2012 MBM6 Chapter 6 Competitor Analysis Copyright Roger J. Best, 2012 MBM6 Chapter 6 Marketing Profitability vs. Operating Income MBM6 Chapter 6 The averages for the five airlines are well below the averages and median performances for operating income, marketing return on sales, and marketing return on investment for the 200 Fortune 500 companies. Copyright Roger J. Best, 2012 Competitor Analysis MBM6 Chapter 6 This competitor analysis is broken down into two categories: market based performance and operating performance. Copyright Roger J. Best, 2012 Competitive Benchmarking MBM6 Chapter 6 How could the airlines leverage competitive benchmarking to learn and apply best practices from other industries? Copyright Roger J. Best, 2012 Competitive Position & Sources of Advantage MBM6 Chapter 6 Assessing Industry Attractiveness and Forces In the final section we will briefly look at how we need to engage in a detailed analysis of competitors to understand the degree to which a business has a position of competitive advantage. Copyright Roger J. Best, 2012 Industry Forces and Profit Potential Copyright Roger J. Best, 2012 Marketing MBM6 Performance Tool 6.4 Chapter 6 Price Rivalry and the Prisoner's Dilemma MBM6 Chapter 6 What is the worst potential outcome for the situation presented above? Copyright Roger J. Best, 2012 Competitive Position & Sources of Advantage Chapter 6 Understanding Competitive Advantage, Customer Value, and Profitability Discovering Sources of Competitive Advantage Assessing Industry Attractiveness and Forces Value, rather than cost, must be used in analyzing competitive position. Copyright Roger J. Best, 2012 MBM6 Chapter 6 Competitive Position & Sources of Advantage MBM6 Chapter 6 Understanding Competitive Advantage, Customer Value, and Profitability In this section we will look at how a competitive advantage results in some level of superior customer value based on a customer's preference for performance benefits, the cost of the purchase, and the ease of the purchase. Copyright Roger J. Best, 2012 Competitive Advantage, Customer Value, & Profitability MBM6 Chapter 6 A competitive advantage results in some level of superior customer value based on a customer's preference for performance benefits, the cost of the purchase, and the ease of the purchase. Copyright Roger J. Best, 2012 Competitive Advantage, Customer Value, & Profitability MBM6 Chapter 6 Superior customer value results in superior profits To achieve aboveaverage profits, a business has to develop some source of competitive advantage that provides target customers with positive customer value. Copyright Roger J. Best, 2012 Sources of Advantage & Performance MBM6 Chapter 6 Compare and contrast the three companies above in terms of their sources of competitive advantage and the relative impact on their financial performance Copyright Roger J. Best, 2012 Sources of Competitive Advantage Copyright Roger J. Best, 2012 MBM6 Chapter 6 Cost Advantage and Profitability MBM6 Chapter 6 Each type of cost advantage can be achieved in several ways. A cost advantage relative to competition contributes to higher levels of profitability. Copyright Roger J. Best, 2012 Unit Cost & Experience Curve As volume increases, the cost per unit generally decreases. Scale Effect: larger unit volume allows for production and purchasing economies that lower the perunit manufacturing cost of a product. Scope Effect: a business can lower the average unit cost of all products by adding products that have similar manufacturing processes and that are made of the same materials as its other products. Learning Effects: each unit produced provides additional learning and the opportunity to build the next unit more efficiently. Copyright Roger J. Best, 2012 Marketing MBM6 Performance Tool 6.1 Chapter 6 Scale and Scope Cost Advantages MBM6 Chapter 6 For Honda, the cost of ignition switches is lower than for some other manufacturers because the same ignition switch components are used in cars, motorcycles, lawn mowers, allterrain vehicles, snow blowers, snowmobiles, jet skis, and generators. Copyright Roger J. Best, 2012 Product Scope and Marketing Cost Advantage Procter & Gamble's sales force expense per pound of detergent sold should decrease as it adds more brands of detergent to its product line. MBM6 Chapter 6 Each time a soup is advertised, the ad reinforces topofthemind awareness of Campbell's Soup brand and other soups in the product line. Copyright Roger J. Best, 2012 Product Differentiation Advantage Marketing MBM6 Performance Tool 6.2 Chapter 6 A product's durability, reliability, performance, features, appearance, and conformance to a specific application each have potential to be a differentiation advantage. Copyright Roger J. Best, 2012 Service Differentiation Advantage MBM6 Chapter 6 By tracking its service performance each day, FedEx is able to create greater overall customer satisfaction with fewer errors, lower costs, and greater profits for shareholders. Copyright Roger J. Best, 2012 Brand Advantage & Profitability MBM6 Chapter 6 The stature of brand names adds a dimension of appeal that is an important customer benefit for many less pricesensitive, more imageconscious consumers. Copyright Roger J. Best, 2012 Market Share Advantage & Profits Marketing MBM6 Performance Tool 6.3 Chapter 6 The more dominant the share leader is with regard to market share compared with its top three competitors, the greater are the share leader's profits. Copyright Roger J. Best, 2012 Product Line Advantage Marketing MBM6 Performance Tool 6.3 Chapter 6 Microbrew Segment A broad product line gives a business more prospective customers and the potential to sell more to each customertranslating into more sales and higher levels of profitability. Copyright Roger J. Best, 2012 Import Position LowCal, LowCarb Channel Advantage Marketing MBM6 Performance Tool 6.3 Chapter 6 A business that has exclusive access to distributors can control channels in a given market and, to some degree, can control market access. Copyright Roger J. Best, 2012 Competitive Strategy Based on Knowledge Advantage MBM6 Chapter 6 A business with excellent customer knowledge but limited competitor knowledge will likely overreact to customer demands. Copyright Roger J. Best, 2012 Customer Perceptions of Interbrand Differentiation A business can use a variety of multidimensional scaling programs to create a perceptual map, such as the one shown above. In this example, interbrand differentiation is graphed in two dimensions. Copyright Roger J. Best, 2012 MBM6 Chapter 6 Competitive Position & Sources of Advantage MBM6 Chapter 6 Discovering Sources of Competitive Advantage In this section we will look at how a competitive advantage requires that (1) the area of relative advantage be meaningful to target customers, and (2) the relative advantage be sustainable (not easily copied by competitors). Copyright Roger J. Best, 2012 Knowing When a Competitor is in Trouble Copyright Roger J. Best, 2012 MBM6 Chapter 6 Competitor Analysis Copyright Roger J. Best, 2012 MBM6 Chapter 6 Marketing Profitability vs. Operating Income MBM6 Chapter 6 The averages for the five airlines are well below the averages and median performances for operating income, marketing return on sales, and marketing return on investment for the 200 Fortune 500 companies. Copyright Roger J. Best, 2012 Competitor Analysis MBM6 Chapter 6 This competitor analysis is broken down into two categories: market based performance and operating performance. Copyright Roger J. Best, 2012 Competitive Benchmarking MBM6 Chapter 6 How could the airlines leverage competitive benchmarking to learn and apply best practices from other industries? Copyright Roger J. Best, 2012 Competitive Position & Sources of Advantage MBM6 Chapter 6 Assessing Industry Attractiveness and Forces In the final section we will briefly look at how we need to engage in a detailed analysis of competitors to understand the degree to which a business has a position of competitive advantage. Copyright Roger J. Best, 2012 Industry Forces and Profit Potential Copyright Roger J. Best, 2012 Marketing MBM6 Performance Tool 6.4 Chapter 6 Price Rivalry and the Prisoner's Dilemma MBM6 Chapter 6 What is the worst potential outcome for the situation presented above? Copyright Roger J. Best, 2012