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 products 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 companys 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 companys
product (and thus the utility they attribute to the product). Insofar as these help to create
a favorable impression of the companys 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.