Instructors’ Manual to Accompany Contemporary Strategy Analysis

Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 7. THE NATURE AND SOURCES OF COMPETITIVE ADVANTAGE

Introduction

Chapter 7 integrates and extends the analysis of competitive advantage that was introduced in the Chapter 7 which discussed the external sources of competitive advantage—namely key success factors at the industry level—and Chapter 5 which discussed the internal sources of competitive advantage—namely the resources and capabilities which provide the foundation for superior performance.  Chapter 7 outlines the conditions under which competitive advantage arises and is eroded by competition, then goes on to examine analyze the two main dimensions of competitive advantage—cost advantage and differentiation advantage—outlining frameworks for identifying the potential for cost and differentiation advantage.

Class Outline

Given that I will have taught the principal inputs into the analysis of competitive advantage when discussion industry analysis and the analysis of resources and capabilities, this topic requires little in the way of conceptual exposition. Hence my focus for this topic is upon case discussion. If the number of sessions in the strategy course allow it, I teach a case which addresses cost advantage and a case which addresses differentiation. For shorter courses, either a choose a case on cost advantage or a case on differentiation advantage, or a case which addresses both.

 [1] Cost Advantage

Depending on the length of the course, I take one of three approaches to the analysis of cost advantage:

• I may devote an entire class session to cost advantage in which case I use one of the cases below;
• If time does not permit, I use half of a class session to expound the framework for cost analysis using examples  to apply the concepts;
• Alternatively, I sometimes cover cost and differentiation advantage as a single topic. For example the Harley-Davidson case is primarily concerned with the analysis of differentiation advantage, however, the case can also be used to explore the sources and extent of Harley’s cost disadvantage (especially relative to Honda which produces twenty times as many bikes annually) and to suggest ways of minimizing Harley’s cost disadvantage.

The two main components of the framework for cost analysis outlined in Chapter 7 are:

1. The factors which cause one firm’s unit costs to differ from those of its competitors (“cost drivers”).  In relation to each of the cost drivers, I ask the students for an example of a firm that derives a cost advantage form this particular driver. For example, in relation to scale economies, Toyota (8.5 million cars per year) gains considerable advantages in purchasing, new product development, manufacturing, and marketing over BMW (1.5 million cars per year). In relation to input costs (especially labor costs), Tata has as has a considerable advantage over VW—simply because of location.
2. The value chain. Again, I focus on an example. For example, in relation to commercial aircraft production, I ask the class to outline the main stages of a value chain, then identify at which stages the major opportunities for obtaining cost advantage occur (similar to the case of automobile manufacture in Figure 9.4).

 Cases:

AirAsia: The World’s Lowest Cost Airline (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

The low cost airlines offer an excellent opportunity for the analysis of cost advantage. Cases on Southwest and Ryanair are widely used on strategy courses. AirAsia offers an interesting alternative to these two better-known airlines—especially given that Malaysian-based AirAsia has the distinction of having a lowest cost per passenger per kilometer flown of any of the world’s larger airlines. Through comparisons of costs with its larger rival, Malaysian Airlines, the case allows exploration of the sources of AirAsia’s cost efficiency. It also examines AirAsia’s expansion into long-haul flights—which risks compromising the simplicity and consistency of AirAsia’s business model.