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Understanding Strategy Maps

March 1st, 2010 by admin No comments »

http://www.qfinance.com/business-strategy-checklists/understanding-strategy-maps
qfinance.com

Checklist

This checklist provides a snapshot of the development, objectives, and applications of strategy maps.

Definition

A strategy map, devised by Professors Robert S. Kaplan and David P. Norton, is a business management tool aimed at forging a strong link between a company’s long-term strategies and its shorter-term operational activities. The concept of strategy mapping was originally developed by Kaplan and Norton in the “balanced scorecard,” a means of assessing how successful a company is in terms of delivering on stated goals. While the basic notion of the balanced scorecard is “what you can’t measure, you can’t manage,” further work aimed to help companies reassess their strategic goals. Kaplan and Norton subsequently shifted their focus to the principle of “what you can’t measure, you can’t describe” as a means to better utilize companies’ intangible assets to help them achieve their objectives. The principle of strategic mapping of long-term strategy with shorter-term operational activities, previously merely one element of the balanced scorecard, was elevated to become a central strategy management tool.

Strategy maps aim to illustrate how a company links its macro strategy objectives with its key day-to-day operational elements from the four different perspectives: financial, customer, internal processes, and learning and growth. The financial element focuses primarily on enhancing the cost structure and utilizing assets towards greater productivity, while the customer element encourages companies to understand what sets them apart from their competitors. Though all elements of the strategy framework aim to improve areas such as attitudes to quality, service, partnerships, and company branding, the internal processes element aims to develop better product and service characteristics. Finally, the learning and growth element aims for companies to consider the skills and technologies that are needed to support the company’s strategy. In all cases, the strategic mapping process seeks to engrain the appreciation of cause and effect. What can be improved on a “day-to-day level” is significant as, cumulatively, improvements can help improve a company’s daily operational activities, helping it to achieve its longer-term strategic objectives. To better demonstrate the connections, the strategy map features a series of arrows linking objectives with individual operational activities.

Advantages

* Strategy mapping demonstrates to employees how seemingly minute improvements to operational activities can, cumulatively, contribute towards major efficiency and strategic objectives.
* Strategy mapping provides a clear, visual demonstration as to how short-term operational and medium- to long-term strategic objectives are closely aligned, helping to ensure greater “buy-in” from employees at all levels.
* Strategy mapping helps to demonstrate how a company’s intangible assets can improve stockholder value.
* Strategy mapping provides a potential solution for managers unable to identify why certain strategies are not delivering tangible performance improvements.

Disadvantages

* Strategy mapping requires “buy in” from individuals across all levels of the organization. If management fails to convince the workforce of the potential benefits of a successful medium- to long-term outcome, employees may feel disenfranchised from the potential benefits of improved corporate performance.
* Though strategic in its macro focus, strategy mapping is unlikely to deliver a single, massive leap forward in any single aspect. Rather, the considerable ultimate benefits of strategic mapping are often comprised of many, seemingly minor, single aspects.

Action Checklist

* Ensure that everyone within the organization appreciates that strategy mapping is a technique which aims to align individuals’ actions with the strategic objective.
* As improvements are likely to be incremental, ensure that the benefits are recognized and built on through an emphasis on the feedback/learning input.

Dos and Don’ts
Do

* Aim to align personal performance improvement goals with those of the company.
* Base remuneration on goals related to improvements in the performance of the overall business. Setting individual performance objectives with related incentive payouts could be counterproductive if individuals shift their focus from delivering collective benefits to the pursuit of personal objectives.

Don’t

* Don’t expect giant and immediate leaps forward in terms of operational efficiency, finances or customer experiences. Strategic mapping is more likely to generate numerous, gradual, incremental improvements across the organization.
* Don’t set remuneration based on individual targets. Agree only on personal performance goals when you are confident that achieving them will contribute to overall performance improvement across the business.

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Use Strategy Maps with the Balanced Scorecard

March 1st, 2010 by admin No comments »

http://strategic-business-planning.suite101.com/article.cfm/use_strategy_maps_with_the_balanced_scorecard
suite101.com
Roger Lever

A balanced scorecard offered an approach for a business to translate strategy into operational terms, to align the organisation to the strategy and make it everyone’s day job. Making strategy a continual process allowed the leadership to focus on strategy execution. However, describing the strategy is not always easy and strategy maps provide a tool to describe and visualise the strategy making it easier to develop the balanced scorecard.
Development of Strategy Maps

Kaplan and Norton built on their Balanced Scorecard (BSC) work in 2004 with Strategy Maps: Converting Intangible Assets into Tangible Outcomes, noting that “Various studies indicated that 70 percent to 90 percent of organizations failed to realise success from their strategies.” Whilst working with over 300 organisations the importance of clear and agreed objectives and the need to link them in cause and effect relationships to build alignment to those objectives was identified. This insight led to the development of strategy maps as an additional tool for the balanced scorecard — describing strategy with explicit cause and effect relationships among the objectives in the four BSC perspectives.
Strategy Maps Describe How the Organisation Creates Value

BSC objectives within the learning and growth perspective, internal perspective, customer perspective and financial perspective are linked together through cause and effect relationships. Consequently strategy maps visually represent how specific objectives in learning and growth link through to individual internal objectives and from there to the customer objectives and finally to the financial objectives. This network of relationships needs to adhere to some principles to ensure effective strategies and objectives are developed:

* Strategy balances contradictory forces, balancing long term with short term objectives, for example long term investment versus short term cost control
* Strategy is based on generating [unique] customer value. Identifying target customers and the value proposition to convert them to loyal customers
* Value is created through internal business processes [operations, customer management, innovation, regulatory and social] and the execution of those processes leading to tangible effects for customer and financial objectives

Align Intangible Assets to Strategy

Kaplan and Norton identify three targets for aligning intangible assets to strategy:

Use Strategy Maps with Balanced Scorecard

Strategy maps are an important tool to help the strategy focused organisation to develop a balanced scorecard. Linking the objectives of the BSC four perspectives both describes strategy and shows, through the cause and effect relationship, how internal objectives affect both the customer and financial objectives. This approach allows for an effective visualisation and communication of business strategy and therefore strategic execution. Find out more at the Balanced Scorecard Institute.

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Balance Scorecard Strategy Map

March 1st, 2010 by admin No comments »

http://articles.smashits.com/articles/business/21944/balance-scorecard-strategy-map.html
smashits.com
Ramakrishnan M

With the help of balanced scorecard strategy map, it is very easy to design the organization goals and build business strategies. Balance scorecard and strategy map are interrelated with each other. Strategies map is the foundation to design business strategies or perspective. Using strategy map, you can design the strategies and using balanced scorecards you can build business models.

Strategy Mapping

Strategy mapping deploy the concept of balancescorecard developed by Kaplan and Norton. Balanced scorecards is a business strategic approach which covers four important business perspectives (financial perspective, non-financial perspective, internal process, value proposition. The advantage of strategy maps understands the target market, improving the efficiency of strategic planning.

Business Strategic Mapping Balance Scorecard

Business Mapping helps organization to achieve results through business process improvement. Strategy map is the key to improve the business performance. First determine your strategy then map it. The balance scorecards strategy map is an incomparable tool for communicating strategy. The balanced scorecard strategy map will show how an organization its objectives into results. One should learn to how to design, build strategy map and balanced scorecard to accelerate your organization performance.

Scorecard Strategy Map

The expanded Scorecard Strategy Map concept, paired with the Balanced Scorecard, offers a new way to manage. Balanced scorecard commences with taking companies perspective and converting into strategy map. The strategy map gives you a graphical representation of the strategies. A strategy map also provides which aspects of their strategy are succeeding and where they are falling short.

The main area the strategy mapper will concentrate on main objectives, cause and effect relationship, strategic initiatives and finally metrics and measurable to assess your business success. Balanced Scorecards are part of the measurement system the factor of a management system that is used to focus, align, and balance the organization’s goals and objectives to accomplish long-term strategic objectives.

Business Strategies should create values to the shareholders. The strategy mapping is a complete whole-systems design tool. The strategy map provides clarity as to roles and responsibilities across the organization that are required to bridge the gap between strategy formulation and getting results at the execution level.

Strategic Value Proposition

The strategy map commence with a strategic goal, is followed with a strategic value proposition and ends with a cause and effect systems map that chart what needs to be done to achieve results. Designing strategy map and creating balanced scorecard performance metrics that tightly link operational targets to strategic goals.

About the Author : Ramki is with Axsellit Technologies (http://www.axsellit.com) Axsellit Software delivers professional, benefit-enriched business solutions . Axsellit Technologies provides Strategic Consulting and Balanced Scorecard Software. http://www.axsellit.com/strategic-planning.html, http://www.axsellit.com/balancedscorecard.html Source: www.isnare.com

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Posted in Economy

Tags: strategic maps

Average Unit Cost Method–Allocating Joint Product Cost:

March 1st, 2010 by admin No comments »

http://www.accountingformanagement.com/average_unit_cost_method_allocating_joint_cost.htm
accountingformanagement.com

Average unit cost method attempts to apportion total joint production cost to the various products on the basis of a predetermined standard or index of production. An average unit cost is obtained by dividing the total number of units produced into the total joint production cost. As long as all units produced are measured in terms of the same unit and do not differ greatly, the method can be used without too much misgiving. When the units produced are not measured in like terms, the method cannot be applied.
Example:

Using the figures at the market value method page, the procedure can be illustrated as follows:

Total joint production cost / Total number of units produced

$120,000 / 60,000

=$2 per unit

Product    Units    Joint production cost Allocated
A               20,000    $40,000
B               15,000    $30,000
C               10,000    $20,000
D               15,000    $30,000
———-
$120,0000
=======

Companies using this method argue that all products turned out by the same process should receive a proportionate share of the total joint production cost based on the number of units produced.

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Activity Based Costing: A Competitive Costing Method

March 1st, 2010 by admin No comments »

http://www.articlesbase.com/strategic-planning-articles/activity-based-costing-a-competitive-costing-method-1388638.html
articlesbase.com
Kevin A Davis Jr

Activity Based Costing is a cost method which helps a company establish a competitive advantage. This competitive advantage is obtained by the decisions and actions taken by management after interpreting the data which is created by ABC. The data is used by organizations primarily to achieve accurate price setting, explore outsourcing options, and assess or plan strategic decisions on process improvements.

The ABC method attempts to link the cost which the business incurs to its products or services provided to its customers. Using this method an organization’s overhead is exponentially reduced due to the fact that most of its current indirect costs will change to direct costs as they are being assigned to a specific product or service. The fact that costs are being assigned to the products they contribute to allows for proper price setting which will provide an accurate level for break even price per product or service. By knowing the break even price an organization can stay competitive by setting a certain price level while still achieving a specific profit margin per product or service. This price setting ability can also be used to determine the future of a newly found failing product. For example if a specific product’s contribution margin is too low or even negative management could use the ABC data to decide on possibly scrapping the production of the product in order to stay competitive.

1. Outsourcing is a viable solution to reduce high production costs and with the use of ABC some organizations are noticing that in-house production is too much of a cost burden and in some instances a giant obstacle towards remaining competitive.

As previously stated, the lifetime of an organization depends upon its ability to stay competitive in the market. With ABC tracking the production costs of various products and services a manager has the ability to examine the current production practices. If an internal process is found to be non-value added it could be possible for the organization to eliminate the process entirely which in effect would reduce its overall costs. ABC also allows for management to experiment in improving the current practices of production by tracking the change in costs associated with adding new tweaks to the process or even implementing an entirely new practice. This ability to view which changes reduce costs and increase production helps management to streamline an organization’s production process. Efficiency is critical in remaining competitive, and with ABC allowing for process perfection costs are able to be reduced while production stays constant or even increases.

The method of Activity Based Costing has allowed for organizations to become and remain competitive in their markets. Its known that markets are constantly evolving and expanding and that these markets are no longer isolated or bounded by geography. U.S. organizations are no longer subject to only home grown competitors, but global competition as well. With this in mind every business will be looking for some edge to get a leg up on the competition, and with the abilities that ABC offers more and more will begin to implement this costing method.

One other outcome from ABC is the possibility of outsourcing. With all costs being tracked to the production of a specific product or service it is now simple to compare the costs of internal production to external production which aids management in deciding upon whether to outsource a certain sector of its production. For example if an organization’s main product is watches, it is now easy to compare the costs of producing its own watch band versus purchasing an externally produced band. If the externally produced component is cheaper the company might purchase rather then produce, or change production methods such as produce in a country with lower wage regulations. Organizations today are under extreme pressure to remain competitive. With companies failing left and right the urge to reduce costs and stay afloat is greater then ever before. Outsourcing is a viable solution to reduce high production costs and with the use of ABC some organizations are noticing that in-house production is too much of a cost burden and in some instances a giant obstacle towards remaining competitive.

As previously stated, the lifetime of an organization depends upon its ability to stay competitive in the market. With ABC tracking the production costs of various products and services a manager has the ability to examine the current production practices. If an internal process is found to be non-value added it could be possible for the organization to eliminate the process entirely which in effect would reduce its overall costs. ABC also allows for management to experiment in improving the current practices of production by tracking the change in costs associated with adding new tweaks to the process or even implementing an entirely new practice. This ability to view which changes reduce costs and increase production helps management to streamline an organization’s production process. Efficiency is critical in remaining competitive, and with ABC allowing for process perfection costs are able to be reduced while production stays constant or even increases.

The method of Activity Based Costing has allowed for organizations to become and remain competitive in their markets. Its known that markets are constantly evolving and expanding and that these markets are no longer isolated or bounded by geography. U.S. organizations are no longer subject to only home grown competitors, but global competition as well. With this in mind every business will be looking for some edge to get a leg up on the competition, and with the abilities that ABC offers more and more will begin to implement this costing method.

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Cost Method of Accounting

March 1st, 2010 by admin No comments »

http://www.buzzle.com/articles/cost-method-of-accounting.html
buzzle.com
By Sayali Bedekar Patil

According to the FASB (Financial Accounting Standards Board), the cost method of accounting is a legitimate accounting method to account for investments. If the investment is such that there is no substantial influence of the investment holder over the company invested in, or if there is no readily determinable fair value of the investment, the cost method of accounting for investments is usually the one used. Under this method, the investment is recorded in the balance sheet at historical cost. Here is a brief look into what the cost method of accounting for investments actually entails.

Cost Method of Accounting for Investments

The points below highlight the cost method of accounting for investments specifically and not the general method of cost accounting that are used in the internal firm product or service costing (accounting).

* The original cost of the investment, that is the historical cost which was paid for the investment, when it was first bought, is the one that is recorded in the balance sheet.
* Once the balance sheet entry has been made, no further adjustments and changes are required to be made, unless the fair market value of the investment drops to such an extent that there is doubt over any kind of possible recovery. Under such a circumstance, a permanent write off of the investment is made.
* If any dividends are declared on the investment in question, the dividends are recoredd like normal dividends and the usual accounting entries are passed for the same.
* Any undistributed earnings on the investments are not recorded in the owner’s balance sheet and hence have no effect on the final balance sheet, per se.
* The consolidation process under the cost method of accounting requires that both, the investment account and the dividend account, be eliminated completely when the parent and the subsidiary consolidate their accounts. You can use accounting software to aid with the consolidation process.
* It is important to note here that no matter which method of accounting is used (cost or equity), the consolidated financial statements will be identical for both.

If the parent company uses the cost method of accounting for investments, the consolidation worksheet entries go in the following sequence. The consolidation starts with eliminating the book value of net assets at acquisition from the parent’s balance sheet. The second step is to record all excess costs incurred in or during the consolidation phase. The difference between the effect of prior periods on retained earnings and the current effects on the income statement and balance sheet are then amortized. A series of elimination entries then follow, namely, dividend income, accumulated depreciation at acquisition and other inter-company transactions. Know more on basic accounting concepts and principles.

Equity Method vs Cost Method of Accounting for Investments

Below are a few differences between the equity accounting method for investments and the cost accounting method for investments.

* The equity method of accounting is used when there is a significant influence or control, with the investment being between 20 to 50 percent of the total stock of the firm invested in. The cost method, as mentioned earlier, is preferably used for lesser investment percentages.
* The cost method of accounting has an advantage over equity method of accounting when there is no fair, easily determinable value for the investment.
* It is easier to calculate the return on investment and do other financial analysis of figures when the equity accounting method is used. As the cost method uses working paper and not the general ledger, all figures must be tracked there first.
* The cost method of accounting includes less paperwork than the equity method. On the other hand, being more comprehensive, the financial statements done using the equity method are more useful to the internal management for facilitating analysis.
* The best scoring point of the equity method over the cost method of accounting is that it has an easy self-checking feature, i.e., the consolidated financial statements should tally with certain parent figures and when they don’t, the problem can be easily identified and corrected. The cost method of accounting has no such self-check feature.

This was a very brief account of the ‘cost method of accounting for investments’. Hope it helps you in understanding the method a little better. If you had any trouble understanding the accounting terminology, you can look it up on the glossary of accounting terms and definitions.

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HOLT – Improving Investor Insights

March 1st, 2010 by admin No comments »

https://www.credit-suisse.com/investment_banking/equities/en/holt.jsp
credit-suisse.com

Credit Suisse HOLT has amassed a proprietary database on over 20,000 companies in more than 64 countries. We leverage our database through a suite of technology-driven tools that incorporate advanced accounting, financing and valuation principles. Our products and services help clients gain unique insights into corporate strategy, performance, and valuation, enhancing investment decisions across the capital structure.

HOLT offers clients unique insights into corporate performance and valuation, emphasizing a company’s cash generating ability and overall potential for value creation. HOLT employs a consistent and rigorous approach to investment analysis, providing a platform that allows investment managers to focus on their core competency: investment decision-making.
HOLT delivers the following benefits to clients:

HOLT provides investors with a unique and consistent approach to benchmarking corporate performance across time and countries by measuring economic value creation in terms of return on investment based on cash flow. This proprietary methodology identified by the trademark CFROI®.

In addition to a feature-rich and customizable software platform, clients have immediate access to a network of investment professionals in the Equity, Fixed Income, Investment Banking divisions at Credit Suisse. Clients gain a unique advantage from direct consultations with investment professionals and from the efficient and objective analysis on companies, portfolios, industries, and markets globally.

HOLT enables clients to focus on decision-making, rather than on data collection; our database and analytical tools allow clients to efficiently gain insights into corporate performance and valuation for more than 20,000 companies in over 64 countries. HOLT remains committed to delivering valuable insights and enhancing the investment decision-making process. Our robust data, innovative platform, and superior service allow our team to generate value for our clients. HOLT continues to be a global market leader for strategic insights into corporate performance and valuation, across fixed income and equity markets globally.

Disclaimer:
CFROI, CFROE, HOLT, HOLTfolio, HOLTSelect, HS60, HS40, ValueSearch, AggreGator, Signal Flag and ‘Powered by HOLT’ are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.

HOLT is a corporate performance and valuation advisory service of Credit Suisse.

This material was produced by HOLT for distribution to market professionals and institutional investor customers. The information, tools, and material presented in this document are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. All market data and other information are not warranted. This material may not be reproduced either in whole, or in part, without the prior written permission of Credit Suisse HOLT.

Credit Suisse Securities (Europe) Limited is authorised and regulated by the Financial Services Authority. The promotion of investments and investment services in the United Kingdom is restricted by Section 21 of the Financial Services and Markets Act 2000 (the ‘FSMA’). The services offered are directed at persons (’Relevant Persons’) who are (a) persons having professional experience relating to investments falling within Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (the ‘Financial Promotion Order’) or (b) high net worth entities and other persons falling within Article 49 of the Financial Promotion Order or (c) other persons to whom it may be communicated without contravention of Section 21 of the FSMA. Please click here for an important disclaimer relating to the HS Indices.

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Competitive Advantage – Michael Porter

March 1st, 2010 by admin No comments »

http://www.sayeconomy.com/competitive-advantage-michael-porter/
sayeconomy.com
by Matt

According to the Competitive Advantage model of Porter, a competitive strategy takes offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior return on investment. According to Michael Porter, the basis of above-average performance within an industry is sustainable competitive advantage.

2 basic types of Competitive Advantage

1. Cost Leadership (low cost)
2. Differentiation

Both can be more broadly approached or narrow, which results in the third viable competitive strategy:

3. Focus

Competitive Advantage type 1: Cost Leadership

* Achieving Cost Leadership means that a firm sets out to become the low cost producer in its industry.
* A cost leader must achieve parity or at least proximity in the bases of differentiation, even though it relies on cost leadership for its competitive advantage.
* If more than one company try to achieve Cost Leadership, this is usually disastrous.
* Often achieved by economies of scale.

Competitive Advantage type 2: Differentiation

* Achieving of Differentiation means that a firm seeks to be unique in its industry along some dimensions that are widely appreciated by buyers.
* A differentiator can not ignore its cost position. In all areas that do not affect its differentiation it should try to decrease cost; in the differentiation area the costs should at least be lower than the price premium it receives from the buyers.
* Areas of differentiation can be: product, distribution, sales, marketing, service, image, etc.

Competitive Advantage type 3: Focus

* Achieving Focus means that a firm sets out to be best in a segment or group of segments.
* 2 variants: Cost Focus and Differentiation Focus.

Stuck in the middle

* This is usually a recipe for below-average profitability compared to the industry.
* Still, attractive profits are possible if and as long as the industry as a whole is very attractive.
* Manifestation of lack of choice.
* Especially dangerous for Focusers that have been successful, and then start neglecting their focus. They must seek other Focus niches. Rather then compromise their focus strategy.

Written by: Tony Jacowski

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Competitive Advantage (Porter) explained

March 1st, 2010 by admin No comments »

http://www.valuebasedmanagement.net/methods_porter_competitive_advantage.html
valuebasedmanagement.net

The Competitive Advantage model of Porter learns that competitive strategy is about taking offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior return on investment. According to Michael Porter, the basis of above-average performance within an industry is sustainable competitive advantage. There are 2 basics types of CA: Michael Porter

- cost leadership (low cost), and

- differentiation.

Both can be more broadly approached or narrow, which results in the third viable competitive strategy: focus.

Approach 1 to Competitive advantage: Cost leadership.
• = a firm sets out to become the low cost producer in its industry.
• Note: a cost leader must achieve parity or at least proximity in the bases of differentiation, even though it relies on cost leadership for it’s CA.
• Note: if more than one company aim for cost leadership, usually this is disastrous.
• Often achieved by economies of scale
Competitive advantage model 2: Differentiation.
• = a firm seeks to be unique in it’s industry along some dimensions that are widely valued by buyers.
• Note: a differentiator cannot ignore it’s cost position. In all areas that do not affect it’s differentiation it should try to decrease cost; in the differentiation area the costs should at least be lower than the price premium it receives from the buyers.
• Area’s of differentiation can be: product, distribution, sales, marketing, service, image, etc.
Competitive advantage 3: Focus.
• = a firm sets out to be best in a segment or group of segments.
• 2 variants: cost focus and differentiation focus.

Stuck in the middle:
• Usually a recipe for below-average profitability compared to the industry
• Still attractive profits are possible if and as long as the industry as a whole is very attractive
• Manifestation of lack of choice
• Especially risky for focusers that have been successful and then to loose their focus. They must seek for other niches rather then compromise their focus strategy.

From a Value Based Management point of view, the CA approach to strategy helps to build a relative competitive advantage, together with Porter’s Value Chain framework. Taken together, they can be seen as one of two dimensions in maximizing corporate value creation. The other value creation dimension is the Market/Industry Attractiveness for which another model from Porter is often used: the Competitive Forces model.

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Competitive Advantage

March 1st, 2010 by admin No comments »

http://www.quickmba.com/strategy/competitive-advantage/
quickmba.com

When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage.

Michael Porter identified two basic types of competitive advantage:

* cost advantage
* differentiation advantage

A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.

Cost and differentiation advantages are known as positional advantages since they describe the firm’s position in the industry as a leader in either cost or differentiation.

A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. The following diagram combines the resource-based and positioning views to illustrate the concept of competitive advantage:

A Model of Competitive Advantage

Resources
l
v
Distinctive —> Cost Advantage or —> Value Creation
Competencies Differentiation Advantage
^
l
Capabilities

Resources and Capabilities

According to the resource-based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear.

Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. The following are some examples of such resources:

* Patents and trademarks
* Proprietary know-how
* Installed customer base
* Reputation of the firm
* Brand equity

Capabilities refer to the firm’s ability to utilize its resources effectively. An example of a capability is the ability to bring a product to market faster than competitors. Such capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult for competitors to replicate.

The firm’s resources and capabilities together form its distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage.

Cost Advantage and Differentiation Advantage

Competitive advantage is created by using resources and capabilities to achieve either a lower cost structure or a differentiated product. A firm positions itself in its industry through its choice of low cost or differentiation. This decision is a central component of the firm’s competitive strategy.

Another important decision is how broad or narrow a market segment to target. Porter formed a matrix using cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic strategies that the firm can pursue to create and sustain a competitive advantage.

Value Creation

The firm creates value by performing a series of activities that Porter identified as the value chain. In addition to the firm’s own value-creating activities, the firm operates in a value system of vertical activities including those of upstream suppliers and downstream channel members.

To achieve a competitive advantage, the firm must perform one or more value creating activities in a way that creates more overall value than do competitors. Superior value is created through lower costs or superior benefits to the consumer (differentiation).