Identify and describe the four building blocks of competitive advantage. Provide an example of each using a real company situation.

Question

What will be an ideal response?

Answer 1

The four building blocks of competitive advantage are superior efficiency, quality, innovation, and customer responsiveness. These building blocks allow a company to differentiate its product offering to provide more utility to customers and/or lower its cost structure.?The simplest measure of efficiency is the quantity of inputs required to produce a given output; that is, efficiency = outputs/inputs. The more efficient a company is, the fewer inputs it requires to produce a particular output, and the lower its’ costs are. One common measure of efficiency is employee productivity. Employee productivity refers to the output produced per employee. Employee productivity helps a company attain a competitive advantage through a lower cost structure. Another important measure of efficiency is capital productivity. Capital productivity refers to the output produced by a dollar of capital invested in the business. Firms that use their capital very efficiently and don’t waste it on unproductive assets or activities will have higher capital productivity.?A product is said to have superior quality when customers perceive that its attributes provide them with higher utility than the attributes of products sold by rivals. When customers evaluate the quality of a product, they commonly measure it against two kinds of attributes: quality as excellence and those related to quality as reliability. From a quality-as-excellence perspective, the important attributes are a product’s design and styling, its aesthetic appeal, its features and functions, the level of service associated with delivery of the product, and so on. When considering quality as reliability, a product can be said to be reliable when it consistently performs the function it was designed for, performs it well, and rarely, if ever, breaks down. The impact of high product quality on competitive advantage is twofold. First, providing high-quality products increases the value those products provide to customers, which gives the company the option of charging a higher price for the products. Second, greater efficiency and lower unit costs associated with reliable products of high quality impact competitive advantage. When products are reliable, less employee time is wasted in making defective products, or providing substandard services, and less time has to be spent fixing mistakes—which means 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.?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 and delivering products to customers. Product innovation generates value by creating new products, or enhanced versions of existing products, that customers perceive as having more value, thus increasing the company’s pricing options. 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.?To achieve superior responsiveness to customers, 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 competitive advantage based on differentiation. Improving the quality of a company’s 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 responsiveness to customers is the need to customize goods and services to the unique demands of individuals or groups. An aspect of responsiveness to customers 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. Other sources of enhanced responsiveness to customers are superior design, superior service, and superior after-sales service and support. All of these factors enhance responsiveness to customers and allow a company to differentiate itself from its less responsive competitors. In turn, differentiation enables a company to build brand loyalty and charge a premium price for its products.?Student examples will vary.