The Logic and Tools of Competitive Strategy: A Summary of Creating Competitive Advantage by Pankaj Ghemawat and Jan W. Rivkin
Creating Competitive Advantage by Pankaj Ghemawat: A Summary and Review
If you are looking for a book that can help you understand how to create and sustain a competitive advantage in your industry, you might want to check out Creating Competitive Advantage by Pankaj Ghemawat and Jan W. Rivkin. This book is a concise and practical guide that explains the logic and tools of competitive strategy, using examples from various industries and countries. In this article, we will summarize and review the main ideas and concepts from the book, and show you how you can apply them to your own business.
Creating Competitive Advantage Pankaj Ghemawat Pdf
What is competitive advantage and why is it important?
Competitive advantage is the ability of a firm to earn superior, long-run financial returns within its industry. A firm that has a competitive advantage over its rivals can create more value for its stakeholders, such as customers, suppliers, employees, shareholders, and society. Value is defined as the difference between what customers are willing to pay for a product or service and what it costs to produce and deliver it.
Creating competitive advantage is important because it allows a firm to achieve higher profitability, growth, and market share. It also enables a firm to withstand competitive pressures, such as price wars, new entrants, substitute products, or changing customer preferences. Moreover, creating competitive advantage can help a firm build a strong reputation and brand image, which can enhance customer loyalty and trust.
How to create competitive advantage: The ADDING value framework
The book proposes a simple but powerful framework for creating competitive advantage, called the ADDING value scorecard. The framework consists of six levers that a firm can use to increase its added value relative to its rivals. These levers are:
A: Adding volume
This lever involves increasing the demand for a firm's products or services by expanding into new markets, segments, geographies, or channels. By adding volume, a firm can benefit from economies of scale, scope, or learning, which can lower its unit costs or improve its quality. For example, Coca-Cola has added volume by entering into more than 200 countries and offering a variety of beverages for different tastes and occasions.
D: Decreasing costs
This lever involves reducing the costs of producing or delivering a product or service by improving efficiency, productivity, or innovation. By decreasing costs, a firm can either lower its prices to attract more customers or increase its margins to generate more profits. For example, Walmart has decreased costs by implementing advanced inventory management systems, optimizing its logistics network, and leveraging its bargaining power with suppliers.
D: Differentiating products or services
This lever involves making a product or service more attractive or distinctive than those of competitors by offering superior features, benefits, quality, design, or customer service. By differentiating products or services, a firm can either charge higher prices to capture more value or increase its market share by appealing to more customers. For example, Apple has differentiated its products by combining innovative technology, elegant design, and user-friendly software.
I: Improving industry attractiveness
This lever involves influencing the structure or dynamics of the industry in which a firm operates by shaping the rules of the game, creating or joining alliances, or changing the competitive landscape. By improving industry attractiveness, a firm can either increase the overall value created by the industry or capture a larger share of that value. For example, Microsoft has improved industry attractiveness by establishing industry standards, forming strategic partnerships, and acquiring or investing in potential rivals.
N: Normalizing risk
This lever involves managing or mitigating the uncertainty or volatility that affects a firm's performance by diversifying its portfolio, hedging its exposures, or insuring against losses. By normalizing risk, a firm can either reduce its cost of capital or increase its expected returns. For example, Berkshire Hathaway has normalized risk by investing in a wide range of businesses, industries, and securities, and by using derivatives and reinsurance to hedge its risks.
G: Generating knowledge
This lever involves creating or acquiring new information or capabilities that can enhance a firm's competitiveness by improving its products, processes, or strategies. By generating knowledge, a firm can either increase its added value by offering better solutions to customers or protect its added value by creating barriers to imitation or substitution. For example, Google has generated knowledge by developing cutting-edge algorithms, collecting massive amounts of data, and acquiring talented people and companies.
How to apply the ADDING value framework to your business
The book provides a step-by-step guide on how to use the ADDING value framework to analyze your current situation and design your competitive strategy. Here are the main steps:
Analyze your current situation and identify your sources of added value
The first step is to understand your current position and performance in your industry. You need to identify who are your customers, what are their needs and preferences, how much are they willing to pay for your products or services, and what are the alternatives available to them. You also need to identify who are your competitors, what are their strengths and weaknesses, how do they create and capture value, and what are their strategies and goals. Finally, you need to identify who are your suppliers, complementors, regulators, and other stakeholders, and how they affect your industry attractiveness and profitability.
Based on this analysis, you need to estimate your added value relative to your rivals. You can use various tools and techniques to do this, such as value chain analysis, benchmarking, customer surveys, financial ratios, or accounting methods. You should also try to disaggregate your added value into its components and sources, such as volume, costs, differentiation, industry attractiveness, risk, and knowledge. This will help you identify where you have an advantage or disadvantage over your competitors.
Evaluate your options and trade-offs for each lever of the framework
The second step is to explore your potential actions and choices for each lever of the framework. You need to consider how you can increase your added value by adding volume, decreasing costs, differentiating products or services, improving industry attractiveness, normalizing risk, or generating knowledge. You also need to consider how your rivals might react to your actions and how you can anticipate or counter their moves. You should also evaluate the trade-offs and synergies among the different levers of the framework. For example, adding volume might increase your costs, decreasing costs might reduce your differentiation, differentiating products or services might limit your volume, improving industry attractiveness might benefit your rivals, normalizing risk might reduce your returns, or generating knowledge might increase your risk. You should try to find the optimal balance among the different levers that maximizes your added value.
Choose the best combination of actions that maximizes your added value
The third step is to select the best combination of actions that maximizes your added value relative to your rivals. You need to compare the expected benefits and costs of each option and choose the one that offers the highest net present value. You should also consider the feasibility and sustainability of each option in terms of resources, capabilities, timing, execution, and alignment. You should also check the consistency and coherence of each option with your vision, mission, values, and goals.
Implement your strategy and monitor your performance
The fourth step is to implement your chosen strategy and monitor its results. You need to communicate your strategy clearly and convincingly to your stakeholders, such as customers, employees, suppliers, partners, investors, and regulators. You also need to mobilize your resources, capabilities, and incentives to execute your strategy effectively You also need to monitor your performance and progress by measuring and evaluating your key indicators, such as revenues, costs, margins, market share, customer satisfaction, employee engagement, innovation, or social impact. You should also track the changes and trends in your industry and environment that might affect your competitive advantage. You should be ready to adapt and adjust your strategy as needed to maintain or enhance your added value.
Key takeaways and recommendations from the book
The book offers several valuable insights and recommendations for managers and entrepreneurs who want to create competitive advantage in their industries. Here are some of the key takeaways:
Competitive advantage is not a static or absolute concept, but a relative and dynamic one. It depends on how a firm compares to its rivals in terms of creating and capturing value for its stakeholders.
Creating competitive advantage requires a firm to configure itself to do something unique and valuable that no one else can do or do as well. The firm must ensure that it is indispensable and irreplaceable in its network of suppliers, customers, and complementors.
Competitive advantage usually comes from the full range of a firm's activities acting in harmony. The essence of creating advantage is finding an integrated set of choices that distinguishes a firm from its rivals.
The ADDING value framework is a simple but powerful tool for creating competitive advantage. It consists of six levers that a firm can use to increase its added value relative to its rivals: adding volume, decreasing costs, differentiating products or services, improving industry attractiveness, normalizing risk, and generating knowledge.
To apply the ADDING value framework to your business, you need to follow four steps: analyze your current situation and identify your sources of added value, evaluate your options and trade-offs for each lever of the framework, choose the best combination of actions that maximizes your added value, and implement your strategy and monitor your performance.
In conclusion, Creating Competitive Advantage by Pankaj Ghemawat and Jan W. Rivkin is a must-read book for anyone who wants to learn how to create and sustain a competitive advantage in their industry. The book provides a clear and practical framework for analyzing and designing competitive strategy, using examples from various industries and countries. The book also offers valuable insights and recommendations for managers and entrepreneurs who want to increase their added value relative to their rivals. By applying the ADDING value framework to your business, you can achieve higher profitability, growth, and market share in your industry.
Here are some frequently asked questions about the book and the topic:
Who are the authors of the book?
Pankaj Ghemawat is a professor of global strategy at IESE Business School and the Stern School of Business at New York University. He is also the founder and director of the Center for the Globalization of Education and Management. He is an expert on global strategy, competition, and globalization. He has written several books and articles on these topics, such as World 3.0, Redesigning Global Strategy, The Laws of Globalization, and Strategy and the Business Landscape.
Jan W. Rivkin is a professor of business administration at Harvard Business School. He is also the co-chair of the HBS MBA program. He is an expert on competitive strategy, business-government relations, innovation ecosystems, and social issues in management. He has written several books and articles on these topics, such as The Locust and the Bee, The Harvard Business Review Manager's Handbook, Choosing the Right Corporate Strategy, and The Dynamics of Standing Still.
What are some examples of firms that have created competitive advantage using the ADDING value framework?
Some examples of firms that have created competitive advantage using the ADDING value framework are:
Amazon: The online retailer has added volume by offering millions of products across multiple categories and countries, decreased costs by optimizing its supply chain and logistics, differentiated its products by providing fast delivery, improved industry attractiveness by creating platforms such as AWS, normalized risk by diversifying its revenue streams, and generated knowledge by using data analytics and artificial intelligence.
Nike: The sportswear giant has added volume by expanding into new segments and geographies, decreased costs by outsourcing its production and distribution, differentiated its products by offering high-quality and innovative designs, improved industry attractiveness by creating a strong brand and culture, normalized risk by hedging its currency and commodity exposures, and generated knowledge by investing in research and development and acquiring new technologies.
Starbucks: The coffee chain has added volume by opening thousands of stores around the world, decreased costs by standardizing its operations and processes, differentiated its products by offering a premium and personalized experience, improved industry attractiveness by creating a loyal and engaged customer base, normalized risk by diversifying its product portfolio and sourcing locations, and generated knowledge by experimenting with new formats and concepts.
What are some of the challenges or limitations of creating competitive advantage?
Some of the challenges or limitations of creating competitive advantage are:
Competitive advantage is not permanent or guaranteed. It can be eroded or lost over time due to changes in customer preferences, competitor actions, industry dynamics, or environmental factors. Therefore, a firm needs to constantly monitor, evaluate, and adapt its strategy to maintain or enhance its added value.
Competitive advantage is not easy or cheap to create. It requires a firm to make significant investments, trade-offs, and sacrifices in terms of resources, capabilities, and opportunities. Therefore, a firm needs to carefully assess the feasibility and sustainability of its strategy and ensure that it has the necessary alignment and execution to implement it.
Competitive advantage is not isolated or independent. It depends on the interactions and interdependencies among the firm and its stakeholders, such as customers, competitors, suppliers, complementors, regulators, and society. Therefore, a firm needs to consider the impact and implications of its strategy on its network and environment and ensure that it creates value not only for itself but also for others.
Where can I find more information or resources on creating competitive advantage?
Some of the sources or resources that you can use to learn more about creating competitive advantage are:
The book Creating Competitive Advantage by Pankaj Ghemawat and Jan W. Rivkin. You can buy it online or at your local bookstore.
The website of Pankaj Ghemawat at https://www.ghemawat.com/. You can find his publications, videos, courses, tools, and events on global strategy, competition, and globalization.
The website of Jan W. Rivkin at https://www.hbs.edu/faculty/Pages/profile.aspx?facId=6581. You can find his publications, videos, courses, tools, and events on competitive strategy, business-government relations, innovation ecosystems, and social issues in management.
The website of Harvard Business School at https://www.hbs.edu/. You can find various case studies, articles, books, podcasts, webinars, and programs on competitive strategy and related topics.
The website of Harvard Business Review at https://hbr.org/. You can find various articles, blogs, podcasts, videos, newsletters, and magazines on competitive strategy and related topics.