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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
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
[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;
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
2. The value chain. Again, I focus on an example. For example, in relation to commercial aircraft
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
Southwest Airlines 2002 (Thunderbird Graduate School of International Business, Case No. A07-02-
0009, 2002)
The case provides cost and efficiency data on the US airline industry, on Southwest, and on the
established airlines that allows examination of the basis of Southwest’s superior efficiency and lower
Airborne Express is in a difficult competitive situation relative to its two major rivals, UPS and Federal
Express. The case allows an assessment of Airborne’s competitive position relative to those of FedEx and UPS
and offers the opportunity to consider Airborne’s potential for cost competitiveness in the face of the scale and
network economies available to FedEx and UPS.
Walmart.
The Walmart cases (see the Grant case and the two HBS cases listed under “Chapter 5. Analyzing Resources
and Capabilities”) can also be used to support a deeper probing in the sources of competitive advantage, in
[2] Differentiation Advantage
I devote more time and attention to the topic of differentiation advantage that I do to cost advantage,
partly because differentiation advantage tends to be more sustainable that cost advantage, partly because
differentiation offers greater scope for innovation, insight, and the exploitation of uniqueness, and partly
because differentiation advantages brings us face to face with some central concepts of strategy including
coherence and identity.
The analysis of differentiation advantage is concerned with identifying opportunities for
matching the demand-side desire for differentiation with the supply-side potential for the firm to
create uniqueness in its offerings. A key feature of this matching process is exploring linkages between
the value chain of the firm and that of its customers.
My major goal for the session on differentiation advantage is to for students to recognize how
opportunities for profitable differentiation can be identified through bringing together the demand side of
differentiation (customers’ preferences for product characteristics) with the supply side of differentiation
(a firm’s capacity for creating unique attributes in its offerings).
I begin with a case discussion—typically Harley-Davidson. Inevitably this case discussion goes well
beyond the issues raised by the analysis of differentiation advantage covered in Chapter 7. In particular,
Cases
Harley-Davidson Inc., May 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn.,
Wiley, 2016).
At the heart of Harley-Davidson’s superior performance in the motorcycle industry is its creation of a
unique position of differentiation based upon the resources where it trumps all its rivals: image and
heritage. At the heart of H-D’s differentiation advantage is the core recognition by the company: H-D is
not supplying motorcycles, it is supplying an experience. The case offers the basis for comprehending the
appeal of this strategy and the means through which H-D has nurtured and delivered this experience.
Starbucks Corporation, May 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th
edn., Wiley, 2016)
Starbucks is a master of differentiation advantage. As Gary Hamel has observed: before Starbucks who
would ever have envisaged thast construction workers would line up to pay $4 a cup for a cappuccino?
