Economic Performance of Various Sectors

Competitive Advantage

The article starts by analyzing the economic performance of various sectors in an economy and the companies in those sectors for the spread between industry’s return on equity and its cost of equity and the average equity in the industry.

This shows that while an industry may seem doing very good in terms of economic performance (e.g., pharmaceutical industry); on analyzing all companies within the pharmaceutical industry also highlights how the profitability of each organization various vastly. This is due to competitive advantage enjoyed by organizations which enables these organisations to earn high profits.

Higher the willingness to pay by buyers and lower the costs creates a wedge which is larger than competition thereby enabling organisations to enjoy higher profits and greater competitive advantage.

For this, a firm must configure itself to do something unique and valuable in order to add value and to undertake an integrated set of choices which is inimitable to competitors.

Value addition and willingness to pay enables organisations to distinguish from competitors.

Unless a firm adds value, it cannot be said to have created value distinctively to its customers. This can be done in two ways – to increase customer’s willingness to pay without much increasing its supplier opportunity costs or to reduce supplier opportunity costs without much sacrificing the willingness to pay. The former is called differentiation strategy and later is called as low-cost strategy. Essentially, it is a trade-off between costs and willingness to pay.

In order to achieve this activity-based cost analysis should be done with the following steps:

a) Analyse value chain – an activity that breaks down the firm into activities.

b) DO comparative cost analysis amongst different firms in a market environment. This will determine the cost drivers associated with each activity. Cost drivers are critical as it is the one which increases or decreases the cost drastically. Cost drivers allow managers to estimate competitors cost positions.

c) Use activities to analyse relative willingness to pay. Each activity in the value chain is responsible for creation / enabling willingness to pay. This can be done by gauging on the below parameters.

a. Who is the real buyer – customer or consumer; who are we catering to?

b. What do the buyers actually want?

c. How is the organisation successful and which customer needs are being fulfilled?

d. Link the customer needs to activities undertaken by an organisations.

Willingness to pay from different customers can vary. Thus, customers get bifurcated into horizontal