(CEA) Unit 1 - Central purpose of business

Added Value, Competitive advantage - Cost advantage and differentiation

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  • Created by: charlotte
  • Created on: 08-06-11 16:43

Added Value

Definition

Added Value can be defined as the difference between a particular product's final selling price and the cost of the direct and indirect inputs used in making that product.

Equation


VALUE ADDED = SALES REVENUE - COST OF BOUGHT IN GOODS AND SERVICES 

How can this be achieved?

  • By introducing new or improved product that provide even greater value to its customers - branding
  • By reducing the cost of bought in items - new suppliers (cheaper raw materials)
  • Reduce waste
  • Reduce production costs - better machinery (increased output + decrease in average cost)
  • Increase efficiency - labour productivity (motivation - non financial + finanicial)
  • Quality
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Competitive Advantage

Definition

Competitive advantage refers to the advantage that a firm has over its competitors, which allows it to attract and retain more customers. A benefit or value provided by a business or product which is unique to the business itself and gives it superiority within the industry or market.

How to achieve competitive advantage...

1. Cost advantage

2. Differentiation advantage



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Cost Advantage

Definition

The term cost advantage refers to the ability of a particular firm to produce a good or service at a lower cost than its rivals

Advantages -> it will gain a larger market share as itwill be able to sell its output at a lower price that its main competitiors -> a firm with a cost advantage can make a larger profit margin on each sale as it can keep its prices at a level that are similar to its main competitors

Disadvantages

-> Having a competitive cost advantage is a very effective tool in helping a firm compete but the problem with this is that there is normally only enough room in an industry for 1 or 2 cost leaders.

The basis of competitive cost advantage will vary in different industries which include 

1. Economies of scale                      2. Economies of experience                         3. Superior technology                 

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ECONOMIES OF SCALE

Economies of scale are the cost advantages that a firm receives from operating on a larger scale. Economies of scale are defined as those advantages of increased size that lead to falling average costs.

ECONOMIES OF EXPERIENCE

Another reason why one firm may have lower costs than many of its competitors is that the firm has accumulated significant experience of operating in the industry and as a result it is better able to produce high quality goods and services in an efficient manner.

SUPERIOR TECHNOLOGY

One further source of a competitive cost advantage relates to the effective use of technology. If a firm is able to source the most up-to-date capital equipment and is able to use it effectively, then it should be able to produce goods and services more efficiently than firms which are using dated or inferior technology.

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Differentiation Advantage

Definition

Refers to a firm's ability to separate itself and its products from that of its main competitors and therefore make its product more attractive to a particular target market. 

Advantages 

->  Differentiation is important for new or small firms as their source of competitive advantages.

  There are a number of different ways through which firms can separte themselves and their products from those of their rivals. The two most common methods are:

1. Create a unique selling proposition (USP)

2. Create a strong brand  


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CREATE A UNIQUE SELLING PROPOSTION (USP)

  • The most obvious way a firm can differentiate itself from that of its main rivals is to change the actual product in some way so as to give the firm a unique selling proposition or unique selling point.A unique selling point is something that sets one firm's product or service apart from that of its competitors in the eyes and minds of potential customers.
  • A firm can create a USP by adding new features or by improving the quality or reliability of the product. A good USP is one that sets the firm's product apart from its rivals and offers an experience which is strong enough to attract customers to the product.

 CREATE A STRONG BRAND

  • A brand can be a name, term, symbol or design (or a combination of all of these) which aims to make the product easily recognisable and distinguishable from that of competitors.
  • When branding is used as differentiation the actual differences in the product or service may be very minor, as the key to the differentiation is to convince the customers that the product is different. This perception can be achieved through marketing and advertising.
  • Branding a product will reduce its price elasticity of demand and therefore it makes it less sensitive to changes in price.
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A Sustainable Competitive Advantage (SCA)

  • A competitive advantage refers to the advantage a firm has over its competitors, which allows it to attract and retain more customers that its rivals and so generate greater sales and profits. If a firm can sustain this position over a long period of time then it is described as having a sustainable competitive advantage.
  • A sustainable competitive advantage is a long term advantage possessed by an organisation, which is not easily copied or eroded by its competitors.
  • A SCA is usually the consequence of distinctive skills and competencies possessed by employees and/or the owners of a company. These core competencies include good leadership, constant innovation, a culture of teamwork and superior knowledge.
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