Explain economic value creation and different sources of competitive advantage.
■ The relationship between economic value creation and competitive advantage is fundamental in strategic management. It provides the foundation upon which to formulate a firm’s competitive strategy of cost leadership or differentiation.
■ Three components are critical to evaluating any good or service: value (V), price (P), and cost (C). In this perspective, cost includes opportunity costs.
■ Economic value created is the difference between a buyer’s willingness to pay for a good or service and the firm’s cost to produce it (V − C).
■ A firm has a competitive advantage when it is able to create more economic value than its rivals. The source of competitive advantage can stem from higher perceived value creation (assuming equal cost) or lower cost (assuming equal value creation).