Lenovo Competitive Advantage

Competitive Advantages, Firm Performance and Business Models (R Ch 5)

Economic Value Creation

-Economic value created: the difference between a buyer’s willingness to pay for a product or service and the firm’s total cost to produce it as known as an economic contribution. The economic value created also can be described as the difference between value (V) and cost (C), or (V-C).

Example:

Let assume Firm A (Lenovo); Firm B (Acer):

Illustration 1 (normal)

We consider buying a laptop and only have a budget of $1,200. There are two models, one offered by Lenovo Group Ltd. (Lenovo), the other by Acer Inc. (Acer). Our subjective assessment of the benefits derived from owning Lenovo’s laptop is $1,000 which is the absolute maximum we’d be willing to pay for it (reservation price). In contrast, we value Acer’s laptop model at $1,200 because it has somewhat higher performance, is more user-friendly and definitely has a higher specification factor. Given that we value Acer’s model by $200 more than Lenovo’s model, we will purchase a laptop from Acer Inc.

Illustration 2 (high perceived value)

Let assume only Lenovo and Acer is competing in the market for a laptop. Assuming that both firms have the same total unit cost of producing the particular laptop model under consideration ($400) and the market at large has similar preferences as we do, then Acer will have a competitive advantage. This is because Acer creates more economic value than Lenovo (by $200), but has the same total cost.