Competitive Advantage Drivers - Deep Dive into Customer Willingness to Pay

Table of Contents

1. Understanding Customer WTP drivers using Customer Understanding Tools
2. Understanding Supplier Opportunity Cost (SOC) Drivers
3. Activity Analysis: Linking Activities to Advantage
4. Activity Analysis in Detail
5. Exercise: Mapping Key Activities and their Link to Competitive Advantage

Having identified the key Strategic Business Units (SBUs) for your chosen company, we now delve into the core of competitive advantage analysis: understanding the drivers of Customer Willingness to Pay (WTP) and Supplier Opportunity Cost (SOC).

Recap: Competitive Advantage Framework (WTP - SOC Wedge)

Recall that competitive advantage, at its fundamental level, stems from creating a wider gap between customer willingness to pay (WTP) and supplier opportunity cost (SOC) relative to competitors.

• Customer Willingness to Pay (WTP): This represents the maximum value a customer is willing to pay for a product or service. It is driven by the perceived benefits and value the customer receives. WTP is not simply about price; it’s about the overall value proposition from the customer’s perspective.
• Supplier Opportunity Cost (SOC): This represents the minimum amount a supplier needs to be paid to provide a resource or input. It reflects the value of the supplier’s next best alternative. Minimizing SOC contributes to cost efficiency.

Crucially, both WTP and SOC are significantly shaped by the industry context and customer needs within that industry. Your industry analysis provides the essential backdrop for understanding these drivers. Furthermore, to truly understand WTP, we need to move beyond broad assumptions and delve into the customer’s perspective using specific analytical tools.

Understanding Customer WTP drivers using Customer Understanding Tools

In a prior lesson, you were introduced to three tools for understanding customers: Experience Mapping, Customer Journey Mapping, and Jobs-to-be-Done. In this section, we will recap these tools and, more importantly, contextualize their application for analyzing Customer Willingness to Pay (WTP) in the context of your Business Strategy Analysis Project.

Recap: Experience Mapping for WTP Analysis

Experience mapping is a visualization tool that allows us to understand the holistic customer experience within a given problem context, irrespective of a specific company or product. By understanding the typical customer experience – the stages, actions, thoughts, and emotions – we can identify key pain points and areas of delight that influence their perception of value and, therefore, their WTP for solutions that address this experience.

How Experience Mapping Helps Analyze WTP:

• Uncovers Pain Points and Desires: Experience mapping helps identify negative emotions, frustrations, and unmet needs within the customer experience. Addressing these pain points directly increases WTP for solutions that alleviate them. Conversely, highlighting and enhancing moments of delight can also increase WTP.
• Identifies Functional and Emotional Needs: By mapping both actions and emotions, experience mapping reveals both the functional and emotional aspects of the customer’s needs. WTP is often driven by both – a product must be functionally effective and emotionally resonant to command a higher WTP.
• Provides a Customer-Centric View: Experience mapping forces us to step outside of the company’s perspective and see the world through the customer’s eyes. This outside-in view is crucial for understanding true customer value drivers.

Example: Consider the “4 Stages of AI Image Generation” experience map you reviewed previously. This map highlights stages like “Prompting,” “Generation Wait,” and “Iteration.” Pain points like “Frustration with Initial Results” or “Uncertainty about Prompting” directly impact a user’s WTP for AI image generation tools. Tools that minimize these pain points or enhance the “Creative Exploration” and “Delight” stages can justify a higher WTP.

Exercise: Brainstorming an Experience Map for Your Chosen SBU’s Customer

For one of your chosen SBUs, brainstorm the stages of a typical customer’s experience related to the problem context that SBU addresses.

1. Define the Scope: Clearly define the scope of the experience you are mapping. What specific problem context or need is your SBU addressing for the customer? (e.g., “Managing personal finances,” “Commuting to work,” “Staying connected with family”).
2. Outline Key Stages: Brainstorm 3-5 key stages a typical customer goes through in this experience, even before they consider your company’s product or service. Focus on the stages of the experience itself, not just the interaction with your company. (e.g., for “Managing personal finances”: “Tracking Income,” “Managing Bills,” “Saving for Goals,” “Tax Preparation”).
3. For each stage, briefly consider:
   • What is the customer intending to achieve in this stage?
   • What actions do they typically take?
   • What are some common emotions (positive and negative) associated with this stage?

Document your brainstormed experience map in your NotebookLM. We will use these insights to further analyze WTP drivers.

Recap: Customer Journey Mapping for WTP Analysis

Customer Journey Mapping (CJM) builds upon experience mapping by focusing specifically on the customer’s interaction with your company across different touchpoints. CJM visualizes the steps a customer takes when engaging with a company, from initial awareness to post-purchase and beyond. It highlights organizational responsibility for customer outcomes and helps identify “moments of truth” that critically impact WTP.

How Customer Journey Mapping Helps Analyze WTP:

• Identifies Key Touchpoints and “Moments of Truth”: CJM maps out all the interactions a customer has with your company (website, sales interactions, product usage, customer service, etc.). “Moments of truth” are specific touchpoints where the customer’s experience has a disproportionately large impact on their overall perception and WTP. Positive moments of truth can significantly enhance WTP, while negative ones can quickly erode it.
• Reveals Organizational Accountability for Customer Experience: CJM explicitly links customer journey stages to the internal organizational units responsible for those stages. This helps identify areas where organizational silos might be hindering a seamless and positive customer experience, ultimately impacting WTP.
• Outside-In Perspective on Company Performance: CJM adopts an “outside-in” perspective, starting with the customer journey and working back to internal operations. This customer-centric view helps assess how effectively the company is delivering value from the customer’s perspective, which directly influences WTP.

Example: Consider a Customer Journey Map for an online retailer. Stages might include “Website Visit,” “Product Search,” “Checkout Process,” “Shipping & Delivery,” “Product Usage,” and “Returns/Customer Service.” “Moments of truth” could be the ease of the checkout process, speed and reliability of delivery, or responsiveness of customer service. A poor experience at any of these moments can decrease WTP and increase churn.

Exercise: Outlining a Customer Journey Map for Your Chosen SBU

For the same SBU you used for Experience Mapping, outline a simplified Customer Journey Map focusing on a key interaction scenario with your company.

1. Define the Scope: Specify the interaction scenario you are mapping. (e.g., “Purchasing product X online,” “Using service Y for the first time,” “Seeking customer support for issue Z”).
2. Outline Key Stages of Interaction: Brainstorm 4-6 key stages a typical customer goes through when interacting with your company in this scenario. Focus on the steps the customer takes when engaging with your company. (e.g., for “Purchasing product X online”: “Website Visit,” “Product Page View,” “Add to Cart,” “Checkout,” “Order Confirmation,” “Delivery”).
3. For each stage, briefly consider:
   • What is the customer intending to achieve at this stage?
   • What actions do they take in interacting with your company?
   • What are potential positive or negative experience factors at this stage that could impact their overall perception and WTP?

Document your outlined Customer Journey Map in your NotebookLM, building on your Experience Map insights.

C. Jobs-to-be-Done (JTBD) for WTP Analysis

Jobs-to-be-Done (JTBD) takes a different approach by focusing on the underlying needs and motivations that drive customers to “hire” a product or service. It shifts the focus from product features and customer demographics to understanding the “job” the customer is trying to get done in their lives or work. Understanding the “job” helps uncover the true drivers of customer choice and WTP, often revealing unmet needs and non-obvious competitors.

How Jobs-to-be-Done Helps Analyze WTP:

• Uncovers Core Customer Needs (Beyond Features): JTBD forces us to think beyond product features and ask: “What fundamental ‘job’ is the customer hiring our product to do?” Understanding this core job reveals the true value the customer seeks and what they are really willing to pay for.
• Identifies True Competition (Beyond Direct Rivals): JTBD broadens our perspective on competition. Customers are not just comparing your product to direct competitors, but also to any other solution (or even non-solution) that helps them get the “job” done. Understanding this “true” competitive set helps refine value propositions and WTP strategies.
• Reveals Unmet Needs and Innovation Opportunities: By focusing on the “job,” JTBD can uncover unmet customer needs that traditional market research might miss. Addressing these unmet needs can create significant value and justify a premium WTP.

Example: The classic JTBD example is the McDonald’s milkshake. People weren’t “buying a milkshake” for the sake of it. They were “hiring” it to do a “job” – often to make their commute more enjoyable and less boring. Understanding this “job” revealed that the competition wasn’t just other breakfast items, but also things like bagels or bananas – anything that could make a commute less tedious. This insight re-shaped how McDonald’s could improve their milkshake offering and potentially increase WTP for commuters.

Exercise: Articulating the “Job-to-be-Done” for Your Chosen SBU’s Customer

For the same SBU you’ve been analyzing, articulate the “Job-to-be-Done” from the customer’s perspective.

1. Focus on Customer Motivation: Think about why a customer “hires” your SBU’s product or service. What are they fundamentally trying to achieve or accomplish in their lives or work?
2. Frame the “Job” as a Verb + Object: Articulate the “job” using a verb and an object, focusing on the outcome the customer desires, not just the product itself. (e.g., “Make my commute less boring,” “Manage my personal finances efficiently,” “Stay connected with family while traveling”). Avoid framing the “job” as simply “using product X.”
3. Consider Different Customer Segments (if applicable): If your SBU serves multiple distinct customer segments, consider whether the “Job-to-be-Done” might differ across these segments. If so, articulate the JTBD for your primary target segment.

Document your articulated “Job-to-be-Done” in your NotebookLM.

Connecting the Customer Understanding Tools: A Complementary Approach

Experience Mapping, Customer Journey Mapping, and Jobs-to-be-Done are not mutually exclusive; they are complementary tools that provide different lenses for understanding WTP drivers.

• Experience Mapping: Provides a broad, high-level understanding of the customer’s experience and problem context, identifying overarching pain points and desires independent of your company.
• Customer Journey Mapping: Focuses on the company-specific customer interaction, pinpointing “moments of truth” and organizational responsibilities within the customer journey.
• Jobs-to-be-Done: Delves into the deepest level of customer motivation, uncovering the underlying needs and desired outcomes that drive purchase decisions and shape WTP.

By applying all three tools, you gain a multi-faceted and robust understanding of customer WTP drivers. The insights from Experience Mapping inform your Customer Journey Mapping, and both contribute to a richer understanding of the Job-to-be-Done.

Understanding Supplier Opportunity Cost (SOC) Drivers

While Customer Willingness to Pay focuses on the demand side of the value equation, Supplier Opportunity Cost (SOC) addresses the supply side. As a reminder, SOC represents the minimum payment a supplier needs to provide resources. Lowering SOC, while maintaining WTP, expands the competitive advantage gap.

Key Drivers of Supplier Opportunity Cost:

• Input Prices: The cost of raw materials, components, labor, capital, and other resources needed for production directly impacts SOC. Factors like commodity prices, wage rates, interest rates, and real estate costs influence input prices.
• Supplier Power: The bargaining power of suppliers can significantly affect SOC. Powerful suppliers may command higher prices, increasing your company’s SOC. Conversely, weak suppliers may be more willing to negotiate lower prices, reducing SOC. (Remember your Five Forces analysis of supplier power in your industry).
• Efficiency of Operations: Internal operational efficiencies directly impact SOC. Streamlined processes, efficient resource utilization, economies of scale, and superior technology can all lower the amount your company needs to pay suppliers per unit of output, effectively reducing SOC.
• Location & Logistics: Geographic location and logistical efficiency influence SOC. Proximity to suppliers, efficient transportation networks, and optimized supply chains can reduce transportation costs and lead times, lowering SOC.

Industry Context and SOC: Similar to WTP, SOC is heavily influenced by your industry context. Industry structure (supplier power, rivalry), industry-specific technologies, and geographic concentrations all play a role in shaping SOC for companies within a given sector. Refer back to your industry analysis to understand the typical SOC drivers in your chosen industry.

Activity Analysis: Linking Activities to Advantage

To understand how a company manages to achieve favorable WTP and SOC positions, we use Activity Analysis, grounded in the Value Chain framework (See the reading from the coursepack on Competitive Advantage Analysis for more details).

The Value Chain disaggregates a company into its discrete activities – the specific tasks and processes it undertakes to design, produce, market, deliver, and support its products or services. These activities fall into two broad categories:

• Primary Activities: Activities directly involved in creating and delivering the product or service. These typically include:
  • Inbound Logistics (receiving and managing inputs)
  • Operations (transforming inputs into outputs)
  • Outbound Logistics (storing and distributing outputs)
  • Marketing and Sales (communicating and selling value)
  • Service (supporting customers after the sale)
• Support Activities: Activities that support the primary activities and each other. These typically include:
  • Firm Infrastructure (general management, finance, legal)
  • Human Resource Management (recruiting, training, compensation)
  • Technology Development (R&D, process automation)
  • Procurement (purchasing inputs)

Activity Analysis involves examining these individual activities to understand:

• WTP Impact: How does each activity contribute to enhancing customer willingness to pay? Does it improve product features, quality, brand image, customer experience, or other WTP drivers identified through your customer analysis tools?
• SOC Impact: How does each activity contribute to reducing supplier opportunity cost? Does it improve efficiency, lower input costs, enhance supplier relationships, or otherwise reduce the resources needed per unit of output?
• Differentiation and Cost Advantage: Which activities are most critical for differentiating the company from competitors (enhancing WTP) and/or achieving a cost advantage (reducing SOC)?
• Interdependencies: How do activities link and interact with each other? Are there opportunities to optimize activities in combination to further enhance WTP and/or reduce SOC?

We will dig deeper into Activity Analysis in the next section. For now, understand that it provides the crucial link between high-level concepts like WTP and SOC and the concrete actions a company takes within its value chain to create competitive advantage.

Connecting WTP, SOC, and Activities: The Interplay

It’s vital to understand that WTP, SOC, and Activities are not isolated concepts; they are deeply interconnected.

• Activities Drive WTP & SOC: A company’s chosen activities directly determine both its ability to create customer value (WTP) and its cost structure (SOC). For example, investing in R&D (a Technology Development activity) might enhance product features (WTP) but also increase R&D expenses (SOC impact needs to be managed effectively). Efficient operations (Operations activity) can lower production costs (SOC) and potentially improve product quality (WTP).
• Industry Context Shapes Activity Choices: The industry environment influences which activities are most critical for achieving high WTP and low SOC. In a highly differentiated industry, marketing and sales activities might be paramount for driving WTP. In a cost-sensitive industry, operational efficiency and procurement activities might be key for minimizing SOC.
• Customer Needs Guide Activity Prioritization: Ultimately, customer needs should be the guiding principle in prioritizing and optimizing activities. Activities should be chosen and executed in a way that maximizes WTP for the target customer segment, while managing SOC effectively. Your Experience Maps, Customer Journey Maps, and JTBD insights are crucial for understanding these customer needs.

Exercise: Identifying Initial WTP and SOC Drivers for Key SBUs

To solidify your understanding of WTP and SOC drivers and their initial connection to your chosen company’s SBUs, complete the following exercise in your NotebookLM:

For each of the 2-3 key SBUs you identified in Section III:

1. Summarize WTP Drivers (from Customer Analysis Tools): Based on your Experience Map, Customer Journey Map, and JTBD analysis for this SBU (from the previous exercises), summarize the key factors that drive customer willingness to pay for this SBU’s offerings. Focus on both functional and emotional drivers. Document these in your NotebookLM under each SBU.
2. Brainstorm Initial SOC Drivers: Based on your industry analysis and general understanding of the SBU’s operations, brainstorm at least 3-5 potential drivers of Supplier Opportunity Cost for this SBU. Consider input prices, supplier power dynamics in the industry, potential operational inefficiencies, and logistical factors. Document these potential SOC drivers in your NotebookLM under each SBU.
3. Initial WTP-SOC Gap Assessment: For each SBU, provide a preliminary, qualitative assessment of the current WTP-SOC gap relative to key competitors. Is the SBU likely to have a wider, narrower, or similar WTP-SOC gap compared to its main rivals? Justify your initial assessment based on your current understanding.

This exercise is designed to be an initial exploration. We will refine and deepen your analysis of WTP and SOC drivers, and explicitly link them to Activity Analysis, in the subsequent sections.

Activity Analysis in Detail

In the previous section, we introduced the Value Chain and Activity Analysis as the crucial link between understanding high-level concepts like WTP and SOC and the concrete actions a company undertakes. Now, we will delve deeper into conducting Activity Analysis to pinpoint the specific activities that drive competitive advantage for your chosen company’s SBUs.

Deep Dive into Value Chain Analysis

Recall that the Value Chain framework disaggregates a company into its primary and support activities. For effective Activity Analysis, we need to go beyond simply listing generic value chain categories and identify the specific, granular activities that your chosen company performs within each category.

Moving from Generic to Specific Activities:

Instead of just saying “Operations” as a primary activity, we need to identify the key operational activities specific to your company’s SBUs. For example:

• Generic “Operations” (too broad):
  • Specific “Operations” Activities for a Coffee Shop SBU: “Sourcing Coffee Beans,” “Roasting Coffee Beans,” “Brewing Coffee,” “Preparing Espresso Drinks,” “Serving Pastries,” “Maintaining Store Cleanliness,” “Managing Inventory of Perishable Goods.”
  • Specific “Operations” Activities for a Software-as-a-Service (SaaS) SBU: “Software Development (feature updates),” “Data Center Operations,” “Maintaining Server Uptime,” “Security Patching,” “User Account Provisioning,” “Customer Data Backup.”

The level of granularity should be sufficient to allow you to analyze how these activities impact WTP and SOC and how they differentiate your company.

Identifying Key Activities: Primary and Support Activities for your SBUs

For each of your 2-3 chosen SBUs, conduct a detailed activity analysis. In your NotebookLM workspace, create a dedicated subsection for “Activity Analysis” within each SBU’s section. Then:

1. List Primary Activities: For each SBU, brainstorm and list the specific primary activities performed. Think about the typical primary value chain categories (Inbound Logistics, Operations, Outbound Logistics, Marketing & Sales, Service) as prompts, but focus on identifying concrete activities your company undertakes within each category for this specific SBU. Aim for a reasonably comprehensive list of the most important primary activities.
2. List Support Activities: Similarly, brainstorm and list the specific support activities that are most critical for this SBU and the overall company. Consider the typical support activity categories (Firm Infrastructure, HR Management, Technology Development, Procurement). Again, focus on concrete activities relevant to your company.
3. Prioritize Key Activities: From your comprehensive lists of primary and support activities for each SBU, select the 3-5 activities (across both primary and support) that you believe are most strategically important for understanding your company’s competitive advantage. These are the activities you will analyze in more detail. Justify your selection – why are these activities key? Consider factors like:
   • Cost Significance: Activities that represent a substantial portion of the SBU’s cost structure.
   • Differentiation Potential: Activities that have a high potential to enhance customer WTP or differentiate the SBU from competitors.
   • Strategic Importance: Activities that are central to the SBU’s overall strategy and success.

Document your lists of primary and support activities, and your selection of key activities with justifications, in your NotebookLM for each SBU.

Pinpointing Industry-Differentiating Activities: What Sets Your Company Apart?

Once you have identified key activities, the next step is to analyze which of these activities are truly industry-differentiating. Competitive advantage arises when a company performs key activities differently or better than rivals, leading to a wider WTP-SOC gap.

For each of your selected key activities (across your chosen SBUs):

1. Benchmark Against Competitors: Based on your industry analysis and any available competitive information, briefly assess how your chosen company performs this activity compared to its key competitors.
   • Is your company performing this activity in a similar way to competitors?
   • Is your company performing this activity differently? If so, how?
   • Does your company appear to perform this activity better than competitors (e.g., more efficiently, higher quality, more innovative)? How do you know (or what evidence suggests this)?
2. Identify Differentiating Activities: Based on your benchmarking, pinpoint the activities where your company appears to be truly differentiating itself from competitors – activities where they are doing things differently and/or better. These are the activities that are most likely sources of competitive advantage.

Document your benchmarking assessments and clearly identify the industry-differentiating activities in your NotebookLM for each SBU.

Analyzing Activity Advantage: How do Activities Drive WTP and/or Reduce SOC?

For each of your identified industry-differentiating activities, conduct a detailed analysis of how these activities contribute to competitive advantage by impacting WTP and/or SOC:

1. WTP Enhancement: For each differentiating activity, explicitly explain how this activity enhances customer willingness to pay.
   • Does it directly improve product features or performance that customers value (functional WTP drivers)?
   • Does it enhance the customer experience, brand image, or emotional connection (emotional WTP drivers)?
   • Connect your explanation back to the WTP drivers you identified through Experience Mapping, Customer Journey Mapping, and JTBD. Show how these differentiating activities are directly addressing customer needs and desires you uncovered earlier.
2. SOC Reduction: For each differentiating activity, explicitly explain how this activity helps reduce supplier opportunity cost.
   • Does it improve operational efficiency, lower input costs, enhance resource utilization, or streamline processes?
   • Does it give the company bargaining power over suppliers?
   • Does it optimize location or logistics?
   • Quantify or provide specific examples where possible to illustrate the SOC reduction impact.
3. WTP-SOC Gap Contribution: For each differentiating activity, summarize how it contributes to widening the WTP-SOC gap for your company relative to competitors. Is it primarily a WTP-enhancing activity, a SOC-reducing activity, or both? What is the relative magnitude of its impact on WTP and SOC?

Document your detailed analysis of how each differentiating activity drives WTP and/or reduces SOC in your NotebookLM.

Using NotebookLM for Activity Analysis: Organizing Notes and Evidence

Throughout your Activity Analysis, continue to effectively utilize NotebookLM to organize your research, notes, and evidence. Consider these strategies:

• Dedicated Sections/Subsections: Create clear sections and subsections within your NotebookLM for each SBU and for each stage of the Activity Analysis (listing activities, prioritizing, benchmarking, WTP/SOC analysis).
• Source Linking: When you identify specific activities or make claims about WTP/SOC impacts, link directly to relevant passages in your source documents (10-K reports, analyst reports, company website, etc.) that support your analysis. Use NotebookLM’s citation features.
• Summarization and Synthesis: Use NotebookLM’s summarization features to extract key information from sources related to specific activities. Synthesize information from multiple sources to build a comprehensive picture of each activity’s impact.
• Chat Feature (Strategically): Utilize NotebookLM’s chat feature to ask targeted questions about specific activities, WTP/SOC impacts, or competitive benchmarking. Capture and organize the insights you gain from the chat.

Exercise: Mapping Key Activities and their Link to Competitive Advantage

To synthesize your Activity Analysis, complete the following exercise in your NotebookLM:

For each of your 2-3 chosen SBUs:

1. Create a Table (or Visual Map): Create a table or visual map that summarizes your Activity Analysis for this SBU.
2. Columns/Sections: Your table/map should include the following for each of your selected key activities:
   • Key Activity Name: (Specific, granular activity)
   • Primary or Support Activity: Category
   • Industry-Differentiating? (Yes/No): Is this activity a source of differentiation?
   • WTP Enhancement Mechanism: How does this activity increase WTP? (Link to customer needs from earlier analysis)
   • SOC Reduction Mechanism: How does this activity reduce SOC?
   • WTP-SOC Gap Contribution: Summary of overall impact on competitive advantage.
3. Review and Refine: Review your completed Activity Analysis table/map for each SBU. Does it clearly and concisely articulate how specific activities drive competitive advantage for your chosen company? Refine your analysis as needed.

This Activity Analysis table/map will serve as a key deliverable and a foundation for the remaining sections of your project.

By completing the Activity Analysis exercises, you have now gained a detailed understanding of how your chosen company’s SBUs create competitive advantage through specific activities that enhance customer willingness to pay and/or reduce supplier opportunity cost. You have identified key, industry-differentiating activities and analyzed their impact on the WTP-SOC gap.

However, competitive advantage is not static. In dynamic markets, competitive advantages can erode over time due to imitation, industry evolution, and disruptive innovation. Therefore, a critical next step in our analysis is to assess the sustainability and durability of the competitive advantage you have identified.