The competitive advantage of Madewell and J Crew Case Study (Great English is a must!! No grammar errors!) (Paper with grammar errors or incoherent senten

The competitive advantage of Madewell and J Crew Case Study (Great English is a must!! No grammar errors!)

(Paper with grammar errors or incoherent sentences won’t be accepted)

(Around 2 Pages, Double Spaced, APA)

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Subject of the paper: MADEWELL VS J.CREW

Requirement: This assignment is designed to test your understanding of the very core ideas of business strategy: cost, differentiation, and competitive niches. You’ll use the following:

Ghemawat and Rivkin article ( Creating Competitive Advantage), specifically the ideas of cost, differentiation, willingness to pay, and value added.
Apply the ideas to Madewell and J.Crew (similarities and differences)
Apply and integrate the framework ideas that are most important, without doing an annoying, artificial “Here I’m going to do a 5-test resource based view analysis.”
introduce the firms and then discuss competition within the industry as well as competition between your two focal firms.

Other information: – Resources

1. Obvious sources:

Wall Street Journal, NY Times, Forbes, Financial Times
New York Times, Forbes, Bloomberg
The company’s website
Firm press releases (PR Newswire or Google News)

2. Firm Sources: Use accounting principles mentioned below

– S-1: https://www.sec.gov/Archives/edgar/data/1513842/00… (For Madewell)

– Yahoo Finance: if applicable (possible) integrate Gross Profit/Revenue: ttps://www.investopedia.com/terms/g/grossmargin.asp and SG&A/Revenue: This explains how much money is spent on administrative overhead. Higher values usually suggest higher expenditures on marketing, customer service, and fixed costs like store lease agreements, etc. (For J.Crew)

3. Broad Industry Information

Broad Industry data (i.e. consumer apparel, fast food, etc.) – you’ll get this by searching the web. Do what you do best.
Wikipedia → check citations to find the actual source material!
Statista
Etc.

This can be helpful too: https://www.nytimes.com/2019/09/17/business/madewell-ipo-j-crew.html

NOTE: ONLY USE SOURCES PROVIDED OR PERMITTED ABOVE

Note 2: for the Competitive advantage reading/file, only read pages 1-9

Format:

APA Format
No plagiarism is accepted
Only academic resources should be used, no older than 5 years old
Adhere to the requested number of words/pages
No Grammar errors ( refunds will be asked for incoherent/ full of grammar errors papers)

*** The work will be checked for plagiarism through Turnitin by the professor. It is essential for everything to be free of plagiarism otherwise sanctions will be imposed***

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Thank you for your support For the exclusive use of M. Kayal, 2020.
9-798-062
REV: FEBRUARY 25, 2006
PANKAJ GHEMAWAT
JAN W. RIVKIN
Creating Competitive Advantage
Some companies generate far greater profits than others. The pharmaceutical maker ScheringPlough produced an economic profit of more than $10 billion during the period 1984-2002. That is,
the accounting profit it generated exceeded its cost of equity capital by that amount. Over the same
period, U.S. Steel produced an economic loss of nearly $500 million; its cost of capital exceeded its
accounting profit by a wide margin. Such large differences in economic performance are
commonplace. Understanding their roots is crucial for strategists.
1
Differences in industry structure shed some light on such differences in performance. To a
certain extent, Schering-Plough has generated more economic profit than U.S. Steel because the
pharmaceutical industry is structurally more attractive than the steel industry. Rivalry in the
pharmaceutical market is muted by factors such as patent protection, product differentiation, and
expanding demand; in contrast, rivalry in the steel industry is fierce—fueled by excess capacity,
limited differences across products, and slow growth. Many pharmaceutical users hesitate to switch
among products or brands, while steel customers are usually willing to switch among producers to
get a better price. Many pharmaceuticals are made from commodities with little labor input, while
unions exercise such power in the steel industry that labor costs often account for a quarter of total
revenue. Such contrasts in industry-level competitive forces are one reason that the profit levels of
firms in different industries differ. Figure 1 shows, for each of many industries, the spread between
the industry’s return on equity and its cost of equity (the vertical axis) and the average equity in the
industry (the horizontal axis) for the period 1984-2002. Reflecting differences in industry-level
competitive forces, the pharmaceutical industry has been among the greatest generators of economic
profit, while the steel industry as a whole has produced losses. The typical pharmaceutical maker is
2
far more profitable than the typical steel producer.
Schering-Plough, however, is not a “typical pharmaceutical maker,” nor is U.S. Steel a “typical
steel producer.” As Figures 2a and 2b illustrate, industry averages can mask large differences in
economic profit within industries. Schering-Plough was far more effective at producing economic
profits than were many drug makers during the 1984-2002 period, while U.S. Steel performed far
worse than many other steel producers. Indeed, recent research indicates that intra-industry
differences in profitability like those shown in Figures 2a and 2b may be larger than differences
3
across industries such as those in Figure 1. Industry-level effects appear to account for 10-20% of the
variation in business profitability while stable within-industry effects account for 30-45%. (Most of
the remainder can be assigned to effects that fluctuate from year to year.)
________________________________________________________________________________________________________________
Professors Pankaj Ghemawat and Jan W. Rivkin prepared this note as the basis for class discussion. It is based in part on earlier notes by Pankaj
Ghemawat, Tarun Khanna, and Anita McGahan.
Copyright © 1998 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
This document is authorized for use only by Malik Kayal in BADM Strategy Summer 2020 taught by DAVID HALLIDAY, George Washington University from May 2020 to Nov 2020.
For the exclusive use of M. Kayal, 2020.
798-062
Creating Competitive Advantage
Economic Profits of U.S. Industry Groups, 1984-2002
Figure 1
Avg. Spread
(1984-2002)
Toiletry & Cosmetic
40%
Tobacco
30%
Soft Drinks
Pharmaceutical
Med Supplies
20%
Computer Software
Publishing
Financial Services
Petro-Integergrated
Aerospace/
Defense
Bank
10%
Retail Store
Railroad
Computers & Peripherals
Auto Parts
Building Materials
Insurance Property & Casualty
Auto & Truck
For El/Ent.
For Telecom
0%
Tele Service
Semiconduct
Air Transport
Textile
(10%)
Steel
(20%)
0
200
400
600
800
1,000
1,200
Power
Paper & For.
1,400
Entertain
1,600
1,800
2,000
Avg. Equity ($B) (1984-2002)
Source: Compustat, Value Line, Marakon Associates analysis
Figure 2a
Economic Profits in the Pharmaceutical Industry, 1984-2002
Mylan Laboratories
Watson Pharmaceuticals Inc
Forest Laboratories -Cl A
Pharmaceutical Prod Dev Inc
Covance Inc
Albany Molecular Resh Inc
Avg. Spread
(1984-2002)
40%
King Pharmaceuticals Inc
Schering-Plough
Merck & Co
Novo-Nordisk A/S -ADR
Novartis AG – ADR
Barr Laboratories Inc
Lilly (Eli) & Co
Bristol Myers Squibb
Pfizer Inc
Idec Pharmaceuticals Corp
Perrigo Co
Ivax Corp
Andrx Corp
Wyeth
20%
0%
Medicis Pharmaceut Cp -Cl A
Genzyme Corp
Parexel International Corp
Aventis Sa -ADR
(20%)
(40%)
(60%)
(80%)
0
5
10
15
20
25
Icn Pharmaceuticals Inc
Quintiles Transnational Corp
Chiron Corp
Protein Design Labs Inc
Sicor Inc
Gilead Sciences Inc
Enzon Pharmaceuticals Inc
Abgenix Inc
Cephalon Inc
Neurocrine Biosciences Inc
Tularik Inc
Medimmune Inc
Medarex Inc
Celgene Corp
30
35
40
Nektar Therapeutics
45
50
Avg. Equity ($B) (1984-2002)
Source: Compustat, Value Line, Marakon Associates analysis
2
This document is authorized for use only by Malik Kayal in BADM Strategy Summer 2020 taught by DAVID HALLIDAY, George Washington University from May 2020 to Nov 2020.
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Creating Competitive Advantage
Figure 2b
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Economic Profits in the Steel Industry, 1984-2002
Avg. Spread
(1984-2002)
Worthington Industries
Gibraltar Steel Corp
6%
Steel Technologies
4%
Commercial Metals
Nucor Corp
2%
0%
(2%)
Quanex Corp
(4%)
Carpenter Technology
Dofasco Inc
Cleveland-Cliffs Inc
(6%)
United States Steel Corp
(8%)
AK Steel Holding Corp
(10%)
Ampco-Pittsburgh Corp
(12%)
Ryerson Tull Inc
(14%)
0
1
2
3
4
5
6
7
8
Avg. Equity ($B) (1984-2002)
Source: Compustat, Value Line, Marakon Associates analysis
In light of this, strategists need a systematic way to understand and analyze within-industry
differences in performance. Toward that end, this note uses the notion of competitive advantage. A
firm is said to have a competitive advantage over its rivals if it has driven a wide wedge between the
willingness to pay it generates among buyers and the costs it incurs—indeed, a wider wedge than its
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competitors have achieved. A firm with a competitive advantage is positioned to earn superior
profits within its industry. In examining the logic of how firms create competitive advantage, this
note emphasizes two themes. First, to create an advantage, a firm must configure itself to do
something unique and valuable. The firm must ensure that, were it to disappear, someone in its
network of suppliers, customers, and complementors would miss it and no one could replace it
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perfectly. The first section of the note uses the concept of “added value” to make this point more
precisely. Second, competitive advantage usually comes from the full range of a firm’s activities—
from production to finance, from marketing to logistics—acting in harmony. The essence of creating
advantage is finding an integrated set of choices that distinguishes a firm from its rivals. The second
section of the note shows how managers can analyze the full range of activities to understand the
sources of competitive advantage.
As a preface to the main discussion, it is important to address a few possible misconceptions.
Creating vs. sustaining competitive advantage. The note separates the challenge of creating
competitive advantage at a point in time from the problem of sustaining advantage over time. In
reality, the two issues are married: the choices that establish a firm’s advantage also influence
whether the advantage can be sustained. For instance, in launching its personal financial software
“Quicken,” Intuit chose to offer customers outstanding post-sale assistance over the telephone.
Customers valued the help from trained operators, and customer service became a tool for creating
competitive advantage. Moreover, customer service helped Intuit sustain its advantage over rivals
such as Microsoft. Competitors found it hard to match Intuit’s service operations and its reputation
3
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798-062
Creating Competitive Advantage
for excellent support. In addition, Intuit used information from its service operations to generate a
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stream of ideas for improving its product.
Despite the connections between creating and sustaining advantage, we find it important to
discuss the two processes separately. Each is so complicated that it would be unwieldy to deal with
both at once.
Links to industry analysis. Within-industry differences in performance are often larger than
differences across industries, but it would be wrong to conclude that industry analysis is
unimportant. Industry analysis is crucial to creating competitive advantage for several reasons.
First, companies that generate competitive advantages typically do so by devising strategies that
neutralize the unattractive features of their industries and exploit the attractive features.
Second, industry conditions appear to have a large influence on whether competitive advantages
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are even possible. In some industries (e.g., computer leasing), conditions “strait-jacket” firms and
leave them little room to establish a superior wedge between willingness to pay and costs. In other
industries (e.g., prepackaged software), conditions permit the most effective firms to enjoy large
advantages over the least.
Finally, market leaders often face a tension between managing industry structure and pursuing an
advantage within that structure. When deciding whether to build a new aluminum smelter, for
instance, Alcoa must consider the impact of the new capacity on industry supply-demand conditions,
not just its effect on Alcoa’s competitive advantage. This is true not only because Alcoa is a large
player in the business, but also because Alcoa is closely tracked by its rivals.
Analysis and creativity. This note takes an analytical approach to competitive advantage. In
actuality, many of the greatest advantages come not from analysis, but from entrepreneurial insight
and trial-and-error. The cold, hard analysis described here is not intended to deny the importance of
insight and trial-and-error. Rather, it aims to guide entrepreneurial creativity and to set a battery of
tests for new business ideas.
The Logic of Value Creation and Distribution
The first and foremost test in this battery concerns “added value,” a concept developed by Adam
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Brandenburger, Barry Nalebuff, and Harborne Stuart. To introduce the concept, we use the example
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of the portal crane business of Harnischfeger Industries. We then link added value to competitive
advantage.
Harnischfeger, based in Milwaukee, Wisconsin, manufactured equipment for industrial
customers. Its material handling equipment division served a range of customers, including forest
products companies such as International Paper. In the late 1970s, Harnischfeger began to offer these
customers a new product: portal cranes. Portal cranes were designed to lift entire tree-length logs off
of railcars and trucks and to hoist them around woodyards. The cranes were a significant
improvement over the giant forklifts that they replaced.
In fact, it was possible to calculate the customer benefits reasonably precisely. Each crane
replaced a fleet of forklifts which cost roughly $1.0 million. A crane was also less expensive to
operate than a forklift fleet; it required less labor, fuel, and maintenance, for instance. Altogether
over its lifespan, each crane generated a net present value of $6.5 million of savings in operating
costs. It cost Harnischfeger only $2.5 million to produce and install each crane. Thus a large gap
4
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Creating Competitive Advantage
798-062
existed between the customer benefits associated with a crane ($1.0 million + $6.5 million) and
Harnischfeger’s costs ($2.5 million). Despite this gap, Harnischfeger was making little profit on its
sales of portal cranes by the late 1980s. What happened?
Willingness to Pay and Supplier Opportunity Cost
A customer’s willingness to pay for a product or service is the maximum amount of money that a
customer would be willing to part with in order to obtain the product or service. In the
Harnischfeger example, a customer considering the purchase of a portal crane would be willing to
pay as much as $7.5 million for the crane. If it cost more than that, the customer would be better off
buying the forklifts for $1 million and paying the extra operating costs of $6.5 million.
The concept of supplier opportunity cost is precisely symmetrical to willingness to pay. It is the
smallest amount that a supplier will accept for the services and resources required to produce a good
or service. We call this an “opportunity cost” because it is dictated by the best opportunities that the
suppliers have to sell their services and resources elsewhere. In the example, the actual cost that
Harnischfeger incurred to deliver a portal crane was $2.5 million. We don’t know what the lowest
amount the suppliers would have accepted actually was, but we will speculate that it was not far
below $2.5 million, say $2.0 million.
Imagine that Harnischfeger is bargaining with International Paper, one of the largest paper
manufacturers, over the price of a portal crane. For now, suppose that Harnischfeger is the only
company that can provide a portal crane and International Paper is the sole customer. The price that
emerges from the bargaining may fall anywhere between $2.5 million, Harnischfeger’s cost, and $7.5
million, International Paper’s willingness to pay. (See Figure 3.) Our theory says nothing about
where the price will fall within this range. If Harnischfeger is a particularly tough bargainer, then the
price will tend toward $7.5 million. If International Paper is the shrewder negotiator, the price will
edge toward $2.5 million.
Figure 3: Division of Value
Supplier
opportunity
cost
Cost
Price
$2.0
mm
$2.5
mm
?
Supplier
share
Harnischfeger share
Willingness
to pay
$7.5
mm
International Paper share
Source: Brandenburger and Stuart, “Value-Based Business Strategy,” 1996
The total value created by a transaction is the difference between the customer’s willingness to pay
and the supplier’s opportunity cost. In the example, a sale of a crane to International Paper creates
value of $5.5 million: an item worth $7.5 million to the customer is created from supplied resources
that had a value of only $2.0 million in their next-best use. The value captured by Harnischfeger is
the difference between the negotiated price and $2.5 million. International Paper captures value
equal to $7.5 million minus the price. And suppliers capture $0.5 million (Figure 3).
5
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Creating Competitive Advantage
Added Value
A firm’s added value plays a large role in determining how much value it actually captures. The
added value of a firm is the maximal value created by all participants in a transaction minus the
maximal value that could be created without the firm. In essence, it is the value that would be lost to
the world if the firm disappeared. Consider the situation with Harnischfeger as the sole provider of
cranes and International Paper as the only customer. If Harnischfeger opts out of the transaction, the
entire $5.5 million of value goes un-created. Similarly, if International Paper refuses to participate,
$5.5 million of value is no longer generated. Both Harnischfeger and International Paper have an
added value of $5.5 million.
Now consider what happens in the late 1980s when Kranco, a management-buyout firm headed
by former Harnischfeger executives, enters the market for portal cranes. Assume that Kranco
produces an identical product, with costs of $2.5 million and supplier opportunity costs of $2.0
million, and it generates the very same willingness to pay of $7.5 million. The added value of
Harnischfeger is now $0. If it participates in a deal with International Paper, the total value created is
$5.5 million. If it opts out, Kranco can fill its place, and total value of $5.5 million is still generated.
Under a condition known as unrestricted bargaining, the amount of value a firm can claim cannot
exceed its added value. To see why this is so, assume for a moment that a lucky firm does strike a
deal that allows it to capture more than its added value. Then the value left over for the remaining
participants is less than the value that those others could generate by arranging a deal amongst
themselves. The remaining participants could break off and form a separate pact that improves their
collective lot. Any deal which grants a firm more than its added value is fragile because of such
separate pacts. Once Kranco enters, it is not surprising that Harnischfeger captures little value and is
barely profitable. After all, it has little or no added value. (See the top half of Figure 4.)
Figure 4: Added Value with Harnischfeger and Kranco Providing Cranes
Supplier opportunity cost of
Harnischfeger crane = $2.0 mm
Willingness to pay for
Harnischfeger crane = $7.5 mm
Harnischfeger
added value =
$0.0 mm
Total value created = $5.5 mm
Total value created = $5.5 mm
Supplier opportunity cost
of Kranco crane = 2.0 mm
Willingness to pay for
Kranco crane = 7.5 mm
Supplier opportunity cost of
Harnischfeger crane = $3.0 mm
Willingness to pay for
Harnischfeger crane = $9.0 mm
Total value created = $6.0 mm
Total value created = $5.5 mm
Supplier opportunity cost
of Kranco crane = 2.0 mm
Harnischfeger
added value =
$0.5 mm
Willingness to pay for
Kranco crane = 7.5 mm
6
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For the exclusive use of M. Kayal, 2020.
Creating Competitive Advantage
798-062
Suppose now that Harnischfeger discovers a way to add some new services to its core product.
(See the bottom half of Figure 4.) The services boost the willingness to pay of International Paper to
$9.0 million, but, because the services entail additional labor, they raise supplier opportunity costs to
$3.0 million. The total value created with Harnischfeger participating is now $9.0 million – $3.0
million = $6.0 million. The total value if Harnischfeger opts out and Kranco provides the crane is $7.5
million – $2.0 million = $5.5 million. The new service boosts Harnischfeger’s added value from $0 to
$0.5 million, essentially because it raises willingness to pay by more than it increases supplier
opportunity costs. By widening the ga…
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