Put very simply, successful companies either have a cost advantage or they

have a value advantage, or – even better – a combination of the two. Cost advan-
tage gives a lower cost profile and the value advantage gives the product or
offering a differential ‘plus’ over competitive offerings.
Let us briefly examine these two vectors of strategic direction.

1 Cost advantage
In many industries there will typically be one competitor who will be the low-cost
producer and often that competitor will have the greatest sales volume in the
sector. There is substantial evidence to suggest that ‘big is beautiful’ when it
comes to cost advantage. This is partly due to economies of scale, which enable
fixed costs to be spread over a greater volume, but more particularly to the impact
of the ‘experience curve’.
The experience curve is a phenomenon with its roots in the earlier notion of
the ‘learning curve’. Researchers in the Second World War discovered that it was
possible to identify and predict improvements in the rate of output of workers as
they became more skilled in the processes and tasks on which they were working.
Subsequent work by Boston Consulting Group, extended this concept by demon-
strating that all costs, not just production costs, would decline at a given rate as
volume increased (see Figure 1.3). In fact, to be precise, the relationship that the
experience curve describes is between real unit costs and cumulative volume.

Figure 1.3 The experience curve

Real costs per unit

Cumulative volume

Traditionally it has been suggested that the main route to cost reduction was
through the achievement of greater sales volume and in particular by improving
market share. However, the blind pursuit of economies of scale through volume
increases may not always lead to improved profitability – the reason being that
in today’s world much of the cost of a product lies outside the four walls of the
business in the wider supply chain. Hence it can be argued that it is increasingly
through better logistics and supply chain management that efficiency and produc-
tivity can be achieved leading to significantly reduced unit costs. How this can be
achieved will be one of the main themes of this book.

LOGISTIC S, THE SUPPLY CHAIN AND COMPETITIVE STRATEGY 5

 Logistics and supply chain management can provide a multitude of ways
to increase efficiency and productivity and hence contribute significantly to
reduced unit costs.

2 Value advantage
It has long been an axiom in marketing that ‘customers don’t buy products, they
buy benefits’. Put another way, the product is purchased not for itself but for the
promise of what it will ‘deliver’. These benefits may be intangible, i.e. they relate
not to specific product features but rather to such things as image or service. In
addition, the delivered offering may be seen to outperform its rivals in some func-
tional aspect.
Unless the product or service we offer can be distinguished in some way from
its competitors there is a strong likelihood that the marketplace will view it as a
‘commodity’ and so the sale will tend to go to the cheapest supplier. Hence the
importance of seeking to add additional values to our offering to mark it out from
the competition.
What are the means by which such value differentiation may be gained?
Essentially the development of a strategy based upon added values will normally
require a more segmented approach to the market. When a company scrutinises
markets closely it frequently finds that there are distinct ‘value segments’. In other
words, different groups of customers within the total market attach different impor-
tance to different benefits. The importance of such benefit segmentation lies in
the fact that often there are substantial opportunities for creating differentiated
appeals for specific segments. Take the car industry as an example. Most volume
car manufacturers such as Toyota or Ford offer a range of models positioned at
different price points in the market. However, it is increasingly the case that each
model is offered in a variety of versions. Thus at one end of the spectrum may be
the basic version with a small engine and two doors and at the other end, a four-
door, high-performance version. In between are a whole variety of options, each of
which seeks to satisfy the needs of quite different ‘benefit segments’. Adding value
through differentiation is a powerful means of achieving a defensible advantage in
the market.
Equally powerful as a means of adding value is service. Increasingly it is the
case that markets are becoming more service-sensitive and this of course poses
particular challenges for logistics management. There is a trend in many markets
towards a decline in the strength of the ‘brand’ and a consequent move towards
‘commodity’ market status. Quite simply this means that it is becoming progres-
sively more difficult to compete purely on the basis of brand or corporate image.
Additionally, there is increasingly a convergence of technology within product cate-
gories, which means that it is often no longer possible to compete effectively on the
basis of product differences. Thus the need to seek differentiation through means
other than technology. Many companies have responded to this by focusing upon
service as a means of gaining a competitive edge. Service in this context relates to

6 LOGISTICS & SUPPLY CHAIN MANAGEMEN T

the process of developing relationships with customers through the provision of an
augmented offer. This augmentation can take many forms including delivery serv-
ice, after-sales services, financial packages, technical support and so forth.

Seeking the high ground

In practice what we find is that the successful companies will often seek to achieve
a position based upon both a cost advantage and a value advantage. A useful
way of examining the available options is to present them as a simple matrix. Let
us consider these options in turn.

Figure 1.4 Logistics and competitive advantage

High

Service Cost and

leader service leader
Value advantage

Low

Commodity Cost
market leader

Low High

Cost advantage

For companies who find themselves in the bottom left-hand corner of our matrix
(Figure 1.4) the world is an uncomfortable place. Their products are indistinguishable
from their competitors’ offerings and they have no cost advantage. These are typi-
cal commodity market situations and ultimately the only strategy is either to move to
the right of the matrix, i.e. to cost leadership, or upwards towards service leadership.
Often the cost leadership route is simply not available. This particularly will be the
case in a mature market where substantial market share gains are difficult to achieve.
new technology may sometimes provide a window of opportunity for cost reduction
but in such situations the same technology is often available to competitors.
Cost leadership strategies have traditionally been based upon the economies
of scale gained through sales volume. This is why market share is considered to
be so important in many industries. However, if volume is to be the basis for cost
leadership then it is preferable for that volume to be gained early in the market life
cycle. The ‘experience curve’ concept, briefly described earlier, demonstrates the
value of early market share gains – the higher your share relative to your competi-
tors the lower your costs should be. This cost advantage can be used strategically
to assume a position of price leader and, if appropriate, to make it impossible
for higher-cost competitors to survive. Alternatively, price may be maintained,

LOGISTIC S, THE SUPPLY CHAIN AND COMPETITIVE STRATEGY 7

 enabling above-average profit to be earned, which potentially is available to further
develop the position of the product in the market.
However, an increasingly powerful route to achieving a cost advantage comes
not necessarily through volume and the economies of scale but instead through
logistics and supply chain management. In many industries, logistics costs rep-
resent such a significant proportion of total costs that it is possible to make major
cost reductions through fundamentally re-engineering logistics processes. The
means whereby this can be achieved will be returned to later in this book.
The other way out of the ‘commodity’ quadrant of the matrix is to seek a strat-
egy of differentiation through service excellence. We have already commented
on the fact that markets have become more ‘service-sensitive’. Customers in all
industries are seeking greater responsiveness and reliability from suppliers; they
are looking for reduced lead times, just-in-time delivery and value-added services
that enable them to do a better job of serving their customers. In Chapter 2 we
will examine the specific ways in which superior service strategies, based upon
enhanced logistics management, can be developed.

Figure 1.5 The challenge to logistics and supply chain management

Relative differentiation

High
Low

High Low
Relative delivered costs

One thing is certain: there is no middle ground between cost leadership and service
excellence. Indeed the challenge to management is to identify appropriate logistics
and supply chain strategies to take the organisation to the top right-hand corner of
the matrix. Companies who occupy that position have offers that are distinctive in
the value they deliver and are also cost competitive. Clearly it is a position of some
strength, occupying ‘high ground’ that is extremely difficult for competitors to attack.
Figure 1.5 clearly presents the challenge: it is to seek out strategies that will take the
business away from the ‘commodity’ end of the market towards a securer position of
strength based upon differentiation and cost advantage.
Logistics management, it can be argued, has the potential to assist the organi-
sation in the achievement of both a cost advantage and a value advantage. As Figure
1.6 suggests, in the first instance there are a number of important ways in which

8 LOGISTICS & SUPPLY CHAIN MANAGEMEN T

productivity can be enhanced through logistics and supply chain management. Whilst
these possibilities for leverage will be discussed in detail later in the book, suffice it to
say that the opportunities for better capacity utilisation, inventory reduction and closer
integration with suppliers at a planning level are considerable. Equally the prospects
for gaining a value advantage in the marketplace through superior customer service
should not be underestimated. It will be argued later that the way we service the cus-
tomer has become a vital means of differentiation.

Figure 1.6 Gaining competitive advantage

The goal:
superior
Value customer
advantage value at
less cost
Logistics leverage
opportunities:

• Tailored services
• Reliability
• Responsiveness

Cost advantage
Logistics leverage opportunities:
• Capacity utilisation
• Asset turn
• Synchronous supply

To summarise, those organisations that will be the leaders in the markets of the
future will be those that have sought and achieved the twin peaks of excellence:
they have gained both cost leadership and service leadership.
The underlying philosophy behind the logistics and supply chain concept is that
of planning and co-ordinating the materials flow from source to user as an inte-
grated system rather than, as was so often the case in the past, managing the
goods flow as a series of independent activities. Thus under this approach the
goal is to link the marketplace, the distribution network, the manufacturing proc-
ess and the procurement activity in such a way that customers are serviced at
higher levels and yet at lower cost. In other words the goal is to achieve competi-
tive advantage through both cost reduction and service enhancement.

The supply chain becomes the value chain

Of the many changes that have taken place in management thinking over the
last 30 years or so perhaps the most significant has been the emphasis placed
upon the search for strategies that will provide superior value in the eyes of the

LOGISTIC S, THE SUPPLY CHAIN AND COMPETITIVE STRATEGY 9