econ corporate strategy revision slide

8/13/2019 Econ Corporate Strategy Revision Slide

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1

ECP 6701

Competitive Strategies in Expanding Markets

Strategic Positioning for

Competitive Advantage


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Readings

BDSS Chapter 11


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Strategic Positioning

Firms within the same industry can position

themselves in different ways Not all positions will be equally profitable or

lead to the same odds of survival

A firms ability to create value and enjoy a

competitive advantage over other firmsdepends on how it positions itself within its

industry


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Competitive Advantage and Value

Creation

A firm is said to have a competitive advantage

in a market if it earns a higher rate of economicprofit compared to the average economic profit

in the industry

Economic profit earned by a firm depends on

the market conditions as well as the economicvalue created by the firm


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Competitive Advantage and Value

Creation

A firm can achieve competitive advantage only

if it can create more economic value than itscompetitors

A firms ability to create value depends on its

cost position as well as its benefit position

relative to its competitors


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Framework for Competitive

Advantage


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Competitive Advantage and

Profitability: Evidence

Research on the variation in profitability across

firms by Anita McGahan and Michael Portershows that

19% of the variation is due to industry effects

32% is due to competitive advantage of firms

43% of the variation is random 4% of the variation is attributable to the corporate

parent and about 2% is the year effect


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Industry and Business Unit Effects

in Profitability


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Value Creation and Profitability

Value created = consumer surplus +

producers profit Consumer surplus is the difference between

the maximum the consumer is willing to pay

(monetary value of the perceived benefit) and

the price


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Components of Consumer Surplus

A firm can increase consumer surplus by

increasing the perceived benefit or by selling ata lower price

The firm can also increase consumer surplus

by reducing the cost of using the product and

the transactions costs that the consumer incurs


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The Value Map

PriceP,

q, quality

Product A

Product B

indifference

curve

Lower

consumer

surplusProduct D

Higherconsumer

surplus

Product C


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Value Map: An Illustration

Points on the indifference curve represent

price-quality with the same consumer surplus The steepness of the indifference curve

reflects the tradeoff between price and quality

that the consumers are willing to make


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Value Map: An Illustration

Products A and B exhibit consumer surplus

parity Product C has a higher consumer surplus than

A and B

Product D has a lower consumer surplus


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Value Created and Economic

Profits

Value created = Consumer surplus +

Producer surplus= (B - P) + (P - C)

= B - C

If (B-C) is not positive the product will not be viable.


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Value Created and Competitive

Advantage

To achieve competitive advantage, a firm must

produce more value than its rivals Consumers will demand the same consumer

surplus from the firm as from its rivals

With superior value creation, the firm can offer

as much consumer surplus as the rivals andstill make an economic profit


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Consonance Analysis of Value

Creation

Consonance analysis looks at a firms

prospects for continuing to create value Ability to create value will be affected by

changes in market demand

changes in technology and

threats from other firms in the industry and fromother industries


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The Value Chain

The value chain or the vertical chain is the

representation of the firm as a set of valuecreating activities

Activities in the value chain include primary

activities like production and marketing as well

as support activities such as human resourcemanagement and finance


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Michael Porters Value Chain


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Value Chain

Each activity in the value chain can potentially

add to perceived benefits Each activity also adds to costs

In practice it is difficult to isolate the

incremental perceived benefit and the

incremental cost of each activity


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Value Creation and Resources and

Capabilities

Capabilities have some of the following

characteristics They are typically valuable across multiple markets

and products

They are embedded in organizational routines that

survive when individuals are replaced They represent tacit knowledge in the organization


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Two broad approaches to strategic positioning

Cost leadership Benefit leadership

Alternative is to use a narrow focus strategy


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The Strategic Logic of Cost

Leadership

A cost leader can create more value than its

competitors by offering the same benefits as the competitors do

(benefit parity)

offering a slightly lower benefit (benefit proximity)

offering a qualitatively different product


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The Strategic Logic of Cost

Leadership

Price, unit costP, C,

q, quality

PE

PF

qEqF

CE

CF

DC

E

F

Dq

indifference

curve


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The Strategic Logic of Benefit

Leadership

A benefit leader firm can create superior values

by offering

cost parity

cost proximity

substantially higher benefit and higher cost


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Leadership

Price, unit costP, C,

q, quality

PE

PF

qE qF

CE

CF DC

E

F

Dq

indifference

curve


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Leadership

Firm F offers higher benefit than the rest of theindustry (E) at a slightly higher cost

If the benefit leader attains consumer surplusparity with the rest of the firms in the industry itearns a higher profit margin

PFPE> CFCEPFCF> PECE


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Extracting Profits From Cost and

Benefit Advantage

When the products are not differentiated, the

firm that has a cost (or benefit) advantage over

others can capture the entire market

With product differentiation, this extreme result

does not hold since firms face downward

sloping demand curves With differentiated products, customers do not

switch easily


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Exploiting a Competitive Advantage

Through Pricing

When the product differentiation is weak the

firm should follow a market share strategy

With a cost advantage, the firm should

underprice its rivals and build share

With a benefit advantage, the firm should

maintain price parity and let the benefit buildthe share


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Exploiting a Competitive Advantage

Through Pricing

When the product differentiation is strong the

firm should follow a profit margin strategy

With a cost advantage, the firm should

maintain price parity with its rivals

With a benefit advantage, the firm should

charge a price premium over the competitors


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Conditions Suitable for Seeking a

Cost Advantage

Cost advantage should be sought

when the nature of the product does not allow

benefit enhancement

when consumers relatively price sensitive and

when the product is a search good rather than an

experience good


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Conditions Suitable for Seeking a

Benefit Advantage

Benefit advantage should be sought

when consumers are willing to pay a premium for

benefit enhancements

when economies of scale and learning have been

already exploited and differentiation is the best route

to value creation and

when the product is an experience good


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Diversity of Strategies

Firms need to deliver a distinct bundle of

economic value through their strategy choices

When consumers differ in their willingness to

pay for product attributes, different strategies

can coexist (Example: Walmart and Target)


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Stuck in the Middle

It can be argued that firms should either pursue

a cost advantage or a benefit advantage but

not both

Firms that pursue both could, according to this

argument, get stuck in the middle and have

neither advantage In reality, successful firms appear to have both

types of advantages simultaneously


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Cost and Benefit Leadership

There could be other explanations why cost

advantage and benefit advantage appear

together

Firms that offer high quality products may

expand market share and enjoy cost

advantages due to economies of scale andlearning


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Cost and Benefit Leadership

Learning economies may be more important

for high quality production than for low quality

production

The high quality producers may also be more

efficient producers than low quality producers


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Two questions are important

How will the firm create value? [Benefit, cost]

Where will the firm do it? [Broad or narrow

segments]


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Segmenting an Industry

An industry can be represented in two

dimensions

Product varieties

Customer groups

A potential segment is the intersection of a

particular product group with a particularcustomer group


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Segmenting an Industry

Differences in segments arise due to

Customer preferences

Supply conditions

Segment size

Customers within a group should have

common features


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Focus Strategies

Customer specialization: A wide range of

products to a narrow customer group

Product specialization: Limited product variety

for a wide range of customers

Geographic specialization: Exploit the unique

conditions of the region

econ corporate strategy revision slide

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