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ECP 6701 Competitive Strategies in Expanding Markets. Strategic Positioning for Competitive Advantage. Readings. BDSS Chapter 11. Strategic Positioning. Firms within the same industry can position themselves in different ways

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slide1

ECP 6701

Competitive Strategies in Expanding Markets

Strategic Positioning for Competitive Advantage

readings
Readings
  • BDSS Chapter 11
strategic positioning
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 firm’s ability to create value and enjoy a competitive advantage over other firms depends on how it positions itself within its industry
competitive advantage and value creation
Competitive Advantage and Value Creation
  • A firm is said to have a competitive advantage in a market if it earns a higher rate of economic profit compared to the average economic profit in the industry
  • Economic profit earned by a firm depends on the market conditions as well as the economic value created by the firm
competitive advantage and value creation1
Competitive Advantage and Value Creation
  • A firm can achieve competitive advantage only if it can create more economic value than its competitors
  • A firm’s ability to create value depends on its cost position as well as its benefit position relative to its competitors
competitive advantage and profitability evidence
Competitive Advantage and Profitability: Evidence
  • Research on the variation in profitability across firms by Anita McGahan and Michael Porter shows 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
value creation and profitability
Value Creation and Profitability
  • Value created = consumer surplus + producer’s profit
  • Consumer surplus is the difference between the maximum the consumer is willing to pay (monetary value of the perceived benefit) and the price
components of consumer surplus
Components of Consumer Surplus
  • A firm can increase consumer surplus by increasing the perceived benefit or by selling at a 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
competition in price quality continuum
Competition in Price-Quality Continuum
  • When products differ in quality, competing firms can be viewed as submitting consumer surplus bids with their quality-price combinations
  • When a firm fails to offer as much consumer surplus as its rivals, its sales will decline
the value map

P,

Price

Lower

consumer

surplus

indifference

curve

Product D

Product A

Product C

Product B

Higher

consumer

surplus

q, quality

The Value Map
value map an illustration
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
value map an illustration1
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
value created and economic profits
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.

value created and competitive advantage
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 and still make an economic profit
consonance analysis of value creation
Consonance Analysis of Value Creation
  • Consonance analysis looks at a firm’s 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 from other industries
the value chain
The Value Chain
  • The value chain or the vertical chain is the representation of the firm as a set of value creating activities
  • Activities in the value chain include primary activities like production and marketing as well as support activities such as human resource management and finance
value chain
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
value creation and resources and capabilities
Value Creation and Resources and Capabilities
  • Two ways in which a firm can create more economic value than its competitors
    • Configure its value chain differently from competitors
    • Perform the activities more effectively than the rivals
  • If the firm’s value chain is similar to its rivals’ the firm needs resources and capabilities that the rivals do not have to create superior value
value creation and resources and capabilities1
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
strategic positioning1
Strategic Positioning
  • Two broad approaches to strategic positioning
    • Cost leadership
    • Benefit leadership
  • Alternative is to use a narrow focus strategy
the strategic logic of cost leadership
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
the strategic logic of cost leadership1

P, C,

Price, unit cost

indifference

curve

E

PE

F

PF

CE

DC

Dq

CF

q, quality

qF

qE

The Strategic Logic of Cost Leadership
the strategic logic of cost leadership2
The Strategic Logic of Cost Leadership
  • Firm F offers lower quality than the rest of the industry (E) and has much lower costs than the rest of the industry
  • If the cost leader attains consumer surplus parity with the rest of the firms in the industry it earns a higher profit margin

CE – CF > PE – PF

PF – CF > PE – CE

the strategic logic of benefit leadership
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
the strategic logic of benefit leadership1

P, C,

Price, unit cost

indifference

curve

F

PF

E

PE

CF

DC

CE

Dq

q, quality

qF

qE

The Strategic Logic of Benefit Leadership
the strategic logic of benefit leadership2
The Strategic Logic of Benefit Leadership
  • Firm F offers higher benefit than the rest of the industry (E) at a slightly higher cost
  • If the benefit leader attains consumer surplus parity with the rest of the firms in the industry it earns a higher profit margin

PF – PE> CF – CE

PF – CF> PE– CE

extracting profits from cost and benefit advantage
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
exploiting a competitive advantage through pricing
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 build the share
exploiting a competitive advantage through pricing1
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
conditions suitable for seeking a cost advantage
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
conditions suitable for seeking a benefit advantage
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
diversity of strategies
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)
stuck in the middle
“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
cost and benefit leadership
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 and learning
cost and benefit leadership1
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
strategic positioning2
Strategic Positioning
  • Two questions are important
    • How will the firm create value? [Benefit, cost]
    • Where will the firm do it? [Broad or narrow segments]
segmenting an industry
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 particular customer group
segmenting an industry1
Segmenting an Industry
  • Differences in segments arise due to
    • Customer preferences
    • Supply conditions
    • Segment size
  • Customers within a group should have common features
broad coverage strategies
Broad Coverage Strategies
  • Offer a full line of products to serve a range of customer groups
  • Economies of scope can arise from
    • Production
    • Distribution
    • Marketing
focus strategies
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