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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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Strategic Positioning
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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The Strategic Logic of Benefit
Leadership
Price, unit costP, C,
q, quality
PE
PF
qE qF
CE
CF DC
E
F
Dq
indifference
curve
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The Strategic Logic of Benefit
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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Strategic Positioning
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