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16 Cards in this Set

  • Front
  • Back
Strategic Positioning (1) goal?
Goal?
A firm’s ability to create value and enjoy a competitive advantage over other firms depends on how it positions itself within its industry.

However:
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.

So?
Underlines the importance of careful strategic positioning.
how to position the competitive advantage?
Strategic positioning, how?
A firm has to try to position itself in such a way that it is able to produce more value relative to its competitors.
 Competitive advantage!!

Definition:
When a firm outperforms (i.e. earns higher rates of economic profit than) competitors who sell in the same market.
How to define the market?  see previous lectures!!

Economic profit?
Depends on the economic attractiveness of the market as well as the success of the firm in creating more economic value than its competitors.
Competitive Advantage & Value Creation (1)
Given market attractiveness, how can a firm create value?

Created value:
The difference between the value that resides in the finished good and the value that is sacrificed to convert inputs into the finished product.

Definition is vague:
Value that resides in the finished good?
Value that is sacrificed?

Better understanding when discussing the concepts of:
Maximum willingness-to-pay.
Consumer surplus.
Competitive Advantage & Value Creation (2)
Maximum willingness-to-pay:
Price at which the consumer is indifferent between buying the product and not buying.
[Value that resides in the finished good.]

Consumer surplus:
The difference between the maximum the consumer is willing to pay and the prevailing market price.
consumer surplus and competition:
Why is consumer surplus important?
Consumer surplus needs to be positive for a purchase to occur. (Why?)
In case of a choice between two products the consumer will choose the one with the largest surplus.

Therefore:
When a firm fails to offer as much consumer surplus as its rivals, its sales will decline.

How to avoid? Increase consumer surplus by:
Increasing the perceived benefit (quality).
Lowering the price.
Competitive Advantage & Value Creation (3)
We now understand maximum willingness-to-pay and consumer surplus  Back to the idea of value creation.

Recap created value: The difference between the value that resides in the finished good and the value that is sacrificed to convert inputs into the finished product.

Suppose:
Maximum willingness-to-pay = B
Price = P
Cost of making the product = C
[Value that is sacrificed.]

Consumer surplus = B – P
Created value = B – C = (B – P) + (P – C)
Created value = Consumer surplus + Producer surplus.
Competitive Advantage & Value Creation (4)
value creation:
Value creation:
Consumers demand the same surplus from the firm as from its rivals.
With superior value creation, the firm can offer as much consumer surplus as its rivals and still make an economic profit.

Therefore:
To achieve competitive advantage a firm must produce more value than its rivals.

How can a firm produce more value?
Value chain analysis!
Value chain (vertical chain)
Is the representation of the firm as a set of value creating activities.

Each activity in the value chain can potentially add to the perceived benefits.
Each activity also adds to the costs.
A firm can create more value than its rivals by:
Configuring the value chain differently.
Performing the activities more efficiently.
Need for resources and capabilities rivals do not have.
Fe: Resources  patents, brand name.
Fe: Capabilities  superior acquisition of information by banks.

However in practice:
It is very difficult to isolate the incremental perceived benefits and costs of each activity.
Porters generic strategies:
Two (+ one) competitive strategies:
Cost leadership.
Benefit leadership (Differentiation).
Focus strategy.
Strategy of Cost Leadership (1)
Applied strategy:
A cost leader creates a larger B – C by achieving a lower C than its rivals.

How?
Undercut rivals’ prices and sell more than they do.
Match rivals’ prices and attain higher price – cost margins than they can.
2nd
Strategy:
Firm F offers lower quality and has much lower costs than the rest of the industry (E).

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  price – cost margin F is larger.
Strategy of Benefit Leadership (1)
Applied strategy:
A benefit leader creates a larger B – C by achieving a higher B than its rivals.

How?
Match rivals’ prices and sell more than they do.
Charge price premium and attain higher price – cost margins than rivals can.

2nd
Strategy:
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  price – cost margin F is larger.
Cost advantage is a suitable strategy when:
The nature of the product does not allow benefit enhancement.
Fe: Oil  scale economies.
Consumers are relative price sensitive.
Fe: Mars bar.
It concerns a search good.
Quality of good is known before purchase.
Fe: Chairs or other furniture.
Benefit advantage is a suitable strategy when:
Consumers are willing to pay a premium for benefit enhancements.
Fe: Bang & Olufsen.
When economies of scale and learning are significant (obtain benefit advantage through differentiation in a niche market).
Fe: Internet brokers.
It concerns a experience good.
Quality of good is only known after purchase and when it is used for a while.
Fe: Your brand new car.
Different focus strategies?
Customer specialisation: Offer a wide range of products to a narrow customer group.
Product specialisation: Offer limited product variety for a wide range of customers.
Geographic specialisation: Exploit the unique conditions of the region.
conclusion ch 13
A firm has a competitive advantage when it outperforms its rivals who sell in the same market.

Value creation is an essential element in creating competitive advantage.

Different strategies can be applied to create value:
Cost leadership.
Benefit leadership.
Focus strategies.

Dell? In the case of Dell, the different reconfiguration of the value chain and a deliberate focus on cost advantage enhanced the creation of economic value.