Business 42001- Knez

Business 42001- Knez

Competitive Strategy

Lecture 2
Competitive Advantage and Strategic Positioning
Activity Analysis - Cost Analysis - Benefit Analysis

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Competitive Advantage and Value Creation  The key question for profitability is not “How much economic value do I create?”, but rather “How much value do I create compared to my competitors?”.  If my product has a higher B - C than yours, I can match your “consumer surplus bid” (B - P) ... and walk away with more profit (P - C). Why? Value-created = Consumer Surplus + Profit

 Lower C (with same/close B) gives me the opportunity to ... –

undercut your price and sell more than you do, or ...

–

match your price and attain higher a higher price-cost margin than you.

 Higher B (with same/close C) gives me the opportunity to ... –

match your price and sell more than you do, or ...

–

charge a price premium and attain a higher price-cost margin than you.

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Superior Value Creation Typically Entails Tradeoffs  It is typically difficult to outperform competitors on all dimensions. – Delivering superior customer benefits is usually costly – Reducing costs often entails quality compromises.

 How you configure your activities when you strive to attain a lowcost position is likely to be different from how you configure activities when you strive to deliver superior customer benefits.  Two broad routes to competitive advantage – Cost advantage. – Differentiation (benefit) advantage.

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Two Dimensions of Strategic Positioning Value Position

(Product) (customer)

Variety - Based Needs - Based

Scope Position

Cost Leadership

Differentiation Leadership

Focus on a limited set of products or services that can cover multiple customer segments Generate lower costs per unit in a subset of product/service needs

Provide higher level of benefits on subset of product/service needs

Focus on serving most or all the needs of a particular customer segment

Generate lower costs per unit across product/service needs

Provide higher level of benefits across product/service needs

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Exploiting a Competitive Advantage Through Pricing Table 13.3 from BDSS

High price elasticity of demand (weak horizontal differentiation) Firm’s Price Elasticity of Demand

Low price elasticity of demand (strong horizontal differentiation)

Type of Advantage Cost Advantage

Benefit Advantage

(lower C than Competitors)

(higher B than Competitors)

 Modest price cuts gain lots of market share.  Exploit advantage through higher market share.  Share strategy: Under-price competitors to gain share.

 Modest price hikes lose lots of market share.  Exploit advantage through higher market share than competitors.  Share Strategy: Maintain price parity with competitors (let benefit advantage drive share increases.

 Big price cuts gain little share.  Exploit advantage through higher profits margins.  Margin Strategy: Maintain price parity with competitors (let lower costs drive higher margins)

 Big price hikes lose little share.  Exploit advantage through higher profit margins.  Margin Strategy: Charge price premium relative to competitors.

Horizontal Differentiation: Differences between products that increases perceived benefit for some customers but decreases it for others. University of Chicago/Knez

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Porter’s Activity-Based View

 “Operational effectiveness means performing similar activities better than rivals perform them. Strategic positioning means performing different activities from rivals’ or performing similar activities in different ways.” [Porter, 1996]  Strategy is the creation of a unique and valuable position, involving a distinctive system of activities (value chain activities). [Porter 1996]  The activity system is distinctive if it generates superior value for the target customers. Superior value can be in the form of either higher benefits (Singapore Airlines) or lower costs (Southwest airlines).  Given the required fit between the needs of the target customers and the activity system, strategy requires you to make trade-offs in competing – to choose what not to do.

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Cataloguing Activities - Porter’s Value Chain

Firm Infrastructure Mar

Human Resource Management

gin

Support Activities

Technology Development Procurement

Outbound Logistics

Marketing & Sales

Service

rgin

Operations

Ma

Inbound Logistics

Primary Activities 7 University of Chicago/Knez

Southwest Activity System* From: What is Strategy, By Michael Porter, HBR 1996.

No meals

No seat assignments*

Frequently, reliable departures

High compensation of employees

Flexible union contracts

1.5 minute Gate turnarounds

Lean, highly productive ground and gate crews

High level of employee stock ownership

Limited passenger service

Limited use of travel agents

Automatic ticketing machines

High aircraft utilization

No baggage transfers

No connections with other airlines

Standardized fleet

Short-haul, point-to-point routes between midsize cities and secondary airports

Very low ticket prices

“Southwest the low-fare airline”

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SWA Example - Top Down View* (Some) Core Elements of SWA Value Proposition Travel Any Time

On-Time

Low Price

Easy Access

Cost Advantage High Asset v Utilization Low Cost.

Many Frequent Flights

Full Flights

Maximum Number of Flights

Route Scheduling

Airplane Turnaround Process

Critical Activities *Adapted from Chatterjee - Core Objectives: Clarity in Designing Strategy, CMR 2005

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SWA Example - Top Down View*

Quick Turnaround

Activities Planes Available at Short Notice

Outsource Maintenance

Standardized and Simplify Boarding

All 737

Flight Operations: pilots can fly all planes

Flexible Employees

Resources *Adapted from Chatterjee - Core Objectives: Clarity in Designing Strategy, CMR 2005

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(Strategic) Activity Analysis  Objective: Generate a comprehensive understanding a company’s relative position in the market place • Identify and assess competitive advantages and disadvantages • Identify potential changes/investments to improve/strengthen position  Core Concepts: – Cost advantages (or disadvantages) emanate from the performance of activities necessary to deliver the value proposition, and resources required to perform those activities. – Benefit Advantages emanate through activities that generate benefits not offered by the competition. – Cost and benefit advantages may result from two sources: 1. The company has an alternative configuration of activities to compete for the same target customers 2. The company performs the same activities more effectively.  In most cases, the company’s strategic position requires making tradeoffs: – The provision of higher benefits, with higher costs - differentiation strategy, or – The provisions of few benefits at a lower, with lower costs - low cost strategy The activity analysis should capture those tradeoffs. 11

Activity Analysis: Process  Generate initial description of strategy - value proposition, target market segments, and critical capabilities. Note that (in practice) this is a preliminary description to be refined through the analysis, especially the critical capabilities.  Next, identify the primary competitors in the target market segments. Traditional Steps (as outlined in Ghemawat and Rivkin note): 1. Catalogue Activities (The Value Chain) 2. Use Activities to Analyze Relative Costs 3. Use Activities to Analyze Relative Willingness to Pay 4. Explore Options and Make Choices

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Strategic Cost Analysis

1. Identify the set of primary activities that drive costs (e.g. Value Chain). 2. Identify costs of performing each of the activities. Where possible calculate (or at least characterize) these costs on a per unit basis. 3. Identify the set of cost drivers associated with each activity - factors that make the cost of the activity rise or fall. 4. Given an understanding of the competitors’ value propositions and activity systems, use the identified cost drivers to estimate (or characterize) their relative cost position. 5. Given relative cost analysis: i. Assess and prioritize greatest cost disadvantages and identify ways to lower costs without diminishing the value proposition. ii. Consider potential competitive threats to identified costs advantages, and identify ways to strengthen the advantage.

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Benefit analysis  The objective of the benefit analysis is to: – Identify how a firm may be creating greater benefits than the competition – If possible, verify a greater willingness to pay for the benefits – Identify the activities that generate the distinctive benefits and assess the additional costs created.  The text (BDSS) provides the following categories of Benefit Drivers 1. Physical Characteristics of the product itself. 2. The quantity and characteristics of the services or the complementary goods or its dealers offer for sale. 3. Characteristics associated with the sale or delivery of the good. 4. Characteristics that shape consumers’ perceptions to expectations of the product’s performance or its cost to use. 5. The subjective image of the product.  For our purposes, the above benefit drivers represent alternative dimensions of the value proposition. 14

Customer Segmentation Common Market Segmentation Variables* Identifier Variables (Who they are)

Response Variables (What they want)

Consumer Markets  Demographics (age, gender, life cycle stage, ethnicity, religion)  Socioeconomic factors (income, occupation, education)  Psychographics (beliefs, opinions, activities, interests)

Benefits Desired 

Price, reliability, service

Application or Usage Situation  

Consumer: Planned versus impulse/unexpected Business: Scheduled versus unplanned

Sensitivity to Market Mix Business Markets  Size of Customer  Industry  Geography



Price, promotion, product features

Purchasing Behavior    

Buying volume and frequency Switching among brands Purchasing approach Channels used

*Based on figure 2-1 in chapter 2 of Marketing as Strategy, by Nirmalya Kumar, HBS 2006

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Value Proposition  Value Proposition: The collection of elements (or benefits) that are being offered to the customer at a particular price. In combination, this collection of elements is designed to meet the customer’s overall needs.  Since each dimension of the value proposition comes at a cost (and hence, a price), the customer may be willing to consider alternative value propositions that meet the same broadly defined need (e.g. Avis versus Zipcar).  The basis for alternative value propositions are tradeoffs. The most basic tradeoff is value versus price.  Additional tradeoffs are created by alternative performance capabilities generated by alternative mixtures of the value proposition elements (e.g. alternative technology solutions that offer different performance capabilities iPhone versus a Blackberrry).

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Table Stakes versus Discriminators  Given well defined target market segments, the value proposition can be separated into two categories: i.

Table Stakes - Those features of the value proposition that any player in this market will have to provide at some minimum level of quality. The table stakes define a baseline for making relative comparisons to the competition. ii. Discriminators - Those features of the value proposition that are distinctive relative to the competition. The discriminators can be features of the value proposition that no other competitors provide (but not necessary to compete in the market at a lower price point), or more commonly, enhancements of one of the table stakes. iii. Negative Discriminators - Missing features in the value proposition that are offered as discriminators by the competition.  Over time, significant discriminators become table stakes - the competition introduces the discriminating benefit to their value proposition.

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Breaking Down the Value Proposition Value Proposition Elements

Primary Value Proposition Elements

Additional Value Proposition Elements

Table Stake Category

Discriminators

Availability of latest video titles and assortment of older titles

Largest supply of latest titles

Brick & Mortar Retail Access

Largest number of conveniently located retail outlets, with distinctive in-store shopping experience

Basic in-store customer service

High levels of customer service through highly trained/motivated store personnel

 Largest supply of used video games (with guaranteed quality)  Best source of information/news of interest to the hardcore game enthusiast

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Aside: VP-Driven Business Model Innovation 

New value propositions are designed to meet the needs of customer segments that are either under-served or over-served by those currently offered in the market place. –

Over-served: These are customers for which there are elements of the value proposition they do not need and would rather not have to pay for. The value proposition gap is in the form of the customer having to (implicitly) pay for benefits they don’t want in order to receive the benefits they do what.

–

Under-served: These are customers for which there are missing elements of the value proposition they would be willing to pay for if added. The value proposition gap is in the form of the customer not receiving the benefits that they would be willing to pay for if provided.



Only in special circumstances, where the value proposition is priced (or negotiated) on a customer-by-customer basis, will there be no value proposition (VP) gap. In most businesses (especially consumer), VP gaps are created because the VP must be standardized (to some degree) in order for the revenue/cost model to be viable.

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Aside: VP-Driven Business Model Innovation  Many business model innovations entail the identification of over or under served segments within the existing accepted business models.  The business model innovation entails removing one (or more) table stakes from the value proposition, enabling a whole new business model. The table stakes removed are not important to the under-served target market segment.  Examples – Dell’s direct Model – Netflix – Redhat – Zipcar – Southwest Airlines (no frills, point-to-point) – McCafe

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Strategic Benefit Analysis

1. Prioritize the list of positive and negative discriminators in terms of perceived (Bto-C) or directly measured (B-to-B/G) willingness to pay. Where possible, use the cost analysis to identify the incremental costs required to provide the discriminator. 2. Given the prioritized list, identify the potential competitive threats to the positive discriminators (benefit advantages) and consider ways to strengthen the advantage (given cost considerations). 3. For negative discriminators (benefit disadvantages), first consider the degree to which the lower benefits are justified by a lower cost position. If not justified by lower costs, then identify ways to close the benefit gap by enhancing the performance of the relevant activities/resources - represents an execution problem. ii. If justified through lower costs, identify ways to further strengthening the cost advantage, and, or ways to incrementally close the benefit gap without incurring a significant increase in costs.

i.

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Edward Jones Case (Week 3) Case Write-Up Questions 1.

Breakdown Edward Jones’ value proposition - table stakes and discriminators. Based on your breakdown, what are the most significant benefit advantages they have in their target market. Your identified benefit advantages should be described in terms of important characteristics of their target customer segment. Note that you do not need to provided an exhaustive list of table stakes, simply identify those that appear most relevant for identifying the discriminators. (60%)

2.

What are the cost tradeoffs generated by their benefit advantage, and how does Edward Jones minimize the potential cost disadvantage? You do not have to calculate the explicit cost differentials, just characterize them. (40%)

Case Preparation Questions 1. How did the Edward Jones Strategy change over the years? 2. What are the critical differences between Edward Jones’s strategy and the strategies of the other brokerage firms described in the case?

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