Strategic Positioning for Competitive Advantage

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Strategic Positioning for Competitive Advantage
Chapter 11
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Characterizing and analyzing strategic position
involves two key things
The concept of competitive advantage and methods
of creating it
The economic logic of the main approaches to
positioning
Cost advantage
Benefit (differentiation) advantage
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Competitive Advantage Defined
A business (or business unit) has a competitive
advantage when it earns a higher rate of economic
profit than the average rate of economic profit
of other firms competing in the same market
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Competitive Advantage and Value creation
Conceptual Foundations
Maximum willingness-to-pay and consumer surplus
Maximum willingness-to-pay is determined by
asking the question at what price is the
customer just indifferent between buying the
product or going without it?
Let P denote price and B denote the maximum
willingness-to-pay, the customers consumer
surplus is then
B - P
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Value Created
Value-created Consumer Surplus Producer
Surplus
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Analyzing Value Creation
Understanding how value is created and whether it
can be sustained is critical to achieving
competitive advantage
Key questions that must be asked include
Why does the firm exist?
What are its underlying economics?
What drives consumer benefits?
Evaluating the evolution of fundamental economic
foundations of a business is very important
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Value Creation, Resource and Capabilities
Value chains versus value configurations
There are two basic strategies that a firm can
use to create more economic value than other
firms in an industry
The process of value creation can be configured
differently from competitors
Performing activities in the value configuration
more efficiently than competitors
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Factors of Production, Resources and Capabilities
Factors of production include non-specialized
assets and inputs such as buildings, equipment,
land, unskilled labor and intermediate goods
Resources are firm-specific assets such as
patents and trademarks, brand recognition,
installed-base, organizational culture and
employees with firm-specific expertise or skills
Capabilities are activities that a given firm
does well compared to other firms
Resources are nouns and capabilities are verbs
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Capabilities have several key common
characteristics
They are typically valuable across multiple
products or markets
They are embedded in organizational routines-well
developed patterns of performing activities
inside the organization
They are difficult to reduce to simple algorithms
or procedural guidelines (they are tacit )
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Resources and Capabilities versus Key Success
Factors
Key success factors refer to the skills and
assets a firm must possess to achieve
profitability in a particular market
Key success factors are essentially market level
characteristics that represent necessary
conditions for participation in a given market
Resources and capabilities are firm specific
characteristics that can be difficult or
impossible to replicate
Not always easy to distinguish in reality
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Comparing Cost and Differentiation Strategies
Building competitive advantage on the basis of
superior cost position is attractive when
Economies of scale and learning economies are
potentially significant, but no single firm is
exploiting them
Opportunities for enhancing the product or
services perceived benefit are limited by the
nature of the product
Consumers are price insensitive and are unwilling
to pay much of a premium for enhanced product
quality, performance, or image
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Comparing Cost and Differentiation Strategies
Building competitive advantage on the basis of
superior differentiation is attractive when
The typical consumer is willing to pay a
significant price premium for attributes that
enhance real or perceived benefits
Economies of scale are significant, and existing
firms because of their size or cumulative
experience are already exploiting them
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Stuck in the Middle
There is some disagreement as to whether firms
can simultaneously pursue both cost advantage and
differentiation advantage
Is there a trade-off between cost and quality?
A firm that offers high quality products
increases its market share, which reduces average
cost because of economies of scale or the
learning curve
The rate at which accumulated experience reduces
costs is greater for high-quality products than
for lower quality products
Inefficiencies muddy the relationship between
cost position and differentiation position
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Strategic Positioning Broad Coverage versus
Focus Strategies
Market Segmentation refers to a group of
customers within the broader market who possess a
common set of characteristics
Regardless of how a market segment is defined,
all buyers within the segment will
Have similar product requirements and preferences
Respond to some mix of market variables such as
advertising or price in the same way
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In consumer goods markets, segmentation may occur
on the basis of
demographics geography frequency or intensity of
use depth of product knowledge willingness to
trade-off price and quality
In intermediate goods markets, segmentation may
occur on the basis of
nature of the industry size of the purchasing
firm size of buyers order speed of
delivery product performance or quality
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Broad Coverage Strategies
A broad coverage strategy is aimed at serving all
segments of a market by offering a full line of
products
The economic logic of a broad coverage strategy
is the existence of economies of scope across
product classes. These economies can arise from
Production (use of common facilities and
processes)
Distribution (economies resulting from breadth of
product line)
Marketing (brand name quality and tradition)
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Two types of broad coverage strategies
One-size-fits-all where a common product is
marketed to a variety of different market segments
Customized product lines that offer various
forms of a product to different market segments
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Focus Strategies
With a focus strategy a firm concentrates on
either a single product, or serving a single
market segment, or both
There are several types of focus strategies
Product Specialization
Geographic Specialization
Customer Specialization
Niche Strategy
The economic logic of a focus strategy is that
firms are sometimes able to attain economies of
scale by concentrating on a particular product or
market segment.
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Value Capture and Industry Economics
The share of value-created that a firms retains
as profit depends upon
The percentage of value created that is captured
as profit by an average firm in a given industry
The percentage of the differential value created
that the firm retains as profit
Opportunities for retaining value can vary
substantially along the vertical chain