Economics of Strategy
Unit 4
Chapter 13
Strategic Positioning for
Competitive Advantage
Whole Foods Market, Inc case
No class Wed, Oct 26
Whole Foods Preliminary Case: Wed, Nov 2
Final case: Monday, Nov 7
Source: http://www.wholefoodsmarket.com/company/
Strategic Positioning
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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
Why do profits vary across firms?
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
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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
Creation
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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
Framework for Competitive
Advantage
Value Leadership Strategy
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Benefit leaders
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Woodford Reserve
Coca Cola
Fresh Market Stores
Godiva Chocolates
Dean Foods
Nest Fresh Eggs
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Cost leaders
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Jim Beam
Big K Cola (pvt labels)
Save-A-Lot
Hersheys
Kroger/Aldi
Cal Maine, pvt label
Value Creation and Profitability
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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
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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
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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
“preferred supplier” criteria
Example of Coffee Brands
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Kroger Brand
Nescafe instant
Maxwell House, Folgers
Millstone
Dunkin Donuts
Starbucks
Kona
……many other products with variable prices and
quality – wine, beer, cheese, meat, dining menus
The Value Map
P,
Price
Lower
consumer
Product D surplus
Product B
Product A
indifference
curve
Product C
Higher
consumer
surplus
q, quality
Value Map: An Illustration
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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 Illustration
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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
= Consumer surplus +
Producer surplus
= (B - P) + (P - C)
=B-C
If (B-C) is not positive the product offers
no competitive advantage.
Value Created and Competitive
Advantage
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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
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Consonance (harmony, agreement) analysis
looks at a firm’s prospects for continuing to
create value
Ability to create value will be affected by
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changes in market demand
changes in technology and
threats from other firms in the industry and from
other industries
Quality of supply chain relationships
The Value Chain
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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 Creation and Resources and
Capabilities
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Two ways in which a firm can create more
economic value than its competitors
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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
LEAN Manufacturing (Toyota)
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1 The seven wastes
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1.1 Overproduction
1.2 Unnecessary transportation
1.3 Inventory
1.4 Motion
1.5 Defects
1.6 Over-Processing
1.7 Waiting
Value Creation and Resources and
Capabilities
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Capabilities have some of the following
characteristics
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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 Positioning
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Two broad approaches to strategic
positioning
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Cost leadership
Benefit leadership
Alternative is to use a narrow focus strategy
The Strategic Logic of Cost
Leadership
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A cost leader can create more value than its
competitors by
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offering the same benefits as the competitors do
(benefit parity)…at a lower cost
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Private label mustard
offering a slightly lower benefit (benefit proximity)
offering a qualitatively different product
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Cubic zirconium vs diamonds
100% Kona
Kona “Blend”
The Strategic Logic of Benefit
Leadership
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A benefit leader firm can create superior
values by offering
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cost parity
cost proximity
substantially higher benefit and higher cost
Still need isolating mechanisms that keep
firms from quick benefit duplication
Marksbury Farms Products
Exploiting a Competitive
Advantage Through Pricing
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When the product differentiation is weak (small
opportunity to be a benefit leader) the firm should
follow a market share strategy
With a cost advantage, the firm should under price
its rivals and build share
With a benefit advantage, the firm should maintain
price parity and let the benefit build the share (rather
than building share through lower cost)
Exploiting a Competitive
Advantage Through Pricing
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When the product differentiation is strong the
firm should follow a profit margin strategy
(max gross margin)
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
Search goods vs experience
goods
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Search goods – objective quality attributes
can largely be assessed by the typical buyer
prior to the point of purchase (photo services,
commodity products)
Experience goods – quality can only be
assessed after the consumer has purchased
it and used it for awhile (electronics, wine,
appliances, education, medical service –
movies, plays, music, concerts…..,apple
picking?)
Conditions Suitable for Seeking a
Cost Advantage
Cost advantage should be sought
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when the nature of the product does not allow
benefit enhancement (commodity characteristics)
when consumers are relatively price sensitive and
when the product is a search good rather than an
experience good
Conditions Suitable for Seeking a
Benefit Advantage
Benefit advantage should be sought
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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
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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 – but tough to manage
“Stuck in the Middle”
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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
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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 Positioning
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Two specific strategy questions are important
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How will the firm create value? [Benefit, cost]
Where will the firm do it? [Broad or narrow
segments]
Segmenting an Industry
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An industry can be represented in two
dimensions
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Product varieties – families of related products
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Customer groups
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Snack foods
LOHAS
A potential segment is the intersection of a
particular product group with a particular
customer group
Segmenting with a market-customer
diagram
Product
Possibilities
Customer
Groups
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Extension Possibilities for Pumpkins
Customer Groups
Families
State Parks
Restaurants
Selected Age Groups
Geographic markets
Homeowners
Schools....
Product Possibilities
Pumpkins
Miniature pumpkins
Gourds
Miniature hay bales
Mums
Halloween ensembles....
Segmenting an Industry
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Differences in segments arise due to
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Customer preferences
Supply conditions
Segment size
Customers within a group should have
common features
Broad Coverage Strategies
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Offer a full line of products to serve a range
of customer groups
Economies of scope can arise from
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Production
Distribution
Marketing
Focus Strategies
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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
Product
Possibilities
Customer
Groups
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