ECP 6701
Competitive Strategies in Expanding Markets
Strategic Positioning for
Competitive Advantage
1
Readings

2
BDSS Chapter 11
Strategic Positioning



3
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 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


4
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


5
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
6
Competitive Advantage and
Profitability: Evidence

Research on the variation in profitability across
firms by Anita McGahan and Michael Porter
shows that
–
–
–
–
7
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
Industry and Business Unit Effects
in Profitability
8
Value Creation and Profitability


9
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


10
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


11
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
The Value Map
P,
Price
Lower
consumer
Product D surplus
Product B
Product A
indifference
curve
Product C
Higher
consumer
surplus
12
q, quality
Value Map: An Illustration


13
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



14
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 will not be viable.
15
Value Created and Competitive
Advantage



16
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


Consonance analysis looks at a firm’s
prospects for continuing to create value
Ability to create value will be affected by
–
–
–
17
changes in market demand
changes in technology and
threats from other firms in the industry and from
other industries
The Value Chain


18
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
Michael Porter’s Value Chain
19
Value Chain



20
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
Value Creation and Resources and
Capabilities

Two ways in which a firm can create more
economic value than its competitors
–
–

21
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
Value Creation and Resources and
Capabilities

Capabilities have some of the following
characteristics
–
–
–
22
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

Two broad approaches to strategic positioning
–
–

23
Cost leadership
Benefit leadership
Alternative is to use a narrow focus strategy
The Strategic Logic of Cost
Leadership

A cost leader can create more value than its
competitors by
–
–
–
24
offering the same benefits as the competitors do
(benefit parity)
offering a slightly lower benefit (benefit proximity)
offering a qualitatively different product
The Strategic Logic of Cost
Leadership
P, C,
Price, unit cost
indifference
curve
E
PE
F
PF
CE
DC
Dq
CF
25
qF
qE
q, quality
The Strategic Logic of Cost
Leadership


26
Firm F offers lower quality than the rest of the
industry (E) and has much lower costs than the
rest of the industry
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
The Strategic Logic of Benefit
Leadership

A benefit leader firm can create superior values
by offering
–
–
–
27
cost parity
cost proximity
substantially higher benefit and higher cost
The Strategic Logic of Benefit
Leadership
P, C,
Price, unit cost
indifference
curve
F
PF
E
PE
CF
DC
CE
Dq
28
qE
qF
q, quality
The Strategic Logic of Benefit
Leadership


29
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
Extracting Profits From Cost and
Benefit Advantage



30
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
Exploiting a Competitive Advantage
Through Pricing



31
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 build
the share
Exploiting a Competitive Advantage
Through Pricing



32
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
Conditions Suitable for Seeking a
Cost Advantage
Cost advantage should be sought
–
–
–
33
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
Conditions Suitable for Seeking a
Benefit Advantage
Benefit advantage should be sought
–
–
–
34
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


35
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)
“Stuck in the Middle”



36
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


37
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 and
learning
Cost and Benefit Leadership


38
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

Two questions are important
–
–
39
How will the firm create value? [Benefit, cost]
Where will the firm do it? [Broad or narrow
segments]
Segmenting an Industry

An industry can be represented in two
dimensions
–
–

40
Product varieties
Customer groups
A potential segment is the intersection of a
particular product group with a particular
customer group
Segmenting an Industry

Differences in segments arise due to
–
–
–

41
Customer preferences
Supply conditions
Segment size
Customers within a group should have
common features
Broad Coverage Strategies


Offer a full line of products to serve a range of
customer groups
Economies of scope can arise from
–
–
–
42
Production
Distribution
Marketing
Focus Strategies



43
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