MKT 310 Entrepreneurship Mishari Alnahedh

LECTURE 2: NEW VENTURE STRATEGY

What is the value to be delivered to the customer ? Customer Value Proposition Mishari Alnahedh The starting point of a new venture strategy is the Customer Value Proposition What is the value to be delivered to the customer ? In other words, why should a customer buy your product or use your service ? What unmet needs will the product/service address? Which customer needs are you satisfying? Which one of your customer’s problems are you helping to solve? How does your product/service solve the problem?

Customer Value Proposition Mishari Alnahedh What is customer value? The satisfaction a consumer feels (the customer experience) after making a purchase of goods or services relative to what she must give up to receive them (the next best alternative).

What is Strategy ? Why do some companies outperform their competitors? Mishari Alnahedh Why do some companies outperform their competitors? Management is about HOW to get things done Strategy is about WHAT things need to get done

Definitions of Strategy Strategy is about making choices What is Strategy ? Mishari Alnahedh Definitions of Strategy “Strategy is about adding value through a mix of resources, capabilities and activities different from those used by competitors in your industry.” Strategy is about making choices

What Is Strategic Management About ? Mishari Alnahedh Sustainable competitive advantage occurs when a firm implements a value-creating strategy of which other companies are unable to duplicate the benefits or find it too costly to imitate.

Two Elements of Strategy Mishari Alnahedh INDUSTRY ATTRACTIVENESS RATE OF PROFIT ABOVE THE COMPETITIVE LEVEL Which businesses should we be in? CORPORATE STRATEGY How do we make money? COMPETITIVE ADVANTAGE How should we compete? BUSINESS STRATEGY © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

A useful framework for analyzing competitive advantage Mishari Alnahedh In strategy a source of performance differences is the “competitive advantage”. Competitive advantages reflect rents earned by a firms assets. The value of these assets is determined by the relative advantages they give a firm over its competitors. A useful framework for analyzing competitive advantage Activities: what does it do that is different from its competitors? Added value: How much extra value does the firm add? (to the market) Sustainability: How hard is it for the firm’s competitors to replicate the sources of added value?

Added Value Ghemawat and Rivkin, HBR (2006) Value = Benefits - Costs Competitive Advantage Mishari Alnahedh Added Value Ghemawat and Rivkin, HBR (2006) Value = Benefits - Costs Benefits: Willingness to pay (WTP) WTP = maximum consumer will pay for product Cost = minimum cost of provision (includes opportunity costs of inputs) © 2010 Chad Syverson Chicago Booth School of Business Competitive Strategy Notes

Competitive Advantage Mishari Alnahedh Added Value A customer is willing to pay $12 for a pizza. The price of the pizza is $10 and it costs $7 to make the pizza. Will the customer buy the pizza ? Consumer Surplus  $12 - $10 = $2 Producer Surplus  $10 - $7 = $3 Economic Value  $12 - $7 = $5 © 2010 Chad Syverson Chicago Booth School of Business Competitive Strategy Notes

© 2014 Joe Mahoney University of Illinois Urbana Champaign Economic Value as Competitive Advantage Mishari Alnahedh If the economic value created is Greater than its rival  competitive advantage Equal to its rivals  competitive parity Lower than its rivals  competitive disadvantage © 2014 Joe Mahoney University of Illinois Urbana Champaign

Two Paths to Competitive Advantage via Added Value Mishari Alnahedh Consider two firms Firm 1: Benefits or V1 = B1 – C1 Firm 2: Benefits or V2 = B2 – C2 Assume V2 > V1  (B2 – C2) > (B1 – C1) Added value of firm 2 with competitive advantage = (B2 – B1) – (C2 – C1) Two paths to added value Can add value by lowering costs (reducing C2) Can add value by enhancing WTP (raining B2) Often this increases costs – firms must raise TWP more than costs rise

Two Paths to Competitive Advantage Mishari Alnahedh Examples FlyDubai: Apple: LuLu Hypermarket: In-N-Out Burger:

Two Paths to Competitive Advantage Mishari Alnahedh Examples FlyDubai: Low Cost Apple: high WTP + high cost (Differentiator) LuLu Hypermarket: Low Cost In-N-Out Burger: Low Cost + High WTP (dual)

Sources of Competitive Advantage Mishari Alnahedh COST ADVANTAGE Similar product at lower cost COMPETITIVE ADVANTAGE Price premium from unique product DIFFERENTIATION ADVANTAGE

How Do Resources Lead to Competitive Advantage ? Mishari Alnahedh How Do Resources Lead to Competitive Advantage ? Valuable Does it create “value” for the customer? Rare Do other firms have similar resources? Difficult to Imitate/Substitute Unique Historical Conditions Causal Ambiguity Organization Are you organized to take advantage of your resources?

Trading markets vs. Production markets Competitive process in different market settings Mishari Alnahedh For competitive advantage to exist, there must be some imperfection (or inefficiencies) of competition What types of resources and capabilities are necessary to compete? What are the circumstances of the availability of the resources and capabilities? Trading markets vs. Production markets Trading involves arbitrage across space (trade) and time (speculation) Production involves the physical transformation of inputs into outputs

Competitive advantage and imperfections in the competitive process Mishari Alnahedh SOURCE OF IMPERFECTION OF COMPETITION OPPORTUNITY FOR COMPETITIVE ADVANTAGE MARKET TYPE TRADING MARKETS None (efficient markets) Imperfect information availability Transactions costs Systematic behavioral trends Overshooting None Insider trading Cost minimization Superior diagnosis (e.g.... chart analysis) Contrarianism Barriers to imitation Barriers to innovation Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, barriers to resource replication) & base strategy upon them. Difficult to influence or exploit. PRODUCTION MARKETS

Trading markets Production markets Sources of imperfections to the competitive process Mishari Alnahedh Trading markets Imperfect availability of information Transaction costs Systematic behavioral trends Overshooting as a result of imitation Production markets Barriers to imitation Barriers to innovation

How long will it be before the first rival imitates the first mover? Barriers to Imitation Mishari Alnahedh How long will it be before the first rival imitates the first mover? How fast does new imitation occur once it starts? These two factors determine “appropriability”

Barriers to Imitation REQUIREMENT FOR IMITATION ISOLATING MECHANISM Mishari Alnahedh REQUIREMENT FOR IMITATION ISOLATING MECHANISM Identification - Obscure superior performance - Deterrence--signal aggressive Incentives for imitation intentions to imitators - Pre-emption--exploit all available investment opportunities - Rely upon multiple sources of Diagnosis competitive advantage to create “causal ambiguity” - Base competitive advantage upon Resource acquisition resources and capabilities that are immobile and difficult to replicate

Barriers to Innovation Mishari Alnahedh The more complex an industry in terms of multi-dimensionality of customer choice criteria and the number of value chain activities, the greater the potential for creating “new game” strategies New rules of the game Value chain reconfiguration such as disintermediating Innovative business models to create value for customers from novel experiences, products, product delivery or bundling, process technologies, and organizational formats