Chapter 13:Strategic Positioning I This chapter develops a conceptual framework for characterizing and analyzing strategic position within an industry.This chapter develops a conceptual framework for characterizing and analyzing strategic position within an industry. Define competitive advantageDefine competitive advantage

Competitive Advantage Firms try to differentiate themselves; why? How do airlines obtain a competitive advantage over rivals?

Competitive Advantage & Value Creation A firm’s ability to create value depends on its

Competitive Advantage and Profitability: Evidence Research on the variation in profitability across firms by McGahan and Porter show –19% of the variation is due to industry effects –32% is due to competitive advantage of firms –43% of the variation is random Dunne et al. (2003)

Competitive Advantage Economic Value created = consumer surplus + firm profit

Notes for previous slide

Competitive Advantage Example of an industry where there is a lot of value created, but not captured by firms

CA and Value Creation Link Why does a firm need to create more value [i.e., higher (B-C) ]? See numerical example to demonstrate point.

B 1 = 10, C 1 = 7 B 2 = 10, C 2 = 5 –Suppose set price = $7 –Assume goods are homogenous. Numerical Example

B 1 = 10, C 1 = 7 B 2 = 10, C 2 = 5 –Suppose set price = ($7 –ε) Numerical Example

“The Power of Virtual Integration: An Interview with Dell Computer's Michael Dell” Harvard Business Review, March-April 1998 v76 n2 Close customer relationships have allowed us to dramatically extend the value we deliver to our customers. Today we routinely load the customer’s software in our factory. Eastman Chemical, for example, has their own unique mix of software, some of it licensed from Microsoft, some of it they’ve written themselves, some of it having to do with the way their network works. Normally, they would get their PCs, take them out of the box, and then some guy carrying a walkie-talkie and diskettes and CD-ROMs would come to each employee’s desk to hook the system up and load all that software. Typically, this takes an hour or two -- and costs $200 to $ and it’s a nuisance

So what price Dell should have charged for software installation?

Application: Kmart v Wal-Mart Price Leadership Strategy in 1990s Implications for Target v. Wal-Mart

Diagnosing sources of C.A. is … is a matter of diagnosing why a firm’s B-C is higher than existing or potential competitors Three sources –firm offers higher B –firm has lower C –both

Competitive Advantage What do these firms individually do especially well? –McDonalds –3M –Starbucks v Dunkin Donuts – Volkswagen v Honda –IKEA furniture –H & M clothing