Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved Chapter Customer Value and Relative Positioning 2

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-2 Customer Value: Low-Cost or Differentiated Products Customers choose one firm’s products over its competitor’s products if the firm’s product offers benefits that customers need and that either: – Are superior to benefits of competitors’ products. – Are identical to benefits of competitors’ products but are offered at a lower price than competitors. – Are superior to benefits of competitors’ products and are offered at a lower prices than competitors.

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-3 Differentiation Product Features Brand-Name Reputation Network Size Timing Location Service Product Mix

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-4 Determining Demand for Differentiated Benefits Multidimensional Scaling Hedonics Technological Progress Sources of Differentiation

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-5 Benefits Map for Passenger Jet Airlines Figure 2.1 Cruise Speed and Number of Passengers the Plane Can Carry

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-6 Figure 2.2 Benefits Map for Passenger Jet Airlines Range And Number of Passengers

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-7 Low Cost and Its Determinants Economies of Scale Factor Costs Industry-Specific Cost Drivers Innovation Economies of Learning Agency Costs

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-8 Differentiation versus Low Cost Firm pursuing a low-cost strategy gets higher market share. Firm is then likely to enjoy a high level of profitability. Firm pursuing a differentiation strategy has a lower market share. Firm may enjoy high level of profitability since it charges premium prices. Figure 2.3 Low-Cost vs. Differentiation Positions

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-9 Creating Customer Value and Capturing Profits from It (1 of 2) The benefits that customers value in a firm’s product stem from the combined efforts of the firm and its suppliers, complementors, and customers.

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-10 Creating Customer Value and Capturing Profits from It (2 of 2) Complementors: Firms that offer products that are complementary to the firm’s products – sales of their products increase demand for the firm’s products. e.g. The sales of software increases sales of computers. Coopetitors: Suppliers, rivals, complementors, and customers with whom a firm often must cooperate and compete.

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-11 Figure 2.4 Coopetitors

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-12 Cooperating to Create Value (1 of 3) Competing to Appropriate Value – How much of the revenues that customers pay for the created customer value can the firm capture or appropriate? – How much of the costs of creating and offering the value does the firm, rather than coopetitors, incur?

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-13 Cooperating to Create Value (2 of 3) Impact of Bargaining Position on Ability to Appropriate Value Profits = revenues - costs = P(Q) x Q(P) - C(Q) – Relative Positioning vis-à-vis Suppliers – Relative Positioning vis-à-vis Customers – Relative Positioning vis-à-vis Complementors

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-14 Cooperating to Create Value (3 of 3) Impact of Rivalry, New Entry, and Substitutes on Ability to Appropriate Value – Rivalry – Potential New Entry – Substitutes

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-15 Determinants of Relative Positioning Among Coopetitors (1 of 8) Competitive Forces Exerted by Coopetitors – Suppliers – Buyers – Rivalry – Threat of Entry – Substitutes – Complementors

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-16 Determinants of Relative Positioning Among Coopetitors (2 of 8) – Supplier power over firms is a function of:  Concentration and dominance of suppliers  Differentiated products  Credible threat of forward integration  Small fraction of costs  High profits  Importance to the quality of industry firms’ products  Cost savings  Unavailability of substitute products  Lack of information

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-17 Determinants of Relative Positioning Among Coopetitors (3 of 8) – Buyer power over firms is a function of:  Concentration and dominance of buyers  Undifferentiated products  Credible threat of backward integration  Large fraction of costs  Low profits  Importance to the quality of buyers’ products  No cost savings  Availability of substitute products  More information

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-18 Determinants of Relative Positioning Among Coopetitors (4 of 8) – Rivalry is increased in an industry by several factors:  Number of competitors and their similarity  Small or declining industry growth  Undifferentiated products  Excess capacity  High exit barriers  High fixed costs, low variable costs  Diverse competitors

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-19 Determinants of Relative Positioning Among Coopetitors (5 of 8) – Threat of Entry factors that contribute to high barriers to entry:  High economies of scale  Product differentiation  Capital requirements  Access to critical inputs  Network externalities  Experience curve  Reputation for retaliation  Government policies

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-20 Determinants of Relative Positioning Among Coopetitors (6 of 8) – The extent to which firms offering substitute products have power is determined by:  Availability of key substitutes and willingness of customers to switch  Benefits from substitutes  Price elasticity of demand

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-21 Determinants of Relative Positioning Among Coopetitors (7 of 8) – Complementors’ power over industry firms is determined by:  Availability of key complements  Benefits from complements  Cross-price elasticity of demand

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-22 Influencing Competitive Forces to Strengthen One’s Relative Positioning – Differentiation Position as Influencer – Low-Cost Position as Influencer Determinants of Relative Positioning Among Coopetitors (8 of 8)

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 2-23 Customer Value and Relative Positioning Questions