1. ECP 6701 Competitive Strategies in Expanding Markets
Strategic Positioning for Competitive Advantage

2. Readings
BDSS Chapter 11

3. Strategic Positioning
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

4. Competitive Advantage and Value Creation
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

5. Competitive Advantage and Value Creation
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

6. Framework for Competitive Advantage

7. Competitive Advantage and Profitability: Evidence
Research on the variation in profitability across firms by Anita McGahan and Michael Porter shows that
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

8. Industry and Business Unit Effects in Profitability

9. Value Creation and Profitability
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

10. Components of Consumer Surplus
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

11. Competition in Price-Quality Continuum
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

12. The Value Map Price P, q, quality indifference curve Lower consumer
Product A
Product B
indifference
curve
Lower
consumer
surplus
Product D
Higher
Product C

13. Value Map: An Illustration
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

14. Value Map: An Illustration
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

15. 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.

16. Value Created and Competitive Advantage
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

17. 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
changes in market demand
changes in technology and
threats from other firms in the industry and from other industries

18. The Value Chain
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

19. Michael Porter’s Value Chain

20. Value Chain
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

21. Value Creation and Resources and Capabilities
Two ways in which a firm can create more economic value than its competitors
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

22. Value Creation and Resources and Capabilities
Capabilities have some of the following characteristics
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

23. Strategic Positioning
Two broad approaches to strategic positioning
Cost leadership
Benefit leadership
Alternative is to use a narrow focus strategy

24. The Strategic Logic of Cost Leadership
A cost leader can create more value than its competitors by
offering the same benefits as the competitors do (benefit parity)
offering a slightly lower benefit (benefit proximity)
offering a qualitatively different product

25. The Strategic Logic of Cost Leadership
Price, unit cost
P, C,
q, quality PE PF qE qF CE CF DC E F Dq
indifference
curve

26. The Strategic Logic of Cost Leadership
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

27. The Strategic Logic of Benefit Leadership
A benefit leader firm can create superior values by offering
cost parity
cost proximity
substantially higher benefit and higher cost

28. The Strategic Logic of Benefit Leadership
Price, unit cost
P, C,
q, quality PE PF qE qF CE CF DC E F Dq
indifference
curve

29. The Strategic Logic of Benefit Leadership
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

30. Extracting Profits From Cost and Benefit Advantage
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

31. Exploiting a Competitive Advantage Through Pricing
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

32. Exploiting a Competitive Advantage Through Pricing
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

33. Conditions Suitable for Seeking a Cost Advantage
Cost advantage should be sought
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

34. Conditions Suitable for Seeking a Benefit Advantage
Benefit advantage should be sought
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

35. Diversity of Strategies
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)

36. “Stuck in the Middle”
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

37. Cost and Benefit Leadership
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

38. Cost and Benefit Leadership
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

39. Strategic Positioning
Two questions are important
How will the firm create value? [Benefit, cost]
Where will the firm do it? [Broad or narrow segments]

40. Segmenting an Industry
An industry can be represented in two dimensions
Product varieties
Customer groups
A potential segment is the intersection of a particular product group with a particular customer group

41. Segmenting an Industry
Differences in segments arise due to
Customer preferences
Supply conditions
Segment size
Customers within a group should have common features

42. Broad Coverage Strategies
Offer a full line of products to serve a range of customer groups
Economies of scope can arise from
Production
Distribution
Marketing

43. Focus Strategies
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