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Competitive Strategy
Lecture 2
Competitive Advantage and Strategic Positioning
Activity Analysis
- Cost Analysis
- Benefit Analysis
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Competitive Advantage and Value Creation
The key question for profitability is not “How much economic value do I
create?”, but rather “How much value do I create compared to my competitors?”.
If my product has a higher B - C than yours, I can match your “consumer surplus
bid” (B - P) ... and walk away with more profit (P - C). Why?
Value-created = Consumer Surplus + Profit
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Superior Value Creation Typically Entails
Tradeoffs
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Two Dimensions of Strategic Positioning
Value Position
Cost Leadership Differentiation Leadership
Variety - Based
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Exploiting a Competitive Advantage Through Pricing
High price
Modest price hikes lose lots of
elasticity of Modest price cuts gain lots of market
market share.
share.
demand Exploit advantage through higher
Exploit advantage through higher
(weak horizontal market share than competitors.
market share.
differentiation) Share Strategy: Maintain price parity
Share strategy: Under-price
with competitors (let benefit
competitors to gain share.
advantage drive share increases.
Firm’s
Price
Low price
Elasticity of
Demand elasticity of
Big price cuts gain little share.
demand Big price hikes lose little share.
Exploit advantage through higher
(strong horizontal Exploit advantage through higher
profits margins.
profit margins.
differentiation) Margin Strategy: Maintain price
Margin Strategy: Charge price
parity with competitors (let lower
premium relative to competitors.
costs drive higher margins)
The activity system is distinctive if it generates superior value for the target
customers. Superior value can be in the form of either higher benefits
(Singapore Airlines) or lower costs (Southwest airlines).
Given the required fit between the needs of the target customers and the activity
system, strategy requires you to make trade-offs in competing – to choose what
not to do.
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Cataloguing Activities - Porter’s Value Chain
Firm Infrastructure
Mar
Support
Activities
gin
Technology Development
Procurement
Ma
Inbound Outbound Marketing
rgin
Operations Service
Logistics Logistics & Sales
Primary Activities
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Southwest Activity System*
Frequently,
reliable Limited use
departures of travel Short-haul,
1.5 minute Standardized
agents point-to-point routes
Gate fleet between midsize cities
turnarounds
and secondary
airports
High
compensation Automatic
Lean, highly ticketing
of employees
productive machines Very low
ground and ticket prices
gate crews
Flexible
union High
contracts “Southwest
High level of aircraft
the low-fare
employee stock utilization airline”
ownership
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SWA Example - Top Down View*
Cost Advantage
High Asset
Many Frequent v
Utilization - Full
Flights Low Cost. Flights
Maximum
Number of Flights
Route Airplane
Scheduling Turnaround Process
Critical Activities
Quick
Turnaround
Activities
Planes Available Standardized and Flight Operations:
at Short Notice Simplify Boarding pilots can fly all planes
Resources
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Strategic Cost Analysis
1. Identify the set of primary activities that drive costs (e.g. Value Chain).
2. Identify costs of performing each of the activities. Where possible calculate (or at
least characterize) these costs on a per unit basis.
3. Identify the set of cost drivers associated with each activity - factors that make
the cost of the activity rise or fall.
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Benefit analysis
For our purposes, the above benefit drivers represent alternative dimensions of
the value proposition. 14
Customer Segmentation
Common Market Segmentation Variables*
Identifier Variables (Who they are) Response Variables (What they want)
Consumer Markets Benefits Desired
Demographics (age, gender, life Price, reliability, service
cycle stage, ethnicity, religion)
Socioeconomic factors (income, Application or Usage Situation
occupation, education) Consumer: Planned versus
Psychographics (beliefs, impulse/unexpected
opinions, activities, interests) Business: Scheduled versus unplanned
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*Based on figure 2-1 in chapter 2 of Marketing as Strategy, by Nirmalya Kumar, HBS 2006
Value Proposition
Value Proposition: The collection of elements (or benefits) that are being
offered to the customer at a particular price. In combination, this collection of
elements is designed to meet the customer’s overall needs.
Since each dimension of the value proposition comes at a cost (and hence,
a price), the customer may be willing to consider alternative value
propositions that meet the same broadly defined need (e.g. Avis versus
Zipcar).
The basis for alternative value propositions are tradeoffs. The most basic
tradeoff is value versus price.
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Table Stakes versus Discriminators
Given well defined target market segments, the value proposition can be
separated into two categories:
i. Table Stakes - Those features of the value proposition that any player in
this market will have to provide at some minimum level of quality. The table
stakes define a baseline for making relative comparisons to the
competition.
ii. Discriminators - Those features of the value proposition that are
distinctive relative to the competition. The discriminators can be features of
the value proposition that no other competitors provide (but not necessary
to compete in the market at a lower price point), or more commonly,
enhancements of one of the table stakes.
iii. Negative Discriminators - Missing features in the value proposition that
are offered as discriminators by the competition.
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Breaking Down the Value Proposition
Value
Proposition
Elements Table Stake Category Discriminators
Availability of latest video titles and
Largest supply of latest titles
Primary assortment of older titles
Value
Largest number of conveniently located
Proposition
Brick & Mortar Retail Access retail outlets, with distinctive in-store
Elements
shopping experience
Additional
Value
Largest supply of used video games (with guaranteed quality)
Proposition
Elements Best source of information/news of interest to the hardcore game enthusiast
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Aside: VP-Driven Business Model Innovation
New value propositions are designed to meet the needs of customer segments that are
either under-served or over-served by those currently offered in the market place.
– Over-served: These are customers for which there are elements of the value proposition
they do not need and would rather not have to pay for.
The value proposition gap is in the form of the customer having to (implicitly) pay for
benefits they don’t want in order to receive the benefits they do what.
– Under-served: These are customers for which there are missing elements of the value
proposition they would be willing to pay for if added.
The value proposition gap is in the form of the customer not receiving the benefits that
they would be willing to pay for if provided.
Only in special circumstances, where the value proposition is priced (or negotiated) on a
customer-by-customer basis, will there be no value proposition (VP) gap. In most
businesses (especially consumer), VP gaps are created because the VP must be
standardized (to some degree) in order for the revenue/cost model to be viable.
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Aside: VP-Driven Business Model Innovation
Examples
– Dell’s direct Model
– Netflix
– Redhat
– Zipcar
– Southwest Airlines (no frills, point-to-point)
– McCafe
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Strategic Benefit Analysis
1. Prioritize the list of positive and negative discriminators in terms of perceived (B-
to-C) or directly measured (B-to-B/G) willingness to pay. Where possible, use
the cost analysis to identify the incremental costs required to provide the
discriminator.
2. Given the prioritized list, identify the potential competitive threats to the positive
discriminators (benefit advantages) and consider ways to strengthen the
advantage (given cost considerations).
i. If not justified by lower costs, then identify ways to close the benefit gap by
enhancing the performance of the relevant activities/resources - represents
an execution problem.
ii. If justified through lower costs, identify ways to further strengthening the
cost advantage, and, or ways to incrementally close the benefit gap without
incurring a significant increase in costs.
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Edward Jones Case (Week 3)
1. Breakdown Edward Jones’ value proposition - table stakes and discriminators. Based
on your breakdown, what are the most significant benefit advantages they have in
their target market. Your identified benefit advantages should be described in terms
of important characteristics of their target customer segment.
Note that you do not need to provided an exhaustive list of table stakes, simply
identify those that appear most relevant for identifying the discriminators. (60%)
2. What are the cost tradeoffs generated by their benefit advantage, and how does
Edward Jones minimize the potential cost disadvantage? You do not have to
calculate the explicit cost differentials, just characterize them. (40%)
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