Lecture Unit 8: Strategic positioning for Competitive advantage (1/2) Flashcards
In what ways can firms within the same market differentiate themselves`?
- Firms within the same market can position themselves in different ways ->Benefit or cost position
Do all market positions ensure equal profitability and survival chances for firms?
No, not all market positions will be equally profitable or lead to the same odds of survival.
On what does a firm’s ability to create value and having a competitive advantage over competitiors depend upon?
depends on how it positions itself within its market
When does a firm have a competitive advantage?
- if a firms earns a higher rate of economic profit compared to the average firm in the industry
- only if it can create more economic value than its competitors
What does the economic profit earned by a firm depend upon?
depends on the
- economic attractiveness of its market as well as
- the economic value created by the firm
On what does a firm’s ability to create value depend?
depends on its
- cost position as well as
- its benefit position relative to its competitors
Framework for comeptitive advantage:
What are the two primary positions that determine a firm’s value relative to competitors?
- Benefit position relative to competitors and
- cost position relative to competitors.
Framework for competitive advantage:
What two factors contribute to a firm’s economic profitability according to the framework for competitive advantage?
- Market economics (economic attractiveness of its market)
- value created relative to competitors.
What is the maximum willingness to pay?
= is the price at which the consumer is indifferent between buying the product and not buying
What is the consumer surpluus?
- is the difference between the maximum the consumer is willing to pay (monetary value of the perceived benefit) and the prevailing market price
Why is consumer surplus important for a purchase to occur?
–>(Max WTP - P)
- the consumer surplus needs to be positive for the purchase to occur
- Consumer will choose the product with the largest consumer surplus
What must firms do to compete successfully?
To compete successfully, firms need to deliver consumer surplus.
How can a firm increase consumer surplus?
- by increasing the perceived benefit
- by lowering the price
Price-quality continuum:
How are competing firms viewed when products differ in quality?
- competing firms can be viewed as submitting consumer surplus bids with their quality-price combinations.
What happens when a firm fails to offer as much consumer surplus as its rivals?
when a firms fails to offer as much consumer surplus as its rivals, its sales will decline
Value Map:
What do the points on the indifference curve represent?
represent price-quality combinations with the same consumer surplus
Value map: What does the steepness of the indifference curve reflect?
What does a steep indifference curve mean?
reflects the tradeoff between price and quality that consumers are willing to make
Steep indifference curves:
consumers are willing to pay much more for a good that is of higher quality
What does consumer surplius parity mean?
is achieved when:
- firms’ price-quality positions line up along the same indifference curve
- when firms are offering a consumer the same amount of consumer surplus
What does it mean when firms’ price-quality positions line up along the** same indifference curve?**
When firms’ price-quality positions line up along the same indifference curve, it means the firms have achieved consumer surplus parity.
What happens when a firm moves from a CS parity or CS advantage to a position in which its CS is less than that os its competitors?
–>Its sales will slip and its market share will fall
When is economic value createcd? (Description process)
- when a producer combines inputs such as labor, capital, raw materials and purchased components to make a product whose perceived benefit B (maximum willingness to pay) exceeds the cost C incurred in making the product
What is the formula for Economic value created?
V = (B - P) [Consumer surplus] + (P - C) [Producer surplus]
V = B - C
What happen when
B - C is negative
B - C is positive?
- If B - C (the economic value created) is not positive, the product will not be viable.
- If B – C is positive, all parties are better off because the product was made and sold
How does value creation occur? With respect to?
- Value creation occurs with respect to particular customers
What is necessary for a product to be viable?
No product can be viable without creating positive economic value.
Can a firm be successful in creating positive B - C in one segment while another firm does the same in another segment?
- Yes, a firm may be successful in creating positive B - C in one segment while it takes another firm to do the same in another segment
Is it enough for a firm to simply sell a product, meaning the product is economic viable (B - C) ?
- No, Although a positive B - C is necessary for a product to be economically viable
- just because a firm sells a product whose B - C is positive is no guarantee that it will make a positive profit
How can a firm achieve a 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
What is the situation when a firm has a superior value creation?
- the firm can offer as much consumer surplus as the rivals and still make an economic profit
What does consonance analysis evaluate in a firm?
looks at a firm’s prospects for continuing to create value
Consonance analysis:
What factors affect a firm’s ability to create value according to consonance analysis?
- changes in market demand
- changes in technology and
- threats from other firms in the industry and from other industries
What is the value chain/vertical chain? What does it include?
= is the representation of the firm as a set of value creating activities
Include primary activities and support activities
What are the primary and support activities included in the value chain?
- primary activities: like production and marketing, logistics
- support activities such as human resource management. R&D, infrastructure
Value chain
What do all activities contribute to?
- Each activity in the value chain can potentially add to perceived benefits
- Each activity also adds to costs.
Why is it difficult to isolate the incremental perceived benefit and cost of each activity in the value chain?
In practice, it is difficult to isolate
- the incremental perceived benefit
- and the incremental cost of each activity.
What is value added analysis?
= is a tool to identify where the value creation occurs along the value chain
What do we need to estimating the incremental value for the parts of the value chain?
we need market prices of semi-finished and finished goods to estimate the incremental value for the parts of the value chain.
Value chain
How can firms create more economic value than their compeitors?
- by either configuring its value chain differently from competitors
- by performing marketing activities more effectively than the rivals
What do firms need to perform activities more effectively than rivals?
- To perform activities more effectively than the rivals firms need resources and capabilities that rivals do not have
What are resources?
= are specialized assets (patents, established brand name, installed base, etc.).
What are capabilities?
are activities a firm can perform better than its rivals do
What are the characteristics of capabilities?
- 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
Can a product be viable without creating positive economic value ?
- No product can be viable without creating positive economic value
