Lecture Unit 8: Strategic positioning for Competitive advantage (2/2) Flashcards
What is a firms generic strategy?
describes how it positions itself to compete in the market it serves (Porter)
What are the two broad approaches to strategic positioning?
- cost leadership and
- benefit leadership
-> alternative narrow focus strategy
When does a firm follow a strategy of cost leadership?
creates more value (i.e., B–Q) than its competitors by offering products that have a lower C than its rivals
cost leader can:
- price its product below the rivals and sell more or
- match rivals’ price and achieve better price-cost margins
Cost Leadership
How can a cost leader price its product to create more value?
- The cost leader can price its product below rivals and sell more
- or match rivals’ price and achieve better price-cost margins
How can the cost leader create more value than its competitors? (3 approaches)
- by offering the same benefits as the competitors do (benefit parity)
- by offering a slightly lower benefit (benefit proximity), or
- by offering a qualitatively different product
Strategic Logic of Cost Leadership
How can the firm F achieve a higher profit margin? (Name the equation?
Situation:
Firm F offer lower quality than the rest (E), and has much lower costs
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
WHen does a firm follow a strategy of benefit leadership?
- when the firm creates more value (i.e., B–Q) than its competitors by offering products that have a higher B than its rivals
How can a benefit leader create superior value?
by offering:
- Cost parity
- Cost proximity
- Substantially higher benefit and higher cost
Strategic Logic of Benefit Leadership:
How can the firm earn have a higher profit margin? (Name Equation)
Situation:
Firm F offers higher benefit than the rest (E) and a slightly higer cost
If the benefit leader attains consumer surplus parity with the rest of the firms in the industry
PF – PE > CF – CE
PF – CF > PE – CE
What allows a leader (benefit leader) to charge a price premium without sacrificing market share? (How is this phenomenon called?)
The leader’s benefit advantage: –>Wiggle room
- gives it the “wiggle room” to charge a price premium relative to its lower-benefit, lower-cost rivals without sacrificing market share
What happens when products are not differentiated? (Cost/benefit leader)
- the firm that has a cost (or benefit) advantage over others and can capture the entire market
What happens when we have differentiated products? (Market Dynamics)
- many firms can coexist since firms face downward sloping demand curves
- customers do not switch easily when a firm cuts prices
What can a firm with a cost (or benefit) advantage over others do when products are not differentiated?
The firm can capture the entire market.
How can many firms coexist in a market with product differentiation?
Many firms can coexist because they face downward sloping demand curves.
What does it mean when a firm´s product has a high price elasticity?
consumers are price sensitive because eg.g. horizontal differentiation is weak
What should a firm do if it has high price elasticity (product differentiation is weak)?
- make modest price cuts that can lead to significant increases in market share
What strategy should a firm follow when product differentiation is weak?
follow a market share strategy
What should a firm do if it has a cost advantage, and has a high price elasticity of demand?
With a cost advantage, the firm should underprice its rivals
By offering lower prices,
- the firm can attract more customers, gaining market share (exploit advantage) and potentially driving competitors out of the market
Share strategy: underprice competitors to gain share
What should a firm do if it has a benefit advantage, and has a high price elasticity of demand?
- With a benefit advantage the firm should maintain price parity
- and let the benefit build the share
–>(keep prices similar) and let the superior benefits of the product attract customers and build market share
Share strategy: Maintain price parity with competitors (let benefit advantage drive share)
What does it mean when a firm´s product has a low price elasticity? (Consumer characteristics)
consumers are not very price sensitive because eg.g. horizontal differentiation is strong
What should a firm do if it has low price elasticity (product differentiation is strong)?
- Even deep price cuts will NOT increase the firm’s market share muchh
- the firm should follow a profit margin strategy –>Focus on maintaining higher prices to maximize profits
What strategy should a firm follow when product differentiation is strong?
- when produc differentiation is strong, firms should follow a proft margin strategy
- Focus on maintaining higher prices to maximize profits
What should a firm do if it has a cost advantage, and has a low price elasticity of demand?
- with cost advantage, the firm should maintain price parity with its rivals
Margin strategy: maintain price pairity with compeittors while let lower costs drive higher margins
(benefiting from lower production costs, leading to higher profit margins
What should a firm do if it has a benefit advantage, and has a low price elasticity of demand?
- with benefit advantage, the firm should charge a price premium over the competitors
–>setting higher prices to reflect the superior value or benefits provided by the product
Margin strategy: Charge price premium relative to competitors
What do cost drivers do?
Cost drivers explain why average costs vary across firms
What are the different classes of cost drivers?
- Cost drivers related to firm size, scope, and cumulative experience
- Cost drivers independent of firm size, scope, or cumulative experience
- Cost drivers related to organization of transaction
What are the 5 dimensions of benefit drivers?
- Physical characteristics of the product itself
- The quantity and characteristics of the service or complementary goods the firm or its dealers offer for sale
- Characteristics associated with the sale or delivery of the good
- Characteristics that shape consumers’ perceptions or expectations of the product’s performance
- The subjective image of the product
Whare are the conditions when a firm should seek a cost advantage?
- when the nature of the product does not allow benefit enhancement,
- when consumers are relatively price sensitive, and
- when the product is a search good rather than an experience good
Whare are the conditions when a firm should seek a benefit advantage?
- 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
What does the argument “Stuck in the Middle” suggest about firms pursuing cost and benefit advantages?
- Firms should either pursue a cost advantage or a benefit advantage, but not both
- Firms that pursue both could get stuck in the middle and have neither advantage
What is a potential downside of trying to achieve both cost and benefit advantages?
- It can lead to unfocused decision-making
- May result in uninspired imitation of “best practices.”
Do successful firms typically have one or both types of advantages? (reality)
Successful firms often appear to have both cost and benefit advantages
How do firms that offer high-quality products gain cost advantages (have both types of advantages)?
- Firms that offer high quality products expand market share and enjoy cost advantages due to economies of scale and learning
Why might learning economies be more important for high-quality production?
Because it helps in expanding market share and achieving cost advantages.
What is a potential benefit of high-quality producers in terms of efficiency?
High-quality producers may also be more efficient producers.
What are the 2 questions important for strategic positoning?
1.How will the firm create value? [Benefit, cost]
2.Where will the firm do it? [Broad or narrow segments
What are the two dimensions of an industry?
An industry can be represented in two dimensions
- Product varieties
- Customer group
What is a potential segment?
is the intersection of a particular product group with a particular customer group
–>Market segmentation matrix
What are the reasons for variation in structural attractiveness of segments?
- Customer economics
- Supply conditions
- Segment size
Buyers in each class have similar tastes, needs and marketing responses
What is the broad coverage strategiess? Where do economies of scope arise from?
=Offer a full line of products to serve a range of customer groups;
economies of scope can arise from
- Production
- Distribution
- Marketing
What is the Focus strategiess?
= Focus strategies can insulate the focusing firm from competition
What are the different 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
