Lectures extra Flashcards
VPC or Value, price, cost framework
- Cost: marginal cost of a product unit
- Value: willingness to pay (not price)
o Highest price a customer would be willing to pay for a product/service
In the absence of competitors
o Customer always determines the value - Price: market derived and (mostly) doesn’t matter for competitive advantage
Value minus cost = economic contribution
- Whatever firm produces the most economic contribution has the competitive advantage
Why is it difficult to make money from innovations?
- R&D costs
- First movers advantage
a. Solutions in search of a market
b. Technological/market uncertainty, nobody gets it right the first time
c. Free-rider effect
d. Incumbent inertia - Imitation and favourable prices
- Lack of complementary assets:
Profiting from innovation theory:
3 pillars:
1. Appropriability regime
a. Ease of imitability vs complexity
b. Strength/effectiveness of legal protection mechanisms
- Dominant design
a. Technological maturity; prevailing design - Complementary assets
a. Need access for long term profitability
Strong appropriability
= easy to protect; large share of to the pie retained by supply side
- E.g.: patents of pharmaceuticals, to block imitators and followers
- E.g.: Intel, complex innovation, ingredient branding trademarked, other innovators are depended on Intel
Complementary assets
- Generic: general purpose, money
- Co-specialized: bilateral dependence, container ships for ports are depended
- Specialized: tailored, equipment to produce vaccines
Who profits:
appropriability weak, Complementary assets freely: Difficult to make profits
appropriability weak, Complementary assets tightly: Holder of assets profits
appropriability strong, Complementary assets freely: innovation firm profits
appropriability strong, Complementary assets tightly: highest bargaining power profits
Diversification is a corporate strategy to enter in to a new market or industry which the business is not currently in, whilst also creating a new product for that new market
Development directions:
Product exists, market exists: protect / build
Product exists, market new: market expansion
Product new, market exists: product expansion
Product new, market new: diversification
Economies of scope:
expansion of the variety of activities (use of data for marketing)
Strategic fit
the degree to which an organization is matching its resources and capabilities with the opportunities in the external environment.
Levels of diversification
Specialization ratio: share of total revenue generated by largest business unit
Relatedness ration: share of total revenue generated by businesses related to the core
Single business:
- Specialization 1 - 0.95, relatedness 1- 0.8
Dominant business:
- Specialization 0.95 - 0.7, relatedness 1 - 0.7
Related diversification:
- Specialization 0.7 - 0, relatedness 1 - 0.7
Unrelated diversification:
- Specialization 0.7 - 0, relatedness 0.7 - 0
Diversification must pass three tests:
- Industry attractiveness, Cost-of-entry, Better-off
Related diversification:
- Linkages at the customer level:
o Use of same sales channels, sales team, brands, advertising, customer info - Linkages in assets:
o Use of same machines, IT, plants, offices, logistic systems, back office - Linkages in expertise:
o Use of same technical skills, product/domain expertise, capabilities
Layered challenges of servitization
- New service development
- Nurturing a new culture
- Cultural inertia
- Market environment
Firm level challenges of servitization:
- Shifting mindsets: towards relational, co-creation and partnerships
- Timescale: clients as a partner
- Business model and customer offer
Drivers of servitization:
- Financial: higher profit margin, less sensitive for price competition, resistant to economic cycles
- Strategic: Differentiate manufacturing offerings, sustainable competitive advantage
- Marketing: total cost of ownership, service tend to induce repeat-sale, customer insights enable the development of tailored solutions
