Strategic Positioning and Competitive Advantage

Question 1

In the overall context, what is the relevance of strategic positioning?

Answer 1

• Interest: Firm heterogeneity within an industry
  
  • I.e. industry accounts only for some variation in profitability
  • Firms differ in the way they create and capture value (By benefit position or cost position relative to competitors)
  • How firms positions itself in there industry matters

Question 2

What is willingness to pay?

Answer 2

• Price at which the consumer is indifferent between buying and not buying
• Determining: give for free and then raise price
• Maximum willingness to pay is an indicator of B, the perceived benefit of the product

Question 3

What is CS?

Answer 3

• P - B
• When positive, purchase occurs
• Usually, when faced with a choice between two competing products, consumers will purchase the one with the highest CS
• In general, we can view competition between firms as a process by which firms submit ‘consumer surplus bids’ to consumers, who in turn choose the product that offers the highest amount
• Regardless of the values of P and B, where (P-B) is higher for one product, that product is demanded

Question 4

What are the implications of CS?

Answer 4

• A firm can increase CS by increasing B or lowering P
• When products differ in quality, computing firms can be viewed as submitting CS-bids with their quality-price combinations
• When a firm fails to offer as much CS as its rivals, sales will decline

Question 5

What is a value map?

Answer 5

• Points on the indifference curve represent price-quality combinations with the same CS
• Steepness reflects the tradeoff between price and quality for consumers
• All points on curve offer the same CS = (P-B)
• All points on curve are substitutes
• Helps to frame market disruptions: new entires are generally below the line

Question 6

What is value creation?

Answer 6

• Occurs when a producer combines inputs to make a product whose perceived benefit B exceeds the cost C incurred in making it
• Economic value created is thus B - C when B and C are expressed as per unit of the final product
• The part of the value created that goes to the consumer is B-P = CS
• The producer’s surplus is the rest: P - C - PS
• Thus value created = consumer surplus + producer surplus = (B - P) + (P - C) = (B - C)

Question 7

What is value creation in terms of competitive advantage?

Answer 7

• The firm with an advantage in this situation is one that has the highest B - C
• The firm can offer a slightly more favourable ‘surplus bid’ than the most aggressive bid its rival can offer
• To have a competitive advantage, you need to offer the highest value creation B - C

Question 8

What does value creation mean for strategic positioning?

Answer 8

• Either by increasing B beyond what rivals can offer or decreasing C
• Firm should possess resources and capabilities that rivals do not have and cannot easily copy
  
  • Resources: firm-specific assets such as patents, trademarks, workers with firm-specific expertise, that are valuable, rare and inimitable
• Porter’s generic strategies

Question 9

What are Porter’s Generic Strategies?

Answer 9

• Cost Leadership

* Benefit Leadership/Differentiation

Question 10

What is cost leadership?

Answer 10

• Create more value (B - C) than rivals by offering products that have a lower C (Dell)
• Economic Logic
  
  • Leadership: maintaining some amount of benefit parity in the market, then cut costs substantially
  • Profit margin for F is significantly higher than E, as quality has been approximately maintained

Question 11

What is differentiation?

Answer 11

• Create more value (B - C) than rivals by offering products that have a higher B (Alienware)
• Economic Logic
  
  • Leadership: Maintain costs but offer a large quality improvement
  • E to F: Often means existing product + additional features

Question 12

What is capturing value?

Answer 12

Extracting profits from cost and benefit advantages

Question 13

How is value captures for a cost advantage strategy?

Answer 13

• High PED (weak horizontal differentiationon)
  
  • Modest price cuts gain lots of market share
  • Exploit advantage through higher market share than competitors
  • Share strategy: underprice competitors to gain share
• Low PED (strong horizontal differentiation)
  
  • Big price cuts gain little share
  • Exploit advantage through higher profit margins
  • Margin strategy: maintain price parity with competitors (let lower costs drive higher margins)

Question 14

How is value captured for a differentiation strategy?

Answer 14

• High PED (weak horizontal differentiationon)
  
  • Modest price hikes lose lots of market share
  • Exploit advantage through higher market share than competitors
  • Share strategy: maintain price parity with competitors (let benefit advantage drive share increase)
• Low PED (strong horizontal differentiation)
  
  • Big price hikes lose little share
  • Exploit advantage through higher profit margins
  • Margin strategy: charge price premium relative to competitors