MANA CH 7

Theory of limit pricing

-A firm in a strong market position sets prices at a level that just fails to attract entrants (discourage emergence of competitors by forgoing maximizing short term profits)

Firm stuck in the middle means

-almost guarantee low profitability -either loses high volume customers who want low price OR must bid away profits to get low cost firms -loses high-margin business to firms who focused on high margin targets -blurred corporate culture & organization system

Value Chain analysis for consumer goods

-few consumer good consumed directly -consumers engage in; search, acquisition, use -for consumer durables consumers value chain may be; search, purchase, financing, acquisition of complementary products, operation, service/repair, disposal. (May have linkages with manufacturer's value chain)

Residual Efficiency

-unexplained cost differences btw firms -relate to the extent to which the firm approaches its efficiency frontier of optimal operation which depends on the firm's ability to eliminate "org slack" or "x-efficiency" -excess costs tend to accumulate within corp headquarters and become targets for activist investors -eliminating excess costs requires a threat to a co's survival -high levels are the result of mana systems and co values that intolerant of unnecessary costs-glorify frugality (walmart, ryanair, amazon)

3 Techniques to analyze customer preferences in relation to product attributes

1. Multidimensional scaling (MDS) 2. Conjoint Analysis 3. Hedonic price analysis

Scale economies arise from 3 principal sources

1. Technical input-output relationships 2. Indivisibilities 3. Specialization

2 key capabilites of entreprenurial responsiveness

1. The ability to anticipate changes in the external environment. Ex: IBM, changes in IT sector (personal computing, internet, from hardware to software to services, cloud) Ex: Failed= hewlett- packard 2. SPEED. Bc markets more turbulent and unpredictable so need to respond quickly but need info to do so. Economic and market forecasting is less effective and now use "early warning systems" thru direct relationships with customer, suppliers, and even competitiors. Require short cycle times so that info can be acted upon speedly (EX: Zara-Inditex--vertical supply chain; EX: Boston Consulting Group's concept of time-based competition & strategic agility). IT advances help response capabilities

We can id opportunities for profitable differentiation by (demand side)

1. Understand what customers want 2. how they choose 3. what motivates them *see how to best meet their needs; requires creativity - not just standard framework/technique; find the purpose of the product and need of its customer*

Value Chain analysis of producer goods (3 stages)

1. construct value chain of firm and customer 2. ID drivers of uniqueness in each activity of the firm's value chain 3. locate linkages btw the value chain of the firm and that of the buyer. The amount of additional value that the firm creates for its customer thru exploiting these linkages represents the potential price premium the firm can charge for its differentiation

Drivers/Sources of Uniquness

1. product features and product performance 2. complementary services (credit, delivery, repair) 3. intensity of marketing activities (adv spending) 4. tech embodied in design and manufacture 5. quality of purchased inputs 6. procedures that influence the customer experience (quality control, service procedures, frequency of sales visits) 7. skill & experience of employees 8. location (retail stores) 9. degree of vertical integration (which influences a firm's ability to control inputs and intermediate processes)

Why do we need the concept of competivtive advantage?

Comp advantage may not be revealed in higher profitiability- a firm may forgo current profit in favor of investing in market share, tech, customer loyalty, or executive perks

supply side analysis

ID the firm's potential to create uniqueness; must be aware of the resources and capabilites through which it can create uniqueness *but important to see if creates value for customer and if value added exceeds cost of differentiation*

Newspaper business models include

a. free access with paid 3rd party ads b. user subscriptions c. metered access with limited free access d. "freemium" models with some content offered free but more valuable content only available through subscription

Differentation advantage

achieved when its provides something unique that is valuable to buyers beyond simply offering a low price

Product Design (DESIGN FOR MANUFACTURING)

designing products for ease of production rather than simply for functionality and esthetics can offer substantial cost savings-esp when linked to the intro of new process technology *service offerings can also be designed for ease and efficiency of production-but can cause customers to request deviations from standard offerings which requires a clear strategy to manage variability thru accommodations or restrictions*

small and medium companies survive by

exploiting superior flexibility, outsourcing activities where scale is critical to efficiency & avoid motivational and coordination problems that often afflict large organizations

The comp advantage that arises from external change also depends on

firms ability to respond to change. Any external change creates entrepreneurial opportunities that will accrue to the firms that exploit these opportunities most effectively

Technical input-output relationships

increases in output do not require proportionate increases in input (volume related economies)

The changes that generate competitive advantage can be either

internal or external

Imitation

is the most direct form of competition; thus for comp adv to be sustained over time BARRIERS TO IMITATION must exisit

commodities

lack physical differentiation (ex:cement,wheat, memory chips)

A firm that competes on low cost is distinguishable from a firm that competes on differentiation in terms of

marketing positioning, resources & capabilities, & org characteristics -both are mutually exclusive strategies (if a firm trys both they are 'stuck in the middle')

Value Chain in Differentiation Analysis

match a firms capacity to differentiation to the attributes that customers value most

In most industries, market leadership is held by a firm that

maximizes customer appeal by reconciling effective differentiation with low cost (Toyota, McDonalds, Nike) EX: pursuit of cost efficiency, quality, innovation, and brand -cost leader is not the market leader but a smaller competitor with minimal overheads, non union labor and cheaply acquired assets (cars)

External integrity

measure of how well a product's function, structure, and semantics fit the customer's objectives, values, production system, lifestyle, use pattern, and self identity

In production markets the potential for competitive adv is

much greater bc the complex combo of the resources and capabilities required, highly differentiated nature of these R and C & the imperfections in their supply

Tangible Differentiation

observable characteristics of a product or service that are relevant to customers' preferences and choice processes (size, shape, color, weight, design, material, and performance attributes such as reliability, consistency, taste, speed durability, and safety) -extend to product /services that complement the product (delivery, after sales services, and accessories)

Preemption

occupying existing and potential strategic niches to reduce the range of investment opportunities open to the challenger. Can take many forms: 1. Proliferation of product variable by a market leader can leave new entrants and smaller rivals with few opportunities to estab niche market 2. Large investments in production capacity ahead of growth of market demand also preempt market opp for rivals 3. Patent proliferation can protect tech-based advantage by limiting competitor's technical opportunities

Strategic innovation within e-commerce

often take the form of business model innovations

Multidimensional scaling (MDS)

permits customers' perceptions of competing products to be represented graphically in terms of key product attributes (ex: pain relievers and whiskey)

minimum efficient plant size

point at which most scale economies are exploited

experience goods

qualities and characteristics are only recognized after consumption (medical treatments, frozen tv dinners, wine)

Search goods

qualities and characteristics can be ascertained by inspection

7 principal determinants of a firm's unit cost (cost per unit of output) relative to its competitors (SOURCES OF COST ADVANTAGE)

refered to as COST DRIVERS 1. Economies of scale 2. Economies of learning 3. Production techniques 4. Product design 5. Input costs 6. Capacity utilization 7. Residual Efficiency *examine them to a particular firm to analyze the cost position relative to competitors, diagnose the sources of inefficiency, & make recommendations on how to improve its cost efficiency *

Few goods or services only satisfy physical needs..most buying is influenced by..

social and psychological motivations such as desire to find community with others and to reinforce one's own identiy

The more difficult to discern quality on inspection

the greater the value of the brand

One challenge of a would be imitator is

to decide which management practices are generic best practices and which are contextual--complementary with other management practices

Diagnosing Competitive Advantage: Casual ambiguity and uncertain imitability. If a firm is to imitate the comp adv of another it must

understand the basis of the rival's success. Easy to point to what is different; hard to ID which differences are the critical determinants of superior profitability

Intangible Differentiation

value that customers perceive in a product & is seldom determined solely by observable product features or performance criteria -social, emotional, psychological & esthetics -desire for status, exclusivity, individuality, security, community =powerful motivational forces

Hedonic price analysis

views products as bundles of underlying attributes. -Uses regression analysis to estimate the implicit market price for each attribute -Price differences relate to differences - results can be used to make decisions on what levels of each attribute to include within a new product and the price point for that product

Where activities are tightly linked, complexity theory (NK modeling in particular) predicts that

within a particular competitive environment, a number of fitness peaks will appear, each associated with a unique combo of strategic variables. To locate on the same fitness peak as another firm requires recreating a complex configuration of strategy, structure, mana systems, leadership, and business processes

Strategic Innovation

=creating value for customers from novel/new products, experiences, or modes of product delivery;

Raise

What factor shoud be raised well above the industry's standard?

strategy

describes the specifics of how that business model fits a firm's particular market context and its resource and capability endowments

A firm's primary strategic goal should be

driving volume growth thru maximizing market share. Association does not imply causation-market share and profitability are both outcomes of some other source of competitive advantage-product innovation or good marketing

business process management

emphasis shifted from workflow management to the broader application of info technology to the redesign and enhancement of organizational processes

value chain (ch 5)

framework for viewing the sequence of activities that a co performs. Each activity tends to be subject to a diff set of cost drivers, which give it a distinct cost structure

Cost advantage

goal of the firm is to become the cost leader in its industry or industry segment. Requires the firm to "find and exploit all sources of cost advantage and sell a standard, no-frill product" -historically the principal medium of competition -show large industrial corps exploit economies of scale and scope thru investments in mass production and distrubution

Within an industry, the more heterogeneous are firms' endowments of resources and capabilities the

greater the potential for comp adv. Diff in resources endowments also influence the erosion of comp adv: the more similar are competitors' R and C, the easier is imitation

Abraham Maslow

hierarchy of human needs that progress from basic survival needs to security needs, to belonging needs, to esteem needs, up to the desire for self-actualization

uncertain imitability

if the causes of a firm's success cannot be known for sure, successful imitation is uncertain

Conjoint Analysis

measures the strength of customer preferences for diff product attributes -First need to ID underlying attributes of product - next market research to rank hypothetical products that contain alternative bundles of attributes - results used to estimate proportion of customers who would prefer a hypothetical new product to competing products already available in market -ex: marriott and courtyard hotel

Bundling

offering a combo of complementary products and services -counteracts normal tendency toward unbundling as markets mature -electronic commerce use it (have transaction costs) -important in B2B transactions thru "providing customer solutions"-combo of goods and services that are tailored to needs of each client *another way differentiation can occur*

Internal integrity

refers to consistency btw the function and structure of the product-the parts fit well, components match and work together, layout achieve max space efficiency

For most goods, brand equity has more to do with

status and identity than with tangible product performance (ex: new coke fail bc give precedence to tangible difference (taste) over intangible (authenticity))

business model

stories that explain how enterprises work. Address the question; How do we make money in the business? What is the underlying economic logic that explains how we deliver value to customers and at an appropriate cost? -depicting the content, structure, and governance of transactions designed to create value through the exploitation of business opportunities -the OVERALL configuration of a firm's business system -closely associated with with rise of e-commerce

differentiation opportunities are constrained by

technical and market factors for simple products *for complex products there is a much greater scope for differentiation*

The greater the magnitude of external change and the greater the difference in strategic positioning of firms

the greater the propensity for external change to generate competitive advantage (seen in the dispersion of profitability among the firms within an industry) a. tobacco industry=stable external enviro with little diff in profitability btw firms b. toy industry= unstable w/heterogeneous groups of firms and unpredictable shifts in pref and tech

differentiation advantage

when a firm is able to obtain from is differentiation a price premium that exceeds the cost of providing the differentiation -offer diff product features, ID & understand every possible interaction btw firm and customers & ask how can be enhanced/changed to deliver add value to the customer -look at the firm(supply side) and customer (demand side) = 2 requirements *anything can be turned into a value-added product or service*

Brands (fulfill multiple roles)

- at basic level- provide guarantee of the quality of a product simply by ID the producer of a product-ensuring producer is legally accountable for the products supplied -represents an investment that provides incentive to maintain quality and customer satisfaction -credible sign of quality bc owner not want to devalue it -acts as a guarantee to customer that reduces uncertainty and search costs -embodiment of identity and style (harley) -popular in ecommerce (internet=anonymity of buyers and sellers; ex: amazon can use brand to reduce consumers' perceived risk)

competitive advantage

-DEF: When 2 or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit -result of matching internal strengths to external success factors -is a disequilibrium phenomenon that is created by change, and once established, it sets in motion the competitive process that leads to its destruction

Economies of Scale

-Exist wherever proportionate increases in the amounts of inputs employed in a production process result in lower unit costs. -associated with manufacturing -key determinant of industry's level of concentration (the proportion of industry output accounted for by the largest firms) -In consumer good industries in marketing have driven industry consolidation -greatest sales volume have lowest unit adv cost -if product dev costly;volume is essential to profitability (areospace, auto, software, telecom)

Input Costs

-Firms in an industry do not necessarily pay the same price for identical inputs -Several sources of lower input costs: 1. LOCATIONAL differences in input price: price of inputs and wage rates vary btw location 2. OWNERSHIP of low cost sources of supply: in raw-material-intensive industries, ownership of low-cost sources of material can offer a massive cost advantage 3. NON UNION labor: labor unions=high levels of pay and benefits and work rules that can lower productivity 4. BARGAINING power: ability to negotiate prices and discounts can be cost advantage for industry leaders; esp in retailing (amazon)

Specialization

-Increased scale permits greater task specialization. Mass production involves breaking down the production process into separate tasks performed by specialized workers using specialized equipment. -Division of labor promotes learning and assists automation -Economies of specialization important in knowledge-intensive industries such as investment banking, management consulting, and software dev where large firms are able to offer specialized expertise across a broad range of know-how

Deterrence and Preemption

-avoid competition by undermining the incentives for imitation; persuade it will be unprofitable. For deterrence to work threats must be credible (see more in CH4). A firm can also deter imitation by preemption

blue oceans

-can be entirely new industries created by tech innovation BUT are more likely the creation of new market space within existing industries using existing technologies. -Combine performance attributes that were previously viewed as conflicting -uncontested market spaces such as/may involve: a. new customer segments (apple comps use in multiple places) for or reconceptualizations (cirque du soleil reinvent circus) of existing products b. novel recombinations of product attributes & reconfiguration of value chain (Dell)

Costs of Differentiation

-if differentiation narrows a firm's market scope it also limits the potential for exploiting scale economies -postpone to later stages of firm's value chain -modular design (common components permits scale economies while permitting product variety)

external sources of change

-must have differential effects on companies because of their different resources and capabilities or strategic positioning

Capacity Utilization

-over short and medium terms, plant capacity is more or less fixed and variations in output cause capacity utilization to rise or fall -underutilization raise unit costs bc fixed costs must be spread over fewer units of production -pushing output beyond normal full capacity also creates inefficiencies (ex;overtime pay) -ability to speedily adjust capacity to downturns in demand can be a major source of cost advantage

Economies of learning

-repetition develops both individual skills and organizational routines -learning occurs both at the individual level through improvements in dexterity and problem solving & at the group level through the development and refinement of org routines

Production Techniques (process technology and process design)

-superior process=source of huge cost economies -ex: flat glass, Ford production line -when process innovation is embodied in new capital equipment, diffusion is likely to be rapid -full benefits of new process tech require system-wide changes in job design, employee incentives, org structure, mana controls -major efficiency gains from improved processes may come from process redesign without significant tech innovation -business process re-engineering

law of experience

-the unit cost of value added (unit cost of production less the unit cost of bought in components and materials) to a standard product declines by a constant percentage (btw 15-30%) each time cumulative output doubles -experience curve has its basis in learning by doing *regularity in the reductions in unit cost w increased cumulative output*

Firm can achieve a higher rate of profit (or potential profit) over a rival in 1 of 2 ways: (2 PRIMARY SOURCES OF COMP ADVANTAGE)

1. Cost advantage-supply an identical product/service at a lower cost 2. Differentiation advantage - supply a product/service that is diff in such a way that the customer is willing to pay a price premium that exceeds the add cost of the differentation *1&2 define 2 diff approaches to business strategy*

Innovatory strategies may involve:

1. Creating whole new markets/industries (e.g. Craig McCaw and wireless telephony services; My Space and Facebook in social networking) 2. Creating new customer segments (e.g. AirAsia in low-cost air travel in SE Asia; Nintendo's Wii games console) 3. New sources of competitive advantage a. Reconfiguring the value chain: Zara in fashion clothing; Southwest in airlines; Cemex in cement; IKEA in furniture b. Reconceptualizing the product: Cirque du Soleil in circuses; Starbucks in coffee shops; Apple in computers (iPad) c. New performance combinations : e.g. Low prices with quality (Virgin Atlantic); low prices and style (H&M, Primark, Target)

Value chain analysis of the firm's cost position compromises 5 stages

1. Disaggregate the firm into separate activities; use judgement to make appropriate value chain activities 2. Estimate the cost that each activity contributes to total costs 3. ID cost drivers; determine level of unit cost relative to other firms (ex: large fixed costs like prod dev & marketing cost driver is ability to amortize costs over large volume sales; labor-intense activity driver is wage rate, process design, defect rate) 4. ID linkages; cost of 1 activity can be determined by cost of other 5. ID opportunities for reducing costs; when id areas of comparative inefficiency and cost drivers for each then opp for cost reduction evident

Combining the 2 types of comp advantage with the firm's choice of scope- broad market vs narrow segment- Michael Porter defined 3 generic strategies

1. cost leadership 2. differentiation 3. focus *see diagram*

Weaknesses of experience curves as a strategy tool

1. fails to distinguish several sources of cost reduction (learning, scale, process innovation) 2. presumes that cost reductions from experience are automatic-reality is they must be managed

For one firm to successfully imitate the strategy of another it must meet 4 conditions

1. it must ID the comp advantage of a rival 2. it must have incentive to imitate 3. it must be able to diagnose the sources of the rival's competitive advantage 4. it must be able to acquire the resources and capabilities necessary for imitation *at each stage the incumbent can create isolating mechanisms to impede the would be imitator*

Key source of competitive advantage is

STRATEGIC INNOVATION--new approaches to serving customers and competing with rivals; -if use it thru business models can revolutionize established industries

Identification: Obscuring Superior Performance

Simple barrier to imitation is obscure the firm's superior profitability. Firms that dominate niche market (good to be private co bc dont need to disclose financial performance)

Strategic innovation in retail industry

Want to see new retail concepts and formats a. Big box stores (toys r us, home depot) b. augmented customer service (nordstrom) c. novel display and store layout (sephora) d. new system to supply customers (ikea)

Casual ambiguity

When a firm's competitive advantage is multidimensional and is based on complex bundles of resources and capabilities; it is difficult to diagnose the success of the leading firm. -The outcome of casual ambiguity is uncertain imitabilty

Create

Which factors should be created that the industry has never offered?

Reduce

Which factors should be reduced well below the industry's standard?

Eliminate

Which factors that the industry has long competed on should be eliminated?

Market for experience goods corresponds to

a classic prisoners' dilemma; firm can offer a high or low quality product an customer can either pay a high or low price- if quality cannot be detected equilibrium is established with the customer offering a low price and supplier offering a low quality product even though both would be better off with high quality at high price -resolution is producers to find some credible means of signaling quality to the customer = change payoffs in prisoners dilemma (ex: warranty, brand name, packaging, money back guarantee, sponsorship, retail enviro) *the more difficult to make sure of performance prior to purchase the more important signaling is

Achieving internal and external integrity requires

a combo of close cross-functional collaboration and intimate customer contact -important to those that supply "lifestyle" products where differentiation is based on customers' social and psychological needs -credibility of image depends critically on the consistency of the image presented (linked identity btw customer and company- ex: Harley, Starbucks)

Market research that focuses on traditional demographic and socioeconomic factors is less useful than

a deep understanding of consumers' relationships with a product

strategy canvas

a framework for developing blue ocean strategies. Horizontal axis shows different product characteristics along which the firms in the industry compete. Vertical axis=amt of each characteristic a firm offers its customers (high-low). Challenge is to ID a strategy that can provide a novel combo of attributes=4 choices to be made (Raise, Eliminate, Reduce, Create)

Business Process Re-engineering (BPR)

an approach to redesigning operational processes tat gained massive popularity in 1990s -Michael Hammer and James Champy -"fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance, such as cost, quality , service, and speed" -operational and commercial processes evolve over time without consistent direction or systematic appraisal -if we are starting afresh how would we design this process? -led to major gains in quality, speed, & efficiency -if dont fully understand current process dont just wipe it all clean or can damage company -has been partly superseded by business process management

Once diagnose sources of comp advantage the imitator must

assemble the necessary resources and capabilities for imitation; can acquire by either building or buying them. The imitation barriers here are TRANSFERABILITY and REPLICABILITY of resources and capabilities.

Isolating Mechanisms

barriers that prevent the erosion of the superior profitability of individual firms. -effective in sustaining comp advantage: interfirm profit differentials often persist for periods of a decade or more

stealth marketing/viral marketing

brand identity as word-of-mouth promotion deploying web based social media *traditional mass marketing is less effective in promoting "tribal identity" "shared values" "emotional dialogue"

Fundamental issues of differentiation are also the fundamental issues of....

business strategies: who are our customers? how do we create value and do it effectively?

Competitive Advantage is eroded by

competition; it is undermined on the ability of the competitors to challenge either by imitation or innovation. Hypercompetition may have accelerated the erosion of comp advantage

Differentiation

concerned with how a firm competes- ways in which it can offer uniqueness -consistency, reliability, status, quality, innovation - strategic choice made by a firm -may lead to focusing upon particular market segments (not necessary) -better/more sustainable comp advantage than low cost bc cost has more competitors & can be overturned by innovation -adds cost

Segmentation

concerned with where a firm competes in terms of customer groups, localities, and product types -feature of market structure

Product Integrity

consistency of a firm's differentiation; extent to which a product achieves: total balance of numerous product characteristics (basic functions, esthetics, semantics, reliability, economy) -has internal and external dimensions

Internal sources of change (comp adv from innovation)

create internally through innovation which creates comp adv for the innovator while undermining the comp adv of previous market leaders---schumpeter's process of "creative destruction"

A value chain analysis of a firm's cost seeks to ID....

1. the relative importance of each activity with respect to total cost 2. the cost drivers for each activity and the comparative efficiency with which the firm performs each activity; 3. How costs in one activity influence costs in another 4. Which activities should be undertaken within the firm and which activities should be outsourced

2 types of value creating activities which ID the sources of comp advantage in diff types of markets

1. trading 2. production

Competitive Advantage in trading markets requires imperfections in the competitive process:

1. where there is an imperfect availability of information, comp advantage results from superior access to information (criminal penalties for insider trading) 2. where transaction costs are present, comp adv accrues to the traders w the lowest transaction costs (superior returns to low-cost index mutual funds vs pro managed funds) 3. if markets are subject to systematic behavioral trends, comp adv accrues to traders w superior knowledge of market psychology or price patterns. 4. If markets subject to bandwagon effects, comp adv can be gained in the short term by following the herd (momentum trading) and longer term by a contrarian strategy ex:warren buffet

In trading markets the limiting case is

EFFICIENT MARKETS which corespond closely to perfectly competitive markets (ex: market for securities, foreign exchange, commodity features). If prices reflect all available info and adjust instantly to new available info no market trader can earn more than any othre; cant beat the market = no comp advantage = reflection of conditions of resource avaiablity. Fianance and Info are 2 resources need to compete & are equally available to all traders

Indivisibilities

Many activities and resources are "lumpy"- that are unavailable in small sizes SO they offer activities of scale as firms are able to spread the costs of these items over larger volumes of output. -In R&D new product dev and advertisement market leaders tend to have lower costs as a % of scales than smaller rivals