Business 42001- Knez

Competitive Strategy

Lecture 2

Competitive Advantage and Strategic Positioning

Activity Analysis
- Cost Analysis
- Benefit Analysis

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Competitive Advantage and Value Creation

 The key question for profitability is not “How much economic value do I
create?”, but rather “How much value do I create compared to my competitors?”.

 If my product has a higher B - C than yours, I can match your “consumer surplus
bid” (B - P) ... and walk away with more profit (P - C). Why?
Value-created = Consumer Surplus + Profit

 Lower C (with same/close B) gives me the opportunity to ...

– undercut your price and sell more than you do, or ...
– match your price and attain higher a higher price-cost margin than you.

 Higher B (with same/close C) gives me the opportunity to ...

– match your price and sell more than you do, or ...
– charge a price premium and attain a higher price-cost margin than you.

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Superior Value Creation Typically Entails
Tradeoffs

 It is typically difficult to outperform competitors on all

dimensions.
– Delivering superior customer benefits is usually costly
– Reducing costs often entails quality compromises.
 How you configure your activities when you strive to attain a low-
cost position is likely to be different from how you configure
activities when you strive to deliver superior customer benefits.
 Two broad routes to competitive advantage
– Cost advantage.
– Differentiation (benefit) advantage.

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Two Dimensions of Strategic Positioning

Value Position
Cost Leadership Differentiation Leadership
Variety - Based

Focus on a limited set of products or services that can

cover multiple customer segments
(Product)
Scope Position

Generate lower costs per Provide higher level of

unit in a subset of benefits on subset of
product/service needs product/service needs

Focus on serving most or all the needs

Needs - Based

of a particular customer segment

(customer)

Generate lower costs per Provide higher level of

unit across benefits across
product/service needs product/service needs

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 Exploiting a Competitive Advantage Through Pricing

Table 13.3 from BDSS

Type of Advantage

Cost Advantage Benefit Advantage

(lower C than Competitors) (higher B than Competitors)

High price
 Modest price hikes lose lots of
elasticity of  Modest price cuts gain lots of market
market share.
share.
demand  Exploit advantage through higher
 Exploit advantage through higher
(weak horizontal market share than competitors.
market share.
differentiation)  Share Strategy: Maintain price parity
 Share strategy: Under-price
with competitors (let benefit
competitors to gain share.
advantage drive share increases.
Firm’s
Price
Low price
Elasticity of
Demand elasticity of
 Big price cuts gain little share.
demand  Big price hikes lose little share.
 Exploit advantage through higher
(strong horizontal  Exploit advantage through higher
profits margins.
profit margins.
differentiation)  Margin Strategy: Maintain price
 Margin Strategy: Charge price
parity with competitors (let lower
premium relative to competitors.
costs drive higher margins)

Horizontal Differentiation: Differences between products that increases

perceived benefit for some customers but decreases it for others.
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Porter’s Activity-Based View

 “Operational effectiveness means performing similar activities better than rivals

perform them. Strategic positioning means performing different activities from
rivals’ or performing similar activities in different ways.” [Porter, 1996]

 Strategy is the creation of a unique and valuable position, involving a distinctive

system of activities (value chain activities). [Porter 1996]

 The activity system is distinctive if it generates superior value for the target
customers. Superior value can be in the form of either higher benefits
(Singapore Airlines) or lower costs (Southwest airlines).

 Given the required fit between the needs of the target customers and the activity
system, strategy requires you to make trade-offs in competing – to choose what
not to do.

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Cataloguing Activities - Porter’s Value Chain

Firm Infrastructure

Human Resource Management

Mar
Support
Activities

gin
Technology Development

Procurement

Ma
Inbound Outbound Marketing

rgin
Operations Service
Logistics Logistics & Sales

Primary Activities
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 Southwest Activity System*

From: What is Strategy, By Michael No baggage

Porter, HBR 1996. No meals
Limited transfers
passenger
No seat service
assignments* No connections
with other airlines

Frequently,
reliable Limited use
departures of travel Short-haul,
1.5 minute Standardized
agents point-to-point routes
Gate fleet between midsize cities
turnarounds
and secondary
airports
High
compensation Automatic
Lean, highly ticketing
of employees
productive machines Very low
ground and ticket prices
gate crews
Flexible
union High
contracts “Southwest
High level of aircraft
the low-fare
employee stock utilization airline”
ownership
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 SWA Example - Top Down View*

(Some) Core Elements of SWA Value Proposition

Travel Any Time On-Time Low Price Easy Access

Cost Advantage
High Asset
Many Frequent v
Utilization - Full
Flights Low Cost. Flights

Maximum
Number of Flights

Route Airplane
Scheduling Turnaround Process

Critical Activities

*Adapted from Chatterjee - Core Objectives: Clarity in 9

Designing Strategy, CMR 2005 University of Chicago/Knez
 SWA Example - Top Down View*

Quick
Turnaround

Activities
Planes Available Standardized and Flight Operations:
at Short Notice Simplify Boarding pilots can fly all planes

Outsource All 737 Flexible

Maintenance
Employees

Resources

*Adapted from Chatterjee - Core Objectives: Clarity in 10

Designing Strategy, CMR 2005
(Strategic) Activity Analysis

 Objective: Generate a comprehensive understanding a company’s relative position in

the market place
• Identify and assess competitive advantages and disadvantages
• Identify potential changes/investments to improve/strengthen position
 Core Concepts:
– Cost advantages (or disadvantages) emanate from the performance of activities
necessary to deliver the value proposition, and resources required to perform
those activities.
– Benefit Advantages emanate through activities that generate benefits not offered
by the competition.
– Cost and benefit advantages may result from two sources:
1. The company has an alternative configuration of activities to compete for
the same target customers
2. The company performs the same activities more effectively.
 In most cases, the company’s strategic position requires making tradeoffs:
– The provision of higher benefits, with higher costs - differentiation strategy, or
– The provisions of few benefits at a lower, with lower costs - low cost strategy
The activity analysis should capture those tradeoffs.
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Activity Analysis: Process

 Generate initial description of strategy - value proposition, target market

segments, and critical capabilities. Note that (in practice) this is a preliminary
description to be refined through the analysis, especially the critical capabilities.
 Next, identify the primary competitors in the target market segments.

Traditional Steps (as outlined in Ghemawat and Rivkin note):

1. Catalogue Activities (The Value Chain)

2. Use Activities to Analyze Relative Costs

3. Use Activities to Analyze Relative Willingness to Pay

4. Explore Options and Make Choices

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Strategic Cost Analysis

1. Identify the set of primary activities that drive costs (e.g. Value Chain).

2. Identify costs of performing each of the activities. Where possible calculate (or at
least characterize) these costs on a per unit basis.

3. Identify the set of cost drivers associated with each activity - factors that make
the cost of the activity rise or fall.

4. Given an understanding of the competitors’ value propositions and activity

systems, use the identified cost drivers to estimate (or characterize) their relative
cost position.

5. Given relative cost analysis:

i. Assess and prioritize greatest cost disadvantages and identify ways to
lower costs without diminishing the value proposition.
ii. Consider potential competitive threats to identified costs advantages, and
identify ways to strengthen the advantage.

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Benefit analysis

 The objective of the benefit analysis is to:

– Identify how a firm may be creating greater benefits than the competition
– If possible, verify a greater willingness to pay for the benefits
– Identify the activities that generate the distinctive benefits and assess the
additional costs created.

 The text (BDSS) provides the following categories of Benefit Drivers

1. Physical Characteristics of the product itself.

2. The quantity and characteristics of the services or the complementary goods or
its dealers offer for sale.
3. Characteristics associated with the sale or delivery of the good.
4. Characteristics that shape consumers’ perceptions to expectations of the
product’s performance or its cost to use.
5. The subjective image of the product.

 For our purposes, the above benefit drivers represent alternative dimensions of
the value proposition. 14
 Customer Segmentation
Common Market Segmentation Variables*
Identifier Variables (Who they are)
Consumer Markets
 Demographics (age, gender, life
cycle stage, ethnicity, religion)
 Socioeconomic factors (income,
occupation, education)
 Psychographics (beliefs,
opinions, activities, interests)
Response Variables (What they want)
Benefits Desired
 Price, reliability, service
Application or Usage Situation
 Consumer: Planned versus
impulse/unexpected
 Business: Scheduled versus unplanned

Sensitivity to Market Mix

 Price, promotion, product features
Business Markets
 Size of Customer Purchasing Behavior
 Industry  Buying volume and frequency
 Geography  Switching among brands
 Purchasing approach
 Channels used

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*Based on figure 2-1 in chapter 2 of Marketing as Strategy, by Nirmalya Kumar, HBS 2006
Value Proposition

 Value Proposition: The collection of elements (or benefits) that are being
offered to the customer at a particular price. In combination, this collection of
elements is designed to meet the customer’s overall needs.

 Since each dimension of the value proposition comes at a cost (and hence,
a price), the customer may be willing to consider alternative value
propositions that meet the same broadly defined need (e.g. Avis versus
Zipcar).

 The basis for alternative value propositions are tradeoffs. The most basic
tradeoff is value versus price.

 Additional tradeoffs are created by alternative performance capabilities

generated by alternative mixtures of the value proposition elements (e.g.
alternative technology solutions that offer different performance capabilities -
iPhone versus a Blackberrry).

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Table Stakes versus Discriminators

 Given well defined target market segments, the value proposition can be
separated into two categories:

i. Table Stakes - Those features of the value proposition that any player in
this market will have to provide at some minimum level of quality. The table
stakes define a baseline for making relative comparisons to the
competition.
ii. Discriminators - Those features of the value proposition that are
distinctive relative to the competition. The discriminators can be features of
the value proposition that no other competitors provide (but not necessary
to compete in the market at a lower price point), or more commonly,
enhancements of one of the table stakes.
iii. Negative Discriminators - Missing features in the value proposition that
are offered as discriminators by the competition.

 Over time, significant discriminators become table stakes - the competition

introduces the discriminating benefit to their value proposition.

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 Breaking Down the Value Proposition

Value
Proposition
Elements Table Stake Category Discriminators
Availability of latest video titles and
Largest supply of latest titles
Primary assortment of older titles
Value
Largest number of conveniently located
Proposition
Brick & Mortar Retail Access retail outlets, with distinctive in-store
Elements
shopping experience

High levels of customer service through

Basic in-store customer service
highly trained/motivated store personnel

Additional
Value
 Largest supply of used video games (with guaranteed quality)
Proposition
Elements  Best source of information/news of interest to the hardcore game enthusiast

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Aside: VP-Driven Business Model Innovation

 New value propositions are designed to meet the needs of customer segments that are
either under-served or over-served by those currently offered in the market place.

– Over-served: These are customers for which there are elements of the value proposition
they do not need and would rather not have to pay for.

The value proposition gap is in the form of the customer having to (implicitly) pay for
benefits they don’t want in order to receive the benefits they do what.

– Under-served: These are customers for which there are missing elements of the value
proposition they would be willing to pay for if added.

The value proposition gap is in the form of the customer not receiving the benefits that
they would be willing to pay for if provided.

 Only in special circumstances, where the value proposition is priced (or negotiated) on a
customer-by-customer basis, will there be no value proposition (VP) gap. In most
businesses (especially consumer), VP gaps are created because the VP must be
standardized (to some degree) in order for the revenue/cost model to be viable.

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Aside: VP-Driven Business Model Innovation

 Many business model innovations entail the identification of over or under

served segments within the existing accepted business models.
 The business model innovation entails removing one (or more) table stakes from
the value proposition, enabling a whole new business model. The table stakes
removed are not important to the under-served target market segment.

 Examples
– Dell’s direct Model
– Netflix
– Redhat
– Zipcar
– Southwest Airlines (no frills, point-to-point)
– McCafe

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Strategic Benefit Analysis

1. Prioritize the list of positive and negative discriminators in terms of perceived (B-
to-C) or directly measured (B-to-B/G) willingness to pay. Where possible, use
the cost analysis to identify the incremental costs required to provide the
discriminator.

2. Given the prioritized list, identify the potential competitive threats to the positive
discriminators (benefit advantages) and consider ways to strengthen the
advantage (given cost considerations).

3. For negative discriminators (benefit disadvantages), first consider the degree to

which the lower benefits are justified by a lower cost position.

i. If not justified by lower costs, then identify ways to close the benefit gap by
enhancing the performance of the relevant activities/resources - represents
an execution problem.
ii. If justified through lower costs, identify ways to further strengthening the
cost advantage, and, or ways to incrementally close the benefit gap without
incurring a significant increase in costs.

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Edward Jones Case (Week 3)

Case Write-Up Questions

1. Breakdown Edward Jones’ value proposition - table stakes and discriminators. Based
on your breakdown, what are the most significant benefit advantages they have in
their target market. Your identified benefit advantages should be described in terms
of important characteristics of their target customer segment.

Note that you do not need to provided an exhaustive list of table stakes, simply
identify those that appear most relevant for identifying the discriminators. (60%)

2. What are the cost tradeoffs generated by their benefit advantage, and how does
Edward Jones minimize the potential cost disadvantage? You do not have to
calculate the explicit cost differentials, just characterize them. (40%)

Case Preparation Questions

1. How did the Edward Jones Strategy change over the years?
2. What are the critical differences between Edward Jones’s strategy and the strategies of the
other brokerage firms described in the case?

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