Positioning

Abhijit Sharma
Economics of Industry: Lecture 10
MAN0201M

Lecture overview
This lecture will cover:
Strategic positioning "
The value chain and value map"
Competitive advantage"
Possible firm strategies"
Cost Leadership/ Benefit Leadership"
Segmentation"
Competitive advantage, strategy and profitability"
"
Reference: Besanko et al. Ch 13."

Strategic positioning
Firms within the same industry can
position themselves in different ways.
Not all positions will be equally profitable
or lead to the same odds of survival.
A firm s ability to create value and enjoy a
competitive advantage over other firms
depends on how it positions itself within its
industry.

Competitive advantage and value creation

A firms is said to have a competitive advantage in a
market if it earns a higher rate of economic profit
compared to the average economic profit in the
industry.
Economic profit earned by a firm depends on the
market conditions as well as the economic value
created by the firm.
A firm can achieve competitive advantage only if it
can create more economic value than its
competitors.
A firms ability to create value depends on its cost
position as well as its benefit position relative to its
competitors.

Framework for Competitive Advantage

Industry and business unit effects in

profitability (McGahan and Porter)

Value creation and profitability

Value created = consumer surplus + producers
profit
Consumer surplus is the difference between the
maximum the consumer is willing to pay
(monetary value of the perceived benefit) and
the price.
Components of Consumer Surplus
A firm can increase consumer surplus by
increasing the perceived benefit or by selling at
a lower price.
The firm can also increase consumer surplus by
reducing the cost of using the product and the
transactions costs that the consumer incurs.
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The Value Map

P,
Price

Lower
consumer
Product D surplus

Product B

Product A

indifference
curve

Product C

Higher
consumer
surplus

q, quality

Value Map: An Illustration

When products differ in quality, competing firms can
be viewed as submitting consumer surplus bids with
their quality-price combinations.
When a firm fails to offer as much consumer surplus
as its rivals, its sales will decline Points on the
indifference curve represent price-quality with the
same consumer surplus.
The steepness of the indifference curve reflects the
tradeoff between price and quality that the consumers
are willing to make.
Products A and B exhibit consumer surplus parity.
Product C has a higher consumer surplus than A and
B.
Product D has a lower consumer surplus.
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Value Created and Economic Profits

Value created = Consumer surplus +
Producer surplus
= (B - P) + (P - C)
=B-C
where P is price, B is benefit and C is cost.
If (B-C) is not positive the product will not be viable
(I.e. it will be unprofitable).

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Value creation and competitive advantage

To achieve competitive advantage, a firm must
produce more value than its rivals.
Consumers will demand the same consumer surplus
from the firm as from its rivals.
With superior value creation, the firm can offer as
much consumer surplus as the rivals and still make
an economic profit.
Ability to create value will be affected by
changes in market demand
changes in technology and
threats from other firms in the industry and from
other industries

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The Value Chain

The value chain or the vertical chain is the
representation of the firm as a set of value
creating activities.
Activities in the value chain include primary
activities like production and marketing as well
as support activities such as human resource
management and finance.

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Michael Porter s Value Chain

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Value Chain
Each activity in the value chain can potentially add
to perceived benefits.
Each activity also adds to costs.
In practice it is difficult to isolate the incremental
perceived benefit and the incremental cost of each
activity.
Two ways in which a firm can create more economic
value than its competitors
Configure its value chain differently from
competitors.
Perform the activities more effectively than the
rivals.
If the firm s value chain is similar to its rivals the
firm needs resources and capabilities that the rivals
do not have to create superior value.
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Value Creation and

Resources and Capabilities
Firm capabilities have some of the following
characteristics
They are typically valuable across multiple
markets and products.
They are embedded in organizational
routines that survive when individuals are
replaced.
They represent tacit knowledge in the
organisation.

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Strategic Positioning
Two broad approaches to strategic positioning
Cost leadership
Benefit leadership
Alternative is to use a narrow focus strategy.

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The Strategic Logic of Cost Leadership

A cost leader can create more value than its
competitors by
offering the same benefits as the
competitors do (benefit parity).
offering a slightly lower benefit (benefit
proximity)
offering a qualitatively different product.

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The Strategic Logic of Benefit Leadership

A benefit leader firm can create superior values
by offering
cost parity
cost proximity
substantially higher benefit and higher cost

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Extracting Profits From

Cost and Benefit Advantage
When the products are not differentiated, the
firm that has a cost (or benefit) advantage over
others can capture the entire market.
With product differentiation, this extreme result
does not hold since firms face downward
sloping demand curves.
With differentiated products, customers do not
switch easily.

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Exploiting a Competitive Advantage

Through Pricing
When the product differentiation is weak the firm
should follow a market share strategy.
With a cost advantage, the firm should underprice its
rivals and build share.
With a benefit advantage, the firm should maintain
price parity and let the benefit build the share.
When the product differentiation is strong the firm
should follow a profit margin strategy.
With a cost advantage, the firm should maintain
price parity with its rivals.
With a benefit advantage, the firm should charge a
price premium over the competitors.

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Diversity of Strategies
Firms need to deliver a distinct bundle of economic
value through their strategy choices.
When consumers differ in their willingness to pay for
product attributes, different strategies can coexist
(Example: Waitrose and Aldi).
Stuck in the Middle
It can be argued that firms should either pursue a
cost advantage or a benefit advantage but not both.
Firms that pursue both could, according to this
argument, get stuck in the middle and have neither
advantage.
In reality, successful firms appear to have both types
of advantages simultaneously.
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Cost and Benefit Leadership

There could be other explanations why cost
advantage and benefit advantage appear
together.
Firms that offer high quality products may
expand market share and enjoy cost
advantages due to economies of scale and
learning.
Learning economies may be more important
for high quality production than for low quality
production.
The high quality producers may also be more
efficient producers than low quality producers.
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Strategic Positioning
Two questions are critical:
How will the firm create value? [Benefit/
cost]
Where will the firm do it? [Broad or narrow
segments]

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Segmenting an Industry
An industry can be represented in two dimensions
Product varieties
Customer groups
A potential segment is the intersection of a particular
product group with a particular customer group.
Differences in segments arise due to
Customer preferences
Supply conditions
Segment size
Customers within a group should have common
features.

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Industry Segmentation Matrix

Possible Strategies
Broad Coverage Strategies
Offer a full line of products to serve a range of
customer groups
Economies of scope can arise from
Production
Distribution
Marketing
Focus Strategies
Customer specialisation: A wide range of products to
a narrow customer group
Product specialisation: Limited product variety for a
wide range of customers
Geographic specialisation: Exploit the unique
conditions of the region
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Lecture summary
This lecture has covered:
Value chains and value maps "
Sources of competitive advantage"
Strategy options "
Segmentation, profitability and strategy"
"
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