Download Mishari Alnahedh Economic Value as Competitive Advantage

MKT 310 Entrepreneurship
Mishari Alnahedh
LECTURE 2: NEW VENTURE STRATEGY
Customer Value Proposition
Mishari Alnahedh
The starting point of a new venture strategy is the
Customer Value Proposition
What is the value to be delivered to the customer ?
In other words, why should a customer buy your product
or use your service ?
 What unmet needs will the product/service address?
 Which customer needs are you satisfying?
 Which one of your customer’s problems are you helping to solve?
 How does your product/service solve the problem?
Customer Value Proposition
Mishari Alnahedh
What is customer value?
The satisfaction a consumer feels (the
customer experience) after making a
purchase of goods or services relative to
what she must give up to receive them
(the next best alternative).
What is Strategy ?
Mishari Alnahedh
Why do some companies outperform
their competitors?
 Management is about HOW to get
things done
 Strategy is about WHAT things need
to get done
What is Strategy ?
Mishari Alnahedh
Definitions of Strategy
“Strategy is about adding value through a mix of resources,
capabilities and activities different from those used by competitors
in your industry.”
Strategy is about making choices
What Is Strategic Management About ?
Mishari Alnahedh
Sustainable competitive advantage
occurs when a firm implements a
value-creating strategy of which other
companies are unable to duplicate the
benefits or find it too costly to imitate.
Two Elements of Strategy
Mishari Alnahedh
INDUSTRY
ATTRACTIVENESS
RATE OF PROFIT
ABOVE THE
COMPETITIVE
LEVEL
How do we
make money?
Which
businesses
should we be in?
COMPETITIVE
ADVANTAGE
How should
we compete?
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
CORPORATE
STRATEGY
BUSINESS
STRATEGY
Competitive Advantage
Mishari Alnahedh
 In strategy a source of performance differences is the
“competitive advantage”.
 Competitive advantages reflect rents earned by a firms
assets. The value of these assets is determined by the
relative advantages they give a firm over its competitors.
 A useful framework for analyzing competitive advantage



Activities: what does it do that is different from its
competitors?
Added value: How much extra value does the firm add?
(to the market)
Sustainability: How hard is it for the firm’s competitors to
replicate the sources of added value?
Competitive Advantage
Mishari Alnahedh
Added Value
 Ghemawat and Rivkin, HBR (2006)
 Value = Benefits - Costs
 Benefits: Willingness to pay (WTP)

WTP = maximum consumer will pay for product
 Cost = minimum cost of provision (includes opportunity costs of
inputs)
© 2010 Chad Syverson
Chicago Booth School of Business
Competitive Strategy Notes
Competitive Advantage
Mishari Alnahedh
Added Value
 A customer is willing to pay $12 for a pizza. The price of the
pizza is $10 and it costs $7 to make the pizza.
 Will the customer buy the pizza ?
 Consumer Surplus  $12 - $10 = $2
 Producer Surplus  $10 - $7 = $3
 Economic Value
 $12 - $7 = $5
© 2010 Chad Syverson
Chicago Booth School of Business
Competitive Strategy Notes
Economic Value as Competitive Advantage
Mishari Alnahedh
 If the economic value created is
 Greater than its rival  competitive advantage
 Equal to its rivals  competitive parity
 Lower than its rivals  competitive disadvantage
© 2014 Joe Mahoney
University of Illinois Urbana Champaign
Two Paths to Competitive Advantage via Added Value
Mishari Alnahedh
 Consider two firms
o Firm 1: Benefits or V1 = B1 – C1
o Firm 2: Benefits or V2 = B2 – C2
o Assume V2 > V1  (B2 – C2) > (B1 – C1)
o Added value of firm 2 with competitive advantage =
(B2 – B1) – (C2 – C1)
 Two paths to added value
o Can add value by lowering costs (reducing C2)
o Can add value by enhancing WTP (raining B2)
• Often this increases costs – firms must raise TWP more than costs
rise
Two Paths to Competitive Advantage
Mishari Alnahedh
Examples
FlyDubai:
Apple:
LuLu Hypermarket:
In-N-Out Burger:
Two Paths to Competitive Advantage
Mishari Alnahedh
Examples
FlyDubai: Low Cost
Apple: high WTP + high cost (Differentiator)
LuLu Hypermarket: Low Cost
In-N-Out Burger: Low Cost + High WTP (dual)
Sources of Competitive Advantage
Mishari Alnahedh
COST
ADVANTAGE
COMPETITIVE
ADVANTAGE
DIFFERENTIATION
ADVANTAGE
Competitive Advantage
Mishari Alnahedh
How Do Resources Lead to Competitive Advantage ?
 Valuable

Does it create “value” for the customer?
 Rare

Do other firms have similar resources?
 Difficult to Imitate/Substitute


Unique Historical Conditions
Causal Ambiguity
 Organization

Are you organized to take advantage of your resources?
17
Competitive process in different market settings
Mishari Alnahedh
 For competitive advantage to exist, there must be some
imperfection (or inefficiencies) of competition
 What types of resources and capabilities are necessary to
compete?
 What are the circumstances of the availability of the
resources and capabilities?
 Trading markets vs. Production markets
 Trading involves arbitrage across space (trade) and time
(speculation)
 Production involves the physical transformation of inputs
into outputs
Competitive advantage and imperfections in the
competitive process
Mishari Alnahedh
MARKET
TYPE
SOURCE OF
IMPERFECTION
OF COMPETITION
TRADING
MARKETS
•None (efficient markets)
•Imperfect information availability
•Transactions costs
•Systematic behavioral trends
•Overshooting
•Barriers to imitation
PRODUCTION
MARKETS
•Barriers to innovation
OPPORTUNITY
FOR COMPETITIVE
ADVANTAGE
None
Insider trading
Cost minimization
Superior diagnosis
(e.g.... chart analysis)
Contrarianism
Identify barriers to imitation
(e.g. deterrence, preemption,
causal ambiguity, resource
immobility, barriers to resource
replication) & base strategy
upon them.
Difficult to influence or exploit.
Sources of imperfections to the competitive process
Mishari Alnahedh
Trading markets




Imperfect availability of information
Transaction costs
Systematic behavioral trends
Overshooting as a result of imitation
Production markets


Barriers to imitation
Barriers to innovation
Barriers to Imitation
Mishari Alnahedh
How long will it be before the first rival imitates
the first mover?
How fast does new imitation occur once it starts?
These two factors determine “appropriability”
Barriers to Imitation
Mishari Alnahedh
REQUIREMENT FOR IMITATION
Identification
Incentives for imitation
ISOLATING MECHANISM
- Obscure superior performance
- Deterrence--signal aggressive
intentions to imitators
- Pre-emption--exploit all available
investment opportunities
Diagnosis
- Rely upon multiple sources of
competitive advantage to create
“causal ambiguity”
Resource acquisition
- Base competitive advantage upon
resources and capabilities that are
immobile and difficult to replicate
Barriers to Innovation
Mishari Alnahedh
The more complex an industry in terms of multidimensionality of customer choice criteria and the
number of value chain activities, the greater the
potential for creating “new game” strategies

New rules of the game
• Value chain reconfiguration such as disintermediating
• Innovative business models to create value for customers
from novel experiences, products, product delivery or
bundling, process technologies, and organizational
formats